Archive for the ‘335 Class News’ Category

Class News (335): Final Exam Aids

May 5, 2009

I have received a number of emails about time-inconsistency and monetary policy.  Accordingly, I dug up an old lecture and updated it: central-bank-independence-and-rules_money-and-banking_spring 2009.

I have also had some questions about why Fed independence may come under attack (and why should we care if it does).  Well first off, the Fed has become one of the largest (if not the largest) financial institution in the world.  At year-end 2008, total Fed assets were $2.2 trillion.  The largest U.S. bank holding company at that time was JPMorgan Chase ($2.175 trillion).  Since the beginning of the financial crisis, the Fed has pumped more than $1 trillion in liquidity into the System – more than either TARP 1 (originally passed at $700 billion) or the stimulus package ($787 billion).  Here is a related article from THE ECONOMIST: Federal Reserve: The Hedge Fund of Foggy Bottom.

Finally, all this matters because of the combination of (1) record excess reserves in the banking system and (2) record projected budget deficits.  As of March 2009, the monetary base was $1.64 trillion, and M2 was $8.32 billion – implying a M2 multiplier of 5.06.  The average M2 multiplier from January 2000 to September 2008 was 8.54.  So if the multiplier were to “mean revert,” M2 would rise to $14.03 trillion (an increase of 68.7%).  The Fed stated in the most recent FOMC statement (4/29/09):

In light of increasing economic slack here and abroad, the Committee expects that inflation will remain subdued. Moreover, the Committee sees some risk that inflation could persist for a time below rates that best foster economic growth and price stability in the longer term.

The Fed is obviously confident the supply of excess reserves can be drained from the banking system as demand for those reserves declines, so M2 will not spike.  Foreign demand for U.S. financial assets (like Treasury debt) depends on expectations about the Fed’s likely success.  This particularly matters given the record budget deficits projected by the Congressional Budget Office (which will put pressure on the Fed to monetize the budget deficit to keep interest rates low).

Posted at 4:46 pm Eastern


Class News (335): Error on Quiz #10

May 5, 2009

The key to quiz #10 contained an error.  Question #6 was:

According to F&S, the most distinctive feature of the postwar (1948-1960) period was a sharply rising trend in velocity.  Correct answer: True

The key says false — clearly a mistake (see page 639).  Indeed, the whole point of the chapter was attempting to explain why the secular trend from 1869 to 1960 (taken as a whole) was a decline averaging 1% per year — yet velocity rose from 1948 to 1960.

I will give everyone who took the quiz credit for the question (irrespective of his answer), so the maximum score is now 9/8 (113%).

Sorry for inconvenience/anguish caused.  HT to Marcus Walton for pointing out the error.

Class News (335): More Final Exam Info

May 4, 2009

A typo on the Study Tips sheet has been brought to my attention.  We discussed chapter 23 (Monetary Tranmission Mechanisms) in class, but I left this off the list of fair-game material.  Chapter 23 should have been there. Sorry for the omission.

One other item — if you have finished your extra-credit essay, you may send it electronically to Luiggi.  This will earn “brownie points” by reducing the grading crunch at the end.  Electronic copies will not be accepted once the final exam begins.

Posted at 11:15 am Eastern

Class News (335): Final Exam Info

May 1, 2009

In class and prior posts, I said the final exam would have 2 major essays, rounded out with objective questions.  I have reconsidered.  The exam will now contain only one major essay (the F&S essay), several short-answer questions (to be answered in a few sentences ), and objective questions.  Nothing else will change (allocation of points, coverage, etc.).  Indeed, I will use the candidate essays I provided on the study sheet as a guide when making up short answer questions and objective questions.

I apologize for inconvenience caused/stress induced.  Final grades are due 36 hours after the exam. After conferring with my teaching assistants, I have concluded this will not provide enough time to grade an exam containing a substantial essay component with an appropriate degree of accuracy.

Posted at 5:17 pm Eastern

Class News (335): More Final Exam Info

April 24, 2009

Study Tips
A study guide for the final exam is now in the 335 Exam Locker.

Causes of the Financial Crisis
On the last day of class, I spent about 20 minutes trying to tie what we learned this semester into a coherent list of causes of the financial crisis.  I  have gotten emails from a number of students (who missed class or lost me in class) asking for references.  A few are linked below to get you started.  I will add to the list over the next week.

  1. Housing Policy: THE ECONOMIST – Home Ownership: Shelter or Burden?
  2. Politics/U.S. Housing Policy: WSJ – Roberts: How Government Stoked the Mania.
  3. Monetary Policy: WSJ-Taylor: How Government Created the Financial Crisis.
  4. Bank Supervision: THE ECONOMIST – Rajan: Cycle-Proof Regulation

Here is a PowerPoint slideshow (cartoon) explaining the subprime meltdown.  Warning: It is funny but very vulgar.  For example, if the “f” word bothers you, please don’t look at it.  I link it because it accurately captures what happened:  subprime-meltdown.

Financial Crisis and Recession

  1. Here is a New York Times graphic tracing the crisis in terms analagous to Figure 2, p. 209 (Miskhin): NYT – Primer on the Financial Crisis.
  2. The presentation I gave at the examiner conference on April 14th also includes discussion of the causes of the current recession.  Here it is: vaughan_ffiec-presentation_april-2009.
  3. Op-Ed by Steven Gjerstad and Vernon Smith, tracing the role of household leverage in bringing on the recession: WSJ – Gjerstad-Smith: From Bubble to Depression

Updated at 12:02 pm EDT

Class News (335/402): Extra Credits

April 23, 2009

Extra credit assignments for both classes are in the Exam Lockers.  Previous End-of-Term posts have also been updated.

Posted at 12:18 am EDT

Class News (335): End-of-Term Info

April 23, 2009

I wanted to post what I said in class about extra credits, the final exam, office hours, etc.

Final Exam
Wednesday, May 6, 1:00  – 3:00 PM (in classroom)

Material Covered
Comprehensive (more focus to be provided on “Study Tips,” posted later this week)

Two essays (1 F&S) drawn from provided list and objective questions

Office Hours

  • Thursday, 4/23, 1 to 5 pm
  • Friday, 4/24, 9 am to noon, 1 to 5 pm
  • On-line (to answer reply to emails sent to both Bank and WU addresses) – Tuesday, 4/28, 1-5 pm and Thursday, 4/30, 1-5 pm

Extra Credits

  • Exam II corrections – due at final exam (hard copy), mandatory for those missing the exam, will also curve grades below 70 to 70.
  • To trim your workload and focus your study, I have decided to make the extra-credit assignment one slightly longer paper  (rather than 2 short one) on Friedman and Schwartz.  (You will still be able to earn up to 4, 100% quiz grades.)  Moreover, one of your two final-exam essays will be related to this paper.   Here is more information: short-paper-assignment-fs_spring-2009.

Posted at 12:08 pm EDT Updated at 7:30 pm EDT

Class News (335/402): Exam Stats-Policy Exercise

April 22, 2009

Things were rushed at the end of the morning 402 class, so I forgot to communicate summary stats.  You will find them for all three classes below.  Anyone submitting satisfactory exam corrections will receive a 100% on a quiz; students in all three classes earning below 70 will also be curved to 70.   Exam corrections (hard copy) are due at the final exam.  No need to turn in Exam II, but your corrections should be self-contained (i.e., the TA should be able to tell which question you missed as well as what the correct answer was).

402 (am) 402 (pm) 335
Mean 77.7 81.9 83.7
Median 80.0 84.0 85.0
Maximum 100.0 96.0 96.0
Minimum 41.0 57.0 57.0
Standard Deviation 12.3 9.9 8.0

Let’s play “you are the policymaker,” based on these stats…
The stats conform to the semester pattern with one exception:  The PM 402 mean has consistently been higher than the AM 402 mean, but this time the difference is wider. The difference is statistically significant at the 5% level.  More importantly, it is economically significant.  (Any difference is statistically significant if the sample is large enough.)   Economic significance means “large enough to matter.”  Assume the means represented two actual students.  Does the gap between a C+ (77.7) and  B- (81.9) represent a difference in understanding?  I would say yes, not huge but not trivial.

So now we have an interesting pattern in the data.  What are the potential explanations and policy implications?

  1. AM students leak information about the exam to PM students. If true, what is to be done?  Two completely different exams would stop the leak, but with 2 downsides: (a) time I could have devoted to other student activities (like writing rec letters) will be wasted writing a new exam/key and (b) potential unfairness across sections because of unintentional differences in difficulty.  I could just deduct 4 points from every PM exam – a cheap solution for me.  It might also lower PM-class demand for information (but then again it might raise demand because PM students need an even bigger edge to offset the grade haircut).  The downside is punishing innocent students.  I could add 4 points to every AM exam, but that would not reduce the incentive for PM students to seek information (and would reduce the incentive for AM students to study).   In short, evidence of market failure is shaky and policy alternatives less-than-appealing.
  2. PM students are on average a bit  smarter, more motivated, etc. For example, at Baylor (where I first taught), students registered by class (junior, sophomore, etc) and then by GPA inside that class.  If WU registers this way, and students prefer PM classes , then no policy response is required because there is no market failure.
  3. The difference could just be random. This is a small experiment.  In repeated trials (over “n” semesters in which I taught the same class AM and PM),  PM will do sometimes do better — even if on average AM were better (or there were no difference).   This explanation also implies no market failure.

So if you implement a policy based on theory #1, when theory#2 or #3 were true,  you would waste resources or reduce social justice (perhaps both).  Even if #1 were true, available policy options carry significant risk of inefficiency or inequity.  Now, just to be clear, I am not worried about differences in section means — at all.  And I am certainly not contemplating a PM grade haircut.   But all semester I have emphasized two necessary conditions for a policy response (on economic grounds): (1) existence of market failure and (2) confidence the response will not make things worse.   I thought this  example might bring the issue home.

Posted at 9:21 pm EST

Class News (335/402): Exam Keys Posted

April 17, 2009

Keys to Exam II are now available in the 335 and 402 Exam Lockers.

Posted at 5:42 EDT

Class News (335/402): Email Questions

April 14, 2009

I have spent the last few hours answering email questions.  If I have not gotten to yours yet, do not fret.  I will spend some time after dinner tonight answering as many as I can get to.

In the meantime, here are answers to a number of questions that have been asked in a variety of forms.  Hope this is helpful.

email-questions-exam-ii-335-402 (Updated at 7:51 pm)

Posted at 4:57 EDT