Economics Interview Questions

[Khoa Tran]

Well, maybe you haven't seen some of the following questions at any firm yet, cuz I'm the creator . But I'm sure that they're well-known in the Economics literature. Anyway, I guarantee these're interesting questions .


1. Monetary Theory -> Fractional Reserved Banking. Why doesn't a government put a high minimum reserve-fraction? Let's suppose that on a good Friday (which is today) the US government decides to set the minimum reserve at 50%. Of course, in doing that, it also needs to either offer more government bonds or print more currency (M0) in order to balance the desired total money in circulation.

What are the pros and cons of this minimum-reserve increasing policy?


2. Wait until next good Friday?

[Venux Max]

How can you answer it? Actually at the moment I am taking an interest in the current Vietnamese economy. As the inflation rate has gone up to 14% in VN. It is such a terribly large figure, which troubles the public a lot because all the price has gone up significanlly. The government is still struggling to find out the new solution to tackle this inflationary problems. However, I think that it would be hard for them as they are still inexperienced in this field. Anyways, I think that it all relates with monetary theory and policy...I don't know this field very well, do you have any suggestions?

[Khoa Tran]

How do you know that the government is inexperienced? It's a common feeling among Vietnamese that the government is stupid and corrupt. Well, I believe that they are morally corrupt but I'm not sure if they are inexperienced until I know the inside. Btw, MinhBien has many economists who would rather follow the domestic issues more closely.

Back to my question (not sure why Binh and Hoa deleted their answers), let me give out some pros. The cons are more subtle and interesting but you should figure them out yourself.

Pros (that I thought of):

- There will be less commercial banks. A lot of intellectually qualified bankers will move to other more useful industries, which produce real goods.

- Every existing bank will reduce the risk of having a bank run. Hence, the risk of having a financial crisis or economic recession also decreases.

[Venux Max]

Hi Khoa, thanks for your reply. yeah it's really interesting to know some of the financial issues going on in USA recently.

oh and I think that being inexperience doesn't induce that one is stupid. Moreover, monetary policy has always been tough to handle even in developed markets like USA and UK. On the other hand, Vietnam's economy has just been developing in recent years. As for inflationary issues, the Goverment has legislated some of the policies but they do not help at all, the price still keep increasing. That's why I said that they are still inexperienced in this field, particularly to let the price to rise up so far in the first place.
Anyways, I didn't mean to be anti social activist just currently taking an interest in this issue.that's all...

[giangle]

@Khoa: Have a look at this article: http://en.wikipedia.org/wiki/Full-reserve_banking. Many people have argued for and some countries (eg Islamic banking) have actually implemented full reserve banking system (100% reserve).

On the other hand, some countries (eg UK, Australia) have abolished reserve requirement (0% reserve).

[Khoa Tran]

Anh Giang, I certainly knew those systems existed . But this fact is not so interesting.

What more interesting is what's really behind these policies (their pros and cons). That's what policy makers need to know.

[giangle]

See Mark Thoma's pros for the 0% reserve system and Steve Waldman's cons at:

http://economistsview.typepad.com/ec...d-already.html

For more pros, see Brad Delong's link on that page and search for few other reporter articles along that topic on the press. Another pro, quoted by BoE when it moved to 0% reserve, was to help UK's commercial banks' competitiveness.

For the pros of 100% reserve system, see the external links from the wikipedia page.

But all these are from economists' point of view, not necessary from policy makers' view.