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business
micro economics

Questions and Answers of Micro Economics

Go to the St. Louis Federal Reserve FRED database, and find data on the interest rate on a four-year auto loan (TERMCBAUTO48NS). Assume that you borrow $20,000 to purchase a new automobile and that
The U.S. Treasury issues some bonds as Treasury Inflation Indexed Securities, or TIIS, which are bonds adjusted for inflation; hence the yields can be roughly interpreted as real interest rates. Go
In the aftermath of the global economic crisis that started to take hold in 2008, U.S. government budget deficits increased dramatically, yet interest rates on U.S. Treasury debt fell sharply and
Would fiscal policymakers ever have reason to worry about potentially inflationary conditions? Why or why not?
M1 money growth in the U.S. was about 15% in 2011 and 2012, and 10% in 2013. Over the same time period, the yield on 3-month Treasury bills was close to 0%. Given these high rates of money growth,
Go to the St. Louis Federal Reserve FRED database, and find data on net worth of households and non-profits (HNONWRQ027S) and the 10-year U.S. treasury bond (GS10). For the net worth indicator,
Go to the St. Louis Federal Reserve FRED database, and find data on the M1 money supply (M1SL) and the 10-year U.S. treasury bond rate. For the M1 money supply indicator, adjust the units setting to
If junk bonds are "junk," then why do investors buy them?
During 2008, the difference in yield (the yield spread) between three-month AA-rated financial commercial paper and three-month AA-rated nonfinancial commercial paper steadily increased from its
Prior to 2008, mortgage lenders required a house inspection to assess a home's value, and often used the same one or two inspection companies in the same geographical market. Following the collapse
"According to the expectations theory of the term structure, it is better to invest in one-year bonds, reinvested over two years, than to invest in a two-year bond if interest rates on one-year bonds
If bond investors decide that 30-year bonds are no longer as desirable an investment as they were previously, predict what will happen to the yield curve, assuming (a) The expectations theory of the
Suppose the interest rates on one-, five-, and ten-year U.S. Treasury bonds are currently 3%, 6%, and 6%, respectively. Investor A chooses to hold only one-year bonds, and Investor B is indifferent
Which should have the higher risk premium on its interest rates, a corporate bond with a Moody's Baa rating or a corporate bond with a C rating? Why?
If expectations of future short-term interest rates suddenly fell, what would happen to the slope of the yield curve?
Following a policy meeting on March 19, 2009, the Federal Reserve made an announcement that it would purchase up to $300 billion of longer-term Treasury securities over the following six months. What
In 2010 and 2011, the government of Greece risked defaulting on its debt due to a severe budget crisis. Using bond market graphs, compare the effects on the risk premium between U.S. Treasury debt
In the fall of 2008, AIG, the largest insurance company in the world at the time, was at risk of defaulting due to the severity of the global financial crisis. As a result, the U.S. government
The U.S. Treasury offers some of its debt as Treasury Inflation Protected Securities, or TIPS, in which the price of bonds is adjusted for inflation over the life of the debt instrument. TIPS bonds
Go to the St. Louis Federal Reserve FRED database, and find data on Moody's Aaa corporate bond yield (AAA) and Moody's Baa corporate bond yield (BAA). Download the data into a spreadsheet. a.
Go to the St. Louis Federal Reserve FRED database, and find daily yield data on the following U.S. treasuries securities: one-month (DGS1MO), three-month (DGS3MO), six-month (DGS6MO), one-year
What are the two main sources of cash flows for a stockholder? How reliably can these cash flows be estimated? Compare the problem of estimating stock cash flows to the problem of estimating bond
In the late 1990s, as information technology advanced rapidly and the Internet was widely developed, U.S. stock markets soared, peaking in early 2001. Later that year, these markets began to unwind
Why might the efficient market hypothesis be less likely to hold when fundamentals suggest stocks should be at a lower level?
If monetary policy becomes more transparent about the future course of interest rates, how will stock prices be affected, if at all?
If a forecaster spends hours every day studying data to forecast interest rates, but his expectations are not as accurate as predicting that tomorrow's interest rate will be identical to today's
Go to the St. Louis Federal Reserve FRED database, and find data on the Dow Jones Industrial Average (DJIA). Assume the DJIA is a stock that pays no dividends. Apply the one-period valuation model,
Go to the St. Louis Federal Reserve FRED database, and find data on net corporate dividend payments (B056RC1A027NBEA). Adjust the units setting to "Percent Change from Year Ago," and download the
For each of the following countries, identify the single most important (largest) and least important (smallest) source of external funding: United States; Germany; Japan; Canada. Comment on the
What steps can the government take to reduce asymmetric information problems and help the financial system function more smoothly and efficiently?
How can asymmetric information problems lead to a bank panic?
In December 2001, Argentina announced it would not honor its sovereign (government-issued) debt. Many investors were left holding Argentinean bonds priced at a fraction of their previous value. A few
Many policymakers in developing countries have proposed the implementation of a system of deposit insurance similar to the system that exists in the United States. Explain why this might create more
Gustavo is a young doctor who lives in a country with a relatively inefficient legal and financial system. When Gustavo applied for a mortgage, he found that banks usually required collateral for up
You wish to hire Ron to manage your Dallas operations. The profits from the operations depend partially on how hard Ron works, as follows.If Ron is lazy, he will surf the Internet all day, and he
Why are financial intermediaries willing to engage in information collection activities when investors in financial instruments may be unwilling to do so?
Suppose you go to your local bank, intending to buy a certificate of deposit with your savings. Explain why you would not offer a loan, at an interest rate that is higher than the rate the bank pays
What specific procedures do financial intermediaries use to reduce asymmetric information problems in lending?
Find data on the percent of value of loans secured by collateral for all commercial and industrial loans (ESANQ) and the net percentage of domestic banks tightening standards for commercial and
Go to the St. Louis Federal Reserve FRED database, and find data on net worth of households (TNWBSHNO) and the net percentage of domestic banks tightening standards for prime mortgage loans (DRTSPM).
Go to the St. Louis Federal Reserve FRED database, and find data for all commercial banks on total liabilities (TLBACBM027SBOG), total deposits (DPSACBM027SBOG), and residual of assets less
Go to the St. Louis Federal Reserve FRED database, and find data for all commercial banks on total assets (TLAACBM027SBOG), U.S. government and agency securities held (USGSEC), other securities held
Why are deposit insurance and other types of government safety nets important to the health of the economy?
What are some of the limitations to the Basel and Basel 2 Accords? How does the Basel 3 Accord attempt to address these limitations?
How does bank chartering reduce adverse selection problems? Does it always work?
Suppose Universal Bank holds $100 million in assets, which are composed of the following: Required reserves:..........................$10million Excess reserves: ............................$
Why might more competition in financial markets be a bad idea? Would restrictions on competition be a better idea? Why or why not?
Consider a failing bank. How much is a deposit of $350,000 worth if the FDIC uses the payoff method? The purchase and assumption method? Which method is more costly to taxpayers?
Early the next day, the bank invests $50 million of its excess reserves in commercial loans. Later that day, terrible news hits the mortgage markets, and mortgage rates jump to 13%, implying a
At the height of the global financial crisis in October 2008, the U.S. Treasury forced nine of the largest U.S. banks to accept capital injections in exchange for nonvoting ownership stock, even
Go to the St. Louis Federal Reserve FRED database, and find data on the number of commercial banks in the U.S. in each of the following categories: average assets less than $100 million (US100NUM),
Go to the St. Louis Federal Reserve FRED database, and find data on the residual of assets less liabilities, or bank capital (RALACBM027SBOG), and total assets of commercial banks (TLAACBM027SBOG).
Go to the St. Louis Federal Reserve FRED database, and find data on the level of money market mutual fund assets (MMMFFAQ027S). Download the data into a spreadsheet. a. When did assets start entering
Why is loophole mining so prevalent in the banking industry in the United States?
Why has the number of bank holding companies dramatically increased?
What are the advantages and disadvantages of interstate banking?
How did competitive forces lead to the repeal of the Glass-Steagall Act's separation of the banking and securities industries?
Why does the United States operate under a dual banking system?
What has been the likely effect of the Gramm-Leach-Bliley Act on financial consolidation?
What factors explain the rapid growth of international banking?
Why is there only one U.S. bank among the ten largest banks in the world?
What were the motivations for the original Glass-Steagall Act of 1933?
How does the emergence of interest-rate risk help explain financial innovation?
How do sweep accounts and money market mutual funds allow banks to avoid reserve requirements?
Go to the St. Louis Federal Reserve FRED database, and find data on the 30-year conventional mortgage rate (WRMORTG) and the 5/1-year adjustable-rate mortgage (MORTGAGE5US). a. What are the mortgage
How does the concept of asymmetric information help to define a financial crisis?
How can financial innovation lead to financial crises?
Describe two similarities and two differences between the United States' experiences during the Great Depression and the financial crisis of 2007-2009.
What do you think prevented the financial crisis of 2007-2009 from becoming a depression?
Why would haircuts on collateral increase sharply during a financial crisis? How would this lead to fire sales on assets?
How did the global financial crisis promote a sovereign debt crisis in Europe?
Why is it a good idea for macro prudential policies to require countercyclical capital requirements?
How does the process of financial innovation impact the effectiveness of macro prudential regulation?
What are the three approaches to limiting the too-big-to-fail problem? Briefly describe the advantages and disadvantages of each of the approaches.
Why were consumer protection provisions included in the Dodd-Frank bill, a bill designed to strengthen the financial system?
Why is it important for the U.S. government to have resolution authority?
What is a credit spread? Why do credit spreads rise significantly during a financial crisis?
What causes bank panics to occur?
Why do bank panics worsen asymmetric information problems in credit markets?
Go to the St. Louis Federal Reserve FRED database, and find data on house prices (SPCS20RSA), stock prices (SP500), a measure of the net wealth of households (TNWBSHNO), and personal consumption
Go to the St. Louis Federal Reserve FRED database, and find data on corporate net worth of nonfinancial businesses (TNWMVBSNNCB), private domestic investment (GPDIC1), and a measure of financial
Why was the Federal Reserve System set up with twelve regional Federal Reserve Banks, rather than one central bank as in other countries?
Despite the important role played by the Board of Governors in setting monetary policy, seats to serve on the Board of Governors can sometimes be empty for several years. How might this happen?
How is the president of the United States able to exert influence over the Federal Reserve?
Why is it unlikely that the policy recommendation put forth by the chair of the Board of Governors would ever be voted down by the rest of the FOMC?
In what way does the Federal Reserve have a high degree of instrument independence? If it has a specific mandate from Congress to achieve "maximum employment and low, stable prices," then how does
Should the Federal Reserve be subject to periodic auditing of its policies, procedures, and finances? Why or why not?
Why is the Twelfth Federal Reserve district (San Francisco) so geographically large, while the Second Federal Reserve district (New York) is so small by comparison?
Which is more independent, the Federal Reserve or the European Central Bank? Why?
Should the Federal Reserve redraw its district boundaries, similar to the manner in which congressional districts are periodically realigned? Why or why not?
Why is it important for the regional Federal Reserve Bank presidents to attend the FOMC meetings, even if they are nonvoting members?
Why is the New York Federal Reserve always a voting member of the FOMC?
The presidents of each of the district Federal Reserve Banks (including the New York Federal Reserve Bank) are currently not required to undergo a formal political appointment and approval process.
Go to the St. Louis Federal Reserve FRED database, and find data on the unemployment rate in each of the twelve Federal Reserve districts. These are coded as (D1URN), (D2URN), (D3URN), . . . ,
Go to the St. Louis Federal Reserve FRED database, and find data on the federal funds rate target (DFEDTAR, DFEDTARU, and DFEDTARL) and the discount, or primary credit rate (DPCREDIT). When was the
Classify each of these transactions as an asset, a liability, or neither for each of the "players" in the money supply process-the federal reserve, banks, and depositors. a. You get a $10,000 loan
Describe how each of the following can affect the money supply: (a) The central bank; (b) Banks; (c) Depositors.
What effect might a financial panic have on the money multiplier and the money supply? Why?
The money multiplier declined significantly during the period 1930-1933 and also during the recent financial crisis of 2008-2010. Yet the M1 money supply decreased by 25% in the Depression period but
If a bank depositor withdraws $1,000 of currency from an account, what happens to reserves, checkable deposits, and the monetary base?

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