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Economics of Money, Banking and Financial Markets 9th Edition Frederic S. Mishkin - Solutions
Hoe did a decline in housing prices help trigger the subprime financial crisis starting in 2007?
Why does the twin crises phenomenon of currency and banking crises occur in emerging market countries?
How can a deterioration in bank balance sheets lead to a currency crisis?
If a bank finds that its ROE is too low because it has too much bank capital, what can it do to raise is ROE?
If a bank is failing short of meeting its capital requirements by $1 million, what three things can it do to rectify the situation?
Because diversification is a desirable strategy for avoiding risk, it never makes sense for a bank to specialize in making specific types of loans. Is this statement true, false, or uncertain? Explain your answer.
Rank the following bank assets from most to least liquid:a. Commercial loansb. Securitiesc. Reservesd. Physical capital
Using the T-accounts of the First National Bank and the Second National Bank, describe what happens when Jane Brown writes a $50 check on her account at the First National Bank to pay her friend Joe Green, who in turn deposits the check in his account at the Second National Bank.
What happens to reserves at the First National Bank if one person withdraws $1,000 of cash and another person deposits $500 of cash? Use T-accounts to explain your answer.
The bank you own has the following balance sheet:If the bank suffers a deposit outflow of $50 million with a required reserve ratio on deposits of 10%, what actions must you take to keep your bank fromfailing?
If a deposit outflow of $50 million occurs, which balance sheet would a bank rather have initially, the balance sheet in Problem 5 or the following balance sheet?Why?
Why has the development of overnight loan markets made it more likely that banks will hold fewer excess reserves?
If the bank you own has no excess reserves and a sound customer comes in asking for a loan, should you automatically turn the customer down, explaining that you don’t have any excess reserves to lend out? Why or why not? What options are available for you to provide the funds your customer needs?
Why is being nosy a desirable trait for a banker?
A bank almost always insists that the firms it lends to keep compensating balances at the bank. Why?
Suppose that you are the manager of a bank whose $100 billion of assets have an average duration of four years and whose $90 billion of liabilities have an average duration of six years. Conduct a duration analysis for the bank, and show what will happen to the net worth of the bank if interest
Suppose that you are the manager of a bank that has $15 million of fixed-rate assets, $30 million of rate-sensitive asset5s, $25 million of fixed-rate liabilities, and $20 million of rate-sensitive liabilities. Conduct a gap analysis for the bank, and show what will happen to bank profits if
If casualty insurance companies provided fire insurance without any restrictions, what kind of adverse selection and moral hazard problems might results?
What are the costs and benefits of a too-big-to-fail policy?
Some advocates of campaign reform believe that government funding of political campaigns and restrictions on campaign spending might reduce the principal-agent problem in our political system. Do you agree? Explain your answer.
Do you think that removing the impediment to a nationwide banking system will be beneficial to the economy? Explain your answer.
What bank regulation is designed to reduce adverse selection problems for deposit insurance? Will it always work?
What bank regulations are designed to reduce moral hazard problems created by deposit insurance? Will they completely eliminate the moral hazard problem?
Why did the S&L crisis not occur until the 1980s?
Why is regulatory forbearance a dangerous strategy for a deposit insurance agency?
The FIRREA legislation of 1989 is the most comprehensive banking legislation since the 1930s. Describe its major features.
What steps were taken in the FDICIA of 1991 to improve the functioning of federal deposit insurance?
How can the S&L crisis be blamed on the principal-agent problem?
How could higher deposit insurance premiums for banks with riskier assets benefit the economy?
How has the too-big-to-fail policy been limited in the FDICIA legislation? How might limiting the too-big-to-fail policy help reduce the risk of a future banking crisis?
The commercial banking industry in Canada is less competitive than the commercial banking industry in the United Stated because in Canada only a few large banks dominate the industry, while in the United Stated there are around 7,500 commercial banks. Is this statement true, false, or uncertain?
Why did new technology make it harder to enforce limitations on bank branching?
Why is there a higher percentage of banks with less than $25 million of assets among commercial banks than among saving and loans and mutual saving banks?
What incentives have regulatory agencies created to encourage international banking? Why have they done this?
If reserve requirements were eliminated in the future, as some economists advocate, what effects would this have on the size of money market mutual funds?
Which regulatory agency has the primary responsibility for supervising the following categories of commercial banks?a. National banksb. Bank holding companiesc. Non-Federal Reserve member state banks d. Federal Reserve member state banks
Why has there been such a dramatic increase in bank holding companies?
Why have banks been losing cost advantages in acquiring funds in recent years?
If inflation had not risen in the 1960s and 1970s, the banking industry might be healthier today. Is this statement true, false, or uncertain? Explain you answer.
Why have banks been losing income advantages on their assets in recent years?
The invention of the computer is the major factor behind the decline of the banking industry. Is this statement true, false, or uncertain? Explain your answer.
In what ways can the regional Federal Reserve Banks influence the conduct of monetary policy?
Which entities in the Federal Reserve System control the discount rate? Reserve requirement? Open market operations?
The theory of bureaucratic behavior indicates that the Fed never operates in the public interest." IS this statement true, false and uncertain? Explain your answer.
Why might eliminating the Fed's independence lead to a more pronounced political business cycle?
The independence of the Fed leaves it completely unaccountable for its actions". Is this statement true, false, or uncertain? Explain your answer.
The Federal Reserve System resembles the U.s Constitution in that it was designed with many checks and balances. Discuss.
Do you think that the 14-year nonrenewable terms for governors effectively insulate the Board of Governors from political pressure?
Over time, which entities have gained power in the Federal Reserve System and which have lost power? Why do you think this has happened?
In the 1960s and 1970s, the Federa1 Reserve system lost member banks at a rapid rate. How can the theory of bureaucratic behavior explain the Fed's campaign for legislation to require all commercial banks to become members? Was the Fed successful in this campaign?
The independence of the Fed has meant that it takes the long view and not the short view". Is this statement true, false, or uncertain? Explain your answer.
The Fed promotes secrecy by not releasing FOMC directives to Congress or the public immediately. Discuss the pros and cons of this policy.
Using T-accounts show what happens to checkable deposits in the banking system when the Fed sells $2 million of bonds to the First National Bank.
If the Fed reduces reserves by selling $9 million worth of bonds to the banks, what will the T-account of the banking system look like when the banking system is in equilibrium? What will have happened to the level of checkable deposits?
During the Great Depression years, 1930-1933, the currency ratio c rose dramatically. What do you think happened to the money supply? Why?
If the Fed sells $1 million of bonds and banks reduce their borrowing form the Fed by $1 million, predict what will happen to the money supply.
Predict what will happen to the money supply if there is a sharp rise in the currency ratio.
If the Fed sells $2 million of bonds to the First National Bank, What happens to reserves and the monetary base? Use T-accounts to explain your answer.
Suppose that the Fed buys $1 million of bonds from the First National Bank. If the First National Bank and all other banks use the resulting increase in reserves to purchase securities only and not to make loans, what will happen to checkable deposits?
If the Fed buys $1 million of bonds from the First National Bank, but an additional 10% of any deposit is held as excess reserves, what is the total increase in checkable deposits?
If reserves in the banking system increase by $1 billion as a result of discount loans of $1 billion and checkable deposits increase by $9 billion, why isn't the banking system in equilibrium? What will continue to happen in the banking system until equilibrium is reached? Show the T-account for
During Christmastime, when the public’s holdings of currency increase, what defensive open market operations typically occur? Why?
If float decrease below its normal level, why might the manager of domestic operations consider it more desirable to use repurchase agreement to affect the monetary base rather than an outright purchase of bonds?
Compare the use of open market operations, discounting, and changes in reserve requirements to control money supply on the following criteria: flexibility, reversibility, effectiveness, and speed of implementation.
Using the supply and demand analysis of the market for reserves, show what happens to the federal funds rate, holding everything else constant, if the economy is surprisingly strong, leading to an increase in the amount of checkable deposits.
If there is a switch from deposits into currency, what happens to the federal funds rate? Use the supply and demand analysis of the market for reserves to explain your answer.
You often read in the newspaper that the Fed has just lowered the discount rate. Does this signal that the Fed is moving to a more expansionary monetary policy? Why or why not?
How can the procyclical movement of interest rates (rising during business cycle expansion and falling during business cycle contractions) lead to a procyclical movement in money supply as a result of Fed discounting? Why might this movement of money supply be undesirable?
If reserve requirements were eliminated, it would be harder to control interest rates. True, false, or uncertain?
Considering that raising reserve requirement to 100% makes complete control of the money supply possible, Congress should authorize the Fed to raise reserve requirements to this level.” Discuss.
What incentives arise for a central bank to fall into the time-inconsistency trap of pursuing overly expansionary monetary policy?
What are the advantages of monetary targeting as a strategy for the conduct of monetary policy?
Because the public can see whether a central bank hits its monetary targets almost immediately, whereas it takes time before the public can see whether an inflation target is achieved, monetary targeting makes central banks more accountable than inflation targeting does. Is this statement true, or
A central bank with a dual mandate will achieve lower unemployment in the long run than a central bank with a hierarchical mandate in which price stability takes precedence. Is this statement true, false, or uncertain?
Classify each of the following as either an operating target or an intermediate target, and explain why.a. The three-month Treasury bill rate.b. The monetary base.c. M2
If the Fed has an interest rate target, why will an increase in money demand lead to a rise in the money supply?
What procedures can the Fed use to control the three-month Treasury bill rate? Why does control of this interest rate imply that the Fed will lose control of the money supply?
Compare the monetary base to M2 on the grounds of controllability and measurability. Which do you prefer as an intermediate target? Why?
Interest rates can be measured more accurately and more quickly than the money supply. Hence an interest rate is preferred over the money supply as an intermediate target. Do you agree or disagree? Explain your answer.
What methods have inflation-targeting central banks used to increase communication with the public and increase the transparency of monetary policymaking?
What might inflation targeting increase support for the independence of the central bank to conduct monetary policy?
Because inflation targeting focuses on achieving the inflation target, it will lead to excessive output fluctuations. Is this statement true, false, or uncertain? Explain your answer.
What are the key advantages and disadvantages of the monetary strategy used in the United States under Alan Greenspan in which the nominal anchor is only implicit?
How can bank behavior and the Fed’s behavior cause money supply growth to be procyclical (rising in booms and failing in recessions)?
If the demand for a country’s exports falls at the same time that tariffs on imports are raised, will the country’s currency tend to appreciated or depreciate in the long run?
In the mind-to-late 1970s, the yen appreciated relative to the dollar even though Japan’s inflation rate was higher than Americas. How can this be explained by an improvement in the productivity of Japanese industry relative to American industry?
The president of the United States announces that he will reduce inflation with a new anti-inflation program. If the public believes him, predict what will happen to the exchange rate for the U.S. dollar.
If the Indian government unexpectedly announces that it will be imposing higher tariffs on foreign goods one year from now, what will happen to the value of the Indian rupee today?
If American auto companies make a breakthrough in automobile technology and are able to produce a car that gets 60 miles to the gallon, what will happen to the U.S exchange rate?
If the European central bank decides to contract the money supply to fight inflation, what will happen to the value of the U.S dollar?
A country is always worse off when its currency is weak (falls in value). Is this statement true, false, or uncertain? Explain your answer.
If the British central bank prints money to reduce unemployment, what will happen to the value of the pound in the short run and the long run?
In nominal interest rates in America rise but real interest rates fall, predict what will happen to the U.S. exchange rate.
If Mexicans go on a spending spree and buy twice as much French perfume, Japanese TVs, English sweaters, Swiss watches, and Italian wine, what will happen to the value of the Mexican peso?
If expected inflation drops in Europe so that interest rates fall there, predict what will happen to the exchange rate for the U.S dollar.
If there is a strike in France, making it harder to buy French goods, what will happen to the value of the euro?
Why can balance-of-payments deficits force some countries to implement a contractionary monetary policy?
How can persistent U.S balance-of-payments deficits stimulate world inflation?
Inflation is not possible under the gold standard. Is this statement true, false, or uncertain? Explain your answer.
Why did the exchange-rate peg lead to difficulties for the countries in the ERM when German reunification occurred?
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