EC0 320_REVIEW QUESTIONS

  Please answer each question separately. Not an essay.

1. What is the efficient markets hypothesis? What are the most important characteristics of markets that are necessary for them to be efficient?

2. How do stock prices behave if stock markets are efficient and if investors do not care about risk?

3. Explain the major options available to a bank that is short of reserves. What determines which option a bank is likely to choose?

4. How can the Fed affect the amount of reserves that banks hold? What interest rates can it change to manipulate the quantity of reserves?