Monetary Economics (ECS3701) Selected Examination Questions and suggested solutions [211581]2023

Facts that theory of term and structure of interest rates must explain - -1- interest rates on bonds of different maturities move together over time 2- When short term interest are low, yield curve have an upward slope. When short term interest are high, yield curve have an downward slope. 3- Yield curve almost always slope upward -liquidity premium theory (ex) - -- Suggests that since investors are risk averse, they will demand a greater premium for securities with longer maturity periods - prefer short term than long term because bonds are free of inflation and interest rates risks - Bonds of different maturities are partial (not perfect) substitutes. -monetary base (ex) - -MB=C+R C= currency in circulation R= total reserves in the banking sustem Note: the MB in a country is defined as the portion of the commercial banks' reserves that are maintained in accounts with their central bank plus the total currency circulating in the public -Taylor rule for monetary policy (ex) - - -interest parity condition (ex) - - -risk structure of interest rates (ex) - -Bonds with the same maturity have different interest rates due to: