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Banking
What are the current interest rates on 1-year certificates of deposit at a commercial bank and a credit union located near you? Is one institution’s rate higher than the other’s? What might
Suppose that Melvin’s Bank purchases Gertrude’s Bank, making Gertrude a subsidiary of Melvin. Does this acquisition benefit the stockholders of Melvin’s Bank? Does the answer depend on the
Securitization has spread from mortgages to student loans and credit card debt. However, few loans to businesses have been securitized. Explain why.
Suppose that loan sharks propose legislation to promote their industry. They want a legal right to break the kneecaps of loan defaulters.a. Suppose you were hired as a lobbyist for the loan sharks.
Consider the example in Chapter 7 of two firms that want to issue bonds. Assume as before that a firm makes the promised payment on a bond only if its project succeeds.a. Suppose the government
Discuss several reasons why the government guarantees student loans but not auto loans.
The text Web site provides data on 82 countries from a 2002 study on government bank ownership. For each country, the data include (a) the percentage of bank assets at government-owned banks in 1970,
The Web site of the Community Financial Services Association, the payday lenders’ organization, has a page on “Myths and Realities" about payday lending. Do you agree with the CFSA about what’s
Suppose Melvin's Bank starts with the balance sheet in Table 9.4A and the income statement in Table 9.2. Show how the balance sheet and income statement change in each of the following scenarios.
Do some research on adjustable rate mortgages. One source is Freddie Mac’s Annual ARM Survey (the text Web site links to Freddie Mac’s site, which contains the survey). Since 2009, when ARMs were
Do some research on the Consumer Financial Protection Bureau, established in 2010 (the text Web site links to the Bureau’s site). What regulations on credit cards has the Bureau created? Is it
Suppose again that Melvin's Bank starts with the balance sheet in Table. Then the bank sells $10 of loans for $10 of cash.a. What is the immediate effect on the balance sheet?b. After the loan sale,
Suppose Ashley’s Finance Company raises most of its funds by issuing long-term bonds. It uses these funds for floating-rate loans.a. How does the company’s rate-sensitivity gap differ from those
Canada does not have an institution like Fannie Mae that securitizes mortgages. How do you think this fact affects the types of mortgages offered by Canadian banks? (Hint: Think about interest-rate
Robert Shiller of Yale University has suggested a variation on ARMs in which mort-gage interest rates are tied to inflation, not to short-term interest rates. Discuss the pros and cons of this idea
Suppose the Federal Reserve raises short-term interest rates, an action that is likely to reduce aggregate output temporarily. Describe the various effects on the profits of commercial banks.
How does each of the following developments affect banks’ desired equity ratios? Explain.a. An increase in OBS activities.b. A shift from C&I lending to real estate lending.c. A shift from
As noted in Section 9.4, the Credit CARD Act of 2009 has made it more difficult for people under 21 to obtain credit cards. Do you think this policy helps or hurts young adults? Explain your view.
How could a system be designed to allow a choice of operating systems from which to boot? What would the bootstrap program need to do?
Suppose you are a depositor at Melvin's Bank, which has the balance sheet shown in Table 10.1A. Deposit insurance does not exist. You originally deposited your money in Melvin's Bank because its
The text Web site has a link to a paper by Christine Blair, an economist at the FDIC, called “The Mixing of Banking and Commerce." Read this paper and briefly summarize the arguments for and
Suppose an economy has a high level of loans from one bank to another. How might this fact affect the likelihood of a bank panic?
Some economists suggest that banks should be charged premiums for deposit insurance based on their levels of capital. Premiums should be higher if capital is lower. What is the rationale for this
Suppose Walmart is allowed to open a bank that accepts deposits and makes loans at its U.S. stores.a. How might this affect existing banks, especially community banks?b. In general, who might gain
Consider an analogy (the type on the SATs): “A bank regulator is to a bank as a bank is to a borrower." In what ways is this analogy true? for a review of the bank-borrower relationship.)
Suppose Melvin’s Bank can make a bet on derivatives that has a 2/3 probability of earning $20 and a 1/3 probability of losing $40.a. Assume Melvin’s has $20 in capital. What are the possible
Let's change the example of capital requirements in Table 10.3. Assume that Melvin's Bank holds $40 in Treasury bonds (rather than $10) and $30 in loans to other banks (rather than $10). Otherwise,
Consider two possibilities: (i) a bank is forced to close even though there is no good reason for it to close; (ii) a bank remains open even though there are good reasons for it to close.a. Explain
Link through the text Web site to the site of the Office of the Comptroller of the Currency and look up “Enforcement Actions." Find an example of a specific enforcement action against a bank.
Continue the story of The Friendly Bank for a few more days. Show the bank’s balance sheet, the monetary base, and the money supply for Friday and the following Monday, Tuesday, and Wednesday.
In the text, we ignored traveler’s checks in deriving the money multiplier. Suppose we are more careful and include traveler’s checks in the money supply. Let T be the level of traveler’s
Suppose the Fed wants to reduce the money supply by $100. Should it buy or sell government bonds? How much should it buy or sell?
Assume the monetary base is $100, the currency-deposit ratio is 0.5, and the reserve-deposit ratio is 0.1.a. Calculate the money multiplier and the money supply.b. Suppose the currency-deposit ratio
The Fed bought an unusually large quantity of Treasury bonds at the end of December 1999. What explains this behavior? (Hint: Search online for “Y2K.”)
Which is more stable from day to day, the discount rate or the federal funds rate? Explain.
Start with the Wednesday balance sheet for The Friendly Bank on page 320. Suppose that, at the end of Wednesday, the Fed buys $100 in government bonds from a dealer with an account at the bank.
Let’s change the story of The Friendly Bank by introducing savings deposits. Assume that when people put money into the bank, half of it goes to checking deposits (D) and half to savings deposits
Suppose someone keeps $100 in cash under her pillow. One day, she takes it out and deposits it in a checking account.a. Does this action directly affect the monetary base or the money supply? Explain
Suppose that foreigners start holding more U.S. currency. For a given interest rate, Americans don’t change their holdings of either currency or checking deposits. Assume the Fed keeps the monetary
Redo Problem 5, but do not assume the monetary base is constant. Instead, answer each part of the question assuming the Fed targets the money supply. Then answer each part assuming the Fed targets
How did the Federal Reserve’s actions over 2008-2009 in response to the financial crisis.
Suppose the discount rate is below the federal funds rate, and banks can borrow as much as they want from the Fed. How could a bank earn easy profits? Would the federal funds rate stay above the
Milton Friedman believed the Fed should control the money supply precisely. In the 1960s, he proposed that the required reserve ratio be raised to 100 percent. How would this policy improve control
Suppose potential output grows 2 percent per year and the natural rate of unemployment is constant at 6 percent. In 2020, the unemployment rate is 7 percent.a. Assuming Okun’s law, what is the
The United States was on a gold standard from 1879 to 1914. During that period, the average inflation rate was about zero. Inflation was sometimes positive and sometimes negative, and there was no
The data in Figure 12.14 suggest an unemployment coefficient of approximately -1.0 in the Phillips curve. That is, the Phillips curve is n- n(-1) = -(1.0)(U - U*) . Assume the natural rate, U*, is 5
The text Web site has U.S. data on output, unemployment, and inflation from 1960 through 2010, along with estimates of potential output and the natural rate of un-employment. Focus on the data for
From the text Web site, link to the site of the Federal Reserve Bank of St. Louis; also, see the “Guide to St. Louis Fed Data." Get annual data on the inflation rate, the interest rate on 3-month
Interview a few people who are not economists but are old enough to remember the 1970s. Ask them what caused the high inflation of the 1970s and the deep recession of the early 1980s. Also ask about
Suppose the growth rate of potential output rises. The behavior of the output gap (the fluctuations of output around potential) does not change. Do NBER recessions become more or less common? Explain.
Suppose a country bans trade with other countries, so net exports are always zero. How would this affect the slope of the AE curve? Explain.
Suppose the Fed raises the real interest rate and consumer confidence falls around the same time (as occurred in 1990). Show with a graph what happens to the AE curve and to output.
Suppose the economy starts with output at potential. Then a supply shock occurs: oil prices rise sharply. The Fed is partly accommodative: it raises the real interest rate, but not by enough to keep
Suppose oil prices jump up and the Fed is completely accommodative: it keeps the real interest rate constant. How must the Fed adjust the nominal interest rate? How must it adjust the money supply?
Suppose again that oil prices increase. This has two effects: (a) firms’ costs jump up and (b) since more of consumers’ income goes to pay for oil imports, there is less to spend on U.S. goods.
Suppose the economy starts with output at potential and constant inflation. In 2020, oil prices jump up. Initially, the Fed is accommodative. In 2023, a new Fed chair is appointed and resolves to
Suppose that expected inflation is the average of inflation over the two previous years:n = (1/2)[n(-1) + n(-2)]a. Write the equation for the Phillips curve in this case.b. Redo the disinflation
Suppose the federal funds rate is 3 percent. Bond traders expect it to remain at that level for 3 months and then rise to 3.5 percent for 9 months. However, the FOMC raises the rate to 3.5 percent
Link from the text Web site to the online Economic Report of the President and get annual data on real GDP and real investment. Calculate the growth rates of the two variables for each year since
Suppose that bond traders expect an increase in the federal funds rate, but the FOMC surprises them by keeping it constant. What happens to longer-term rates? Explain.
Describe all the ways that a rise in stock prices affects aggregate expenditure. Do the same for a rise in housing prices. Do stock prices have some effects that housing prices don’t, or vice-versa?
The riskiness of banks’ assets fluctuates over time. For example, default risk on loans rises and falls.a. How are banks likely to adjust their equity ratios (their ratios of capital to assets)
Economists have found that recent earnings have larger effects on investment for small firms than for large firms. What might explain this fact?
Figure 13.12 shows what happens if the AE curve shifts out temporarily and the central bank raises the real interest rate. Now suppose the same shock occurs but the central bank keeps the interest
Consider the expenditure shock in Figure 13.12: the AE curve shifts to the right in 2020 and returns to its initial position in 2021. Suppose the central bank anticipates the shock: in 2019, it knows
Consider the AE/PC model with time lags. Suppose the economy starts in 2019 with output at potential and constant inflation. In 2020, an adverse supply shock occurs, shifting the Phillips curve up.a.
From the text Web site, get Bernanke and Kuttner’s data on expected and unexpected changes in the federal funds rate by the FOMC..Choose one day when the expected change in the funds rate was large
Suppose that country A and country B have the same rate of money growth, and velocity is constant in both. Output growth is higher in country A. Which country has higher inflation? Explain.
“Inflation is always and everywhere a monetary phenomenon, but deflation is not." Comment.
How does each of the following events affect the risk of a liquidity trap?a. The central bank decides to push long-run inflation to zero.b. The neutral real interest rate rises.c. The government
Link from the text Web site to the St. Louis Fed site for data on (1) nominal GDP and (2) interest rates on 3-month Treasury bills. Link to www.sweepmeasures.com for data on M1 adjusted for sweep
Link from the text Web site to the site of the International Labour Organization, whose LABORSTA database reports consumer price indices for most of the world’s countries. For a recent year,
From the St. Louis Fed Web site, get annual data on U.S. inflation from 1960 to the present.a. For each decade from the 1960s through the 2000s, calculate the mean and variance of inflation over the
In Figure 14.1, the relation between money growth and inflation is less perfect among countries with inflation below 10 percent than it is among countries with higher inflation. What might explain
Should the United States return to the gold standard? What might be the advantages and disadvantages?
Assume that a central bank’s nominal seigniorage revenue equals the change in the money supply, denoted AM. Real seigniorage revenue is AM/P. Assume the inflation rate equals the growth rate of the
Suppose all firms in an economy adjust prices once per year. Half the firms adjust prices in January, and half adjust in July. Suppose inflation rises from 0 to 10 percent per year. What is the
Consider the market for loan able funds, which determines the real interest rate in the long run. a. As usual, draw the supply and demand for loans as functions of the pretax real interest rate,
Suppose the pretax real interest rate (r) is 2 percent, the tax rate (^) is 0.4, and the inflation rate (n) is 8 percent. Calculate the after-tax real interest rate (r).
What inflation rate would make the after-tax real interest rate equal the pretax real rate (that is, what inflation rate implies (r) = r)? Explain.
Explain the difference between deflation and disinflation.
Suppose the neutral real interest rate is 3 percent in Country A and 1 percent in Country B. a. What might explain this difference? b. If the central banks of the two countries choose the same
Suppose an economist has a bright idea: a central bank should lean against the wind when output falls, but not when it rises. That is, policymakers should lower the interest rate below the neutral
We have assumed that the coefficients in the Taylor rule, ay and an, are both positive. Under this assumption, the rule guides the economy back to long-run equilibrium after a shock. The output gap Y
Suppose the central bank measures the output gap accurately, but mismeasures the neutral real interest rate. It believes the neutral rate is 1 percent, but the true neutral rate is 3 percent. If the
In Figure 15.6, the central bank responds to an expenditure shock. Suppose policymakers know the true slope of the AE curve but mismeasure the shock: they think the curve shifts to the right by 2A,
Consider a variation on the Taylor rule: r = (0.25)rTAYLOR + (0.75)r(-1), where r is the real interest rate in a quarter, rTAYLOR is the interest rate implied by the Taylor rule, and r(-1) is the
Suppose the Fed had a policy of responding to asset-price bubbles. Under this policy, it would have set higher interest rates than it actually did during the stock market boom of the late 1990s and
Suppose the economy is in long-run equilibrium in 2019. In 2020, a(n) (temporary) adverse expenditure shock reduces output by 2 percent.a. Assume the central bank uses TR-I in Table 15.2. Using the
Suppose a parent paid your college tuition this year. He or she wants you to get a summer job so you can contribute next year. You would prefer to spend your time with friends at the beach. Your
In 2006, Ben Bernanke said the goals of strong output growth and low inflation “are almost always consistent with each other." Alan Greenspan once called the tradeoff between output and inflation
The text Web site has data from the Ball-Sheridan study on inflation targeting. One variable is the standard deviation of output growth, which measures the instability of output. a. In theory, how
The text Web site links to “Inflation Targeting for the United States?," a 2005 article by economist Marvin Goodfriend, and to a comment on the article by Donald Kohn, then the vice-chair of the
Suppose the Phillips curve becomes steeper: a given change in output has a larger effect on inflation. How does this affect the time-consistency problem facing the central bank and the likelihood of
In the Kydland-Prescott theory, it is desirable for central bank officials to hate inflation passionately. Is it also desirable for them to hate unemployment passionately? Explain why or why not.
Governors of the Federal Reserve serve overlapping terms in office. When one governor is appointed, the others are at various points in their terms. Suppose a new law mandates that all governors are
Consider the relationship between inflation targeting and Taylor rules.a. The adjustment of interest rates under inflation targeting is similar to a Taylor rule. Explain why. b. If a central bank
In 2005, when President Bush announced Ben Bernanke’s appointment as Fed chair, the Dow Jones stock index jumped by more than 1 percent in a few minutes. a. Why do you think that happened? b. If
Figure 12.23 on p. 377 shows the effects of an adverse supply shock in the AE/PC model. The figure assumes adaptive inflation expectations: n = n(-1) and shows how the economy evolves if the central
Consider a policy of “output and inflation targeting": the central bank announces numerical targets for both inflation and real GDP. What are the pros and cons of such a policy? No central bank has
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