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Principles of Money Banking and Financial Markets 12th edition Lawrence S. Ritter, William L. Silber, Gregory F. Udell - Solutions
Give one basic argument for and one against flexibility in foreign exchange rates.
Suppose one-year U.S. and German Treasury bills return 7.7 percent and 6.9 percent respectively. If the exchange rate today is 0.95 E/USD, what exchange rate expected to exist one year from today would cause investors to be indifferent between the two securities?
Explain why a persistent currency undervaluation will likely cause bubbles and overinvestment in an economy.
What are the three reasons for the existence of financial intermediaries?
In what ways did Congress try to "finesse" the savings-and-loan crisis of the 1980s?
What is the key feature of the Gramm-Leach-Bliley Financial Services and Modernization Act of 1999?
Discuss the "moral hazard" problem of lending. Bring in the concepts of "upside potential" and "downside potential."
What shift in corporate finance caused trouble for the banking industry in the 1980s? What were the causes of that shift?
Can we fairly blame the sub prime mortgage crises of 2007-2008 on the concept of moral hazard?
What are some things a bank can do to increase its net interest margin?
Is it appropriate to look at a bank's holding of cash and government securities as a measure of its liquidity risk?
How is a bank a manufacturing business? (Think of a bank's "production function.")
Describe a repurchase agreement between a bank and one of its corporate depositors. How do both stand to gain?
What are some events that have changed the ability of banks in the United States to branch between state lines?
What role do finance companies play in leveraged buyouts?
Should women and men pay different rates on insurance policies?
A person starts work for a retail company and is treated reasonably well, at first. But after a few years she notices the company is suddenly putting a lot more demands on her and in other ways is making her life more difficult. What might be happening?
What is an open-end mutual fund? What determines the value of these funds?
What are the fundamental differences between brokers and dealers? Which has a higher risk of capital losses, and why?
What services are provided by investment banks? Do they compete with commercial banks?
Describe what a venture capital fund does.
What is the difference between a defined benefit and a defined contribution pension plan?
Why might a bank ration credit? How can its business customers avoid being affected by this?
A small business has been getting loans from a certain bank for several years and paying them off on time. One day the owner gets a call from the bank's trust department offering their services. What is happening here?
How does outside financing of a "very small" business, such as a bicycle repair shop, proceed?
What are some ways a small firm "signals" that it is a high-quality borrower?
Small and new businesses generally must pay higher loan rates than other businesses. How does moral hazard help explain this?
How does a "line of credit" work? What type of business would find having one particularly desirable?
What are the basic steps in arranging a private placement?
Why might a firm want to shelf-register their bonds?
Why might a bank find it good strategy to charge very high penalties for NSF checks?
When might a credit analysis not solve the adverse selection problem? What alternative solutions exist?
What are the primary sources of funds for small, medium-size, and large businesses?
What is the philosophy of U.S. financial regulation regarding "disclosure?"
Is a "run" on a bank a rational act?
How does the FDIC handle most bank failures? What does this imply about deposit insurance?
What is the moral hazard problem with bank deposit insurance?
Why did the FDIC adopt Prompt Corrective Action procedures in the 1990s?
Define "insider trading" and describe what it is not.
What is the chief goal of bank regulation and how is it related to what appears on a bank balance sheet?
In what way does a minimum risk-based capital ratio requirement battle the moral hazard problem in banking?
How have banks tried to get around the provisions of the Glass-Steagall Act? How has the government responded?
What are some similarities in the world's financial systems?
The executives of a coffee-packing firm order a corporate jet. How might they defend this purchase to stockholders? How does asymmetric information fit in?
Is there something in American public philosophy that prevents us from handling the large-firm stockholder-lender conflict the way Germany and Japan do?
What cost is paid by Germany and Japan for the ease with which they handle the two stockholder conflicts?
Most economists assume that firms always act to maximize profit. What does the theory of asymmetric information have to say about that?
In economics there is a concept called the "free-rider problem." Think about what this might mean and how it relates to an information-asymmetry problem.
What is a "monitoring-intensive" intermediary? What conflict-resolving role does it play?
Under what type of financial system is "financial distress" more easily handled?
Who is the current chairman of the Federal Reserve? Which president first appointed the chair? Have there been reappointments? How does the current chair compare with the previous one?
What accounts for the geographic dispersion of the Federal Reserve district banks?
Shouldn't the president be allowed to appoint a new Fed chairman at the start of his administration?
Some have argued that the Fed's independence makes them a useful scapegoat. Is this plausible?
Does a study of the growth rate of the money supply in presidential election years shed any light on the question of the Fed's independence?
What are the key general characteristics reflected in the formal structure of the Fed?
Why is the chairman of the Fed such a dominant figure in the formation and execution of monetary policy?
The formal structure of the Fed indicates a highly decentralized organization. Is this true in reality today?
Build a case for reducing the Fed's independence.
Is there a relationship between central bank independence and inflation?
Why is an individual bank more limited in its ability to create money than the banking system as a whole?
If reserve requirements were eliminated, what would happen to the deposit expansion multiplier?
What is the effect on the deposit expansion process if banks choose to hold more excess reserves? Why might they do so?
Shouldn't the required reserve ratio be set to 1.0 so that the Fed would have much greater control over the money supply?
Describe the role played by Federal Reserve district banks in the check clearing process. What happens when one of the banks is not a Fed member?
How does the expansion process differ for single-bank versus multiple-bank systems? Are there different deposit multipliers?
Why does the Fed buy government securities during a recession?
Why did the Fed appeal to Congress to grant it the right to establish reserve requirements for nonmember as well as member depository institutions?
Did the Fed have adequate tools to prevent the banking collapse of the early1930s?
How would the Fed handle a liquidity crisis next Thursday?
Could monetary policy be conducted without open market operations?
Does it make sense for a bank in the United States to borrow from the discount window and use those reserves to support business or consumer loans?
What is the usual relationship between the discount rate and the federal funds rate? What happens to this relationship when the Fed moves toward a more expansionary policy?
What would appear on the T-accounts of the Fed, the Banking System, and Government Bond Dealers when the Fed sells $X in government securities?
What would appear on the T-accounts of the Fed and the Banking System when $X in discount loans are made?
There is a revolution in a Latin American country. The new government repudiates billions of dollars of its predecessor's debt held by banks in the United States. How might the Fed react?
If the economy is facing rising levels of inflation, what would the Fed do with its three monetary control tools?
How might banks use float to boost earnings?
How do Federal Reserve notes enter the banking system? How do they leave?
What happens to the interest earned by the Federal Reserve on the government securities it owns outright?
Does the federal government have an incentive to monetize the debt eventually?
Should it be the Fed or the Treasury that decides on the monetizing of the deficit?
What is a float? Describe how it affects bank reserves and the Federal Reserve's balance sheet. What factors affect the size of float?
How does the amount of currency held by the public affect bank reserves? How is the Fed likely to react to a sudden short-run increase in currency holding?
What are tax and loan accounts? Describe why they are set up and how changes in them affect bank reserves.
Suppose the federal government increases taxes to the point that its deficit is eliminated. Would this influence the money supply?
What is the modern version of printing money to pay the government's bills?
"When the government borrows rather than taxing, the result is always increased inflation." Do you agree?
What appears to be the current operating target of the Fed?
Why does the FOMC no longer target M1?
Should the Fed's discount rate be set at a penalty level, say 1 percentage point above the federal funds rate?
Can you think of any politically savvy reasons why the Fed targets interest rates over reserve aggregates?
What is the FOMC directive? Describe its major components.
Why is the federal funds rate considered a good operating target? What are the dangers of relying on it?
Why would the Federal Reserve lose control of the money supply if it chooses to target interest rates exclusively, and vice versa? Which of them should it be controlling?
Evaluate the suitability of M2 as an intermediate target.
What is a reasonable dividing line between the short run and long run in macroeconomics?
Under conditions assumed by the Classical economists, can the Fed control nominal interest rates? How about real interest rates?
Does the Great Depression "prove" that the Classical economists were wrong?
Economists assume that wants are unlimited. Shouldn't the demand for money be unlimited, then?
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