Questions and Answers of Economics Of Money Banking And Financial Markets

Go to the St. Louis Federal Reserve FRED database, and find data on real GDP (GDPC1), potential GDP (GDPPOT), and the unemployment rate (UNRATE) from 1960 to the most recent period. For the
From 2008 to 2015, auto loan rates in the United States declined from around 8% to near historic lows of around 4%. At the same time, auto sales increased dramatically. How, if at all, does this
Suppose you buy a call option on a $$100$,000 Treasury bond futures contract with an exercise price of 105. If the price of the Treasury bond is 115 at expiration, is the option at the money, in
The financial crisis of 2007–2009 sent the United States into its worst recession since the end of World War II, with the unemployment rate rising to above 10%.Go to
In its statement dated June 14, 2017, the Federal Open Market Committee indicated that inflation “is running somewhat below 2%.” Go to http://research.stlouisfed.org/fred2/, and click on the
Refer to Problem 22. Now you believe the dealer knows more about the car than you do. How much are you willing to pay? Why? How can this asymmetric information problem be resolved in a competitive
Table 1 reports the balance sheet of all commercial banks based on aggregate data found in the Federal Reserve Bulletin. Compare this table to the most recent balance sheet reported by Bank of
Why did the Federal Reserve and the government intervene to bail out AIG?
Why is Social Security in danger of eventually going bankrupt?
What are the three main proposals for privatizing Social Security? What are their advantages and disadvantages?
What is ERISA, and why was it established?
How are securities brokers/dealers, investment banks, and organized exchanges different from financial intermediaries?
What problems or concerns do sovereign wealth funds present? Are they valid?
“Hedge funds are not risky because, as their name indicates, they hedge risks.” Is this statement true, false, or uncertain? Explain.
What are the four advantages of private equity funds?How do they help alleviate the free-rider problem?
Suppose you contribute $20,000 at the beginning of each year into your defined benefit pension plan and the interest rate is 10%.a. After eight years, what will be the total value of the account?b.
The Federal Reserve maintains extensive data on finance companies. Go to www.federalreserve.gov/releases, and scroll down until you find G.20 Finance Companies.Click on Releases and find the current
What are the advantages and disadvantages of using forward contracts to hedge?
What advantages do futures contracts have over forward contracts?
In the July 2017 FOMC meeting, governors and voting presidents of the Federal Reserve System agreed not to increase the federal funds rate target, but somewhat let the markets know that there could
What are the advantages and disadvantages of using an options contract rather than a futures contract?
What are the advantages and disadvantages of using interest-rate swaps?
How can financial derivatives create excessive risk in the financial system?
If the price of the Treasury bond is 115 at expiration, is the option at the money, in the money or out of the money?Determine the premium if the profit equals $8,000.
A bank customer will be going to London in June to purchase £100,000 in new inventory. The current spot and futures exchange rates are as follows:The customer enters into a position in June futures
The Chicago Mercantile Exchange houses the fed funds futures market as well as a number of other interest rate options and futures. Go to
How does the provision of several types of financial services by one firm lead to a lower cost of information production for the firm?
How can conflicts of interest make financial markets less efficient?
How can conflicts of interest lead to unethical behavior?
Some commentators have attributed the demise of Arthur Andersen to the combination of auditing and consulting activities provided by the firm. Is this assessment correct?
Describe two conflicts of interest that occur in creditrating agencies.
Describe two conflicts of interest that occur in universal banks.
“Conflicts of interest always reduce the flow of reliable information.” Is this statement true, false, or uncertain?Explain your answer.
Give two examples of conflicts of interest that do not seem to have been exploited and thus have not led to a reduction of reliable information in the financial markets.
When is it more likely that conflicts of interest will be exploited?
How can poorly designed compensation schemes in financial services firms lead to conflicts of interest?
What are “reputational rents,” and how are they significant?
“Sarbanes-Oxley significantly raises compliance costs for firms. Since it dramatically decreases market efficiency, it should be abolished.” Do you agree with this statement? Why or why not?
Why might the market be the best mechanism for minimizing conflicts of interest?
What are the advantages and disadvantages of mandatory disclosure when dealing with conflicts of interest?
How can supervisory oversight help reduce conflicts of interest?
What are the disadvantages of separating financial activities into different firms in an effort to avoid conflicts of interest?
What are the advantages and disadvantages of governmental provision of information as a solution to the problems created by conflicts of interest?
Why is a conflict of interest present when compliance officers are involved in the production of credit ratings?
In what ways is the Dodd-Frank legislation designed to reduce conflicts of interest?
Go to http://www.soxlaw.com/. This site tracks issues and news related to the Sarbanes-Oxley Act.a. Summarize in two or three sentences the primary reason for the passage of the Sarbanes-Oxley Act.b.
Go to www.sec.gov/ and click on “Press Releases.”a. Summarize the major types of issues that the SEC addresses in these press releases.b. Review the past three months of releases, and count how
Since monetary policy changes made through the fed funds rate occur with a lag, policymakers are usually more concerned with adjusting policy according to changes in the forecasted or expected
Irving Fisher developed the clearest exposition of the classical quantity theory of money. Go to https://en.wikipedia.org/wiki/Irving_Fisher and write a onepage summary of his life and contributions.
Wikipedia has a detailed account of hyperinflationary episodes in a number of countries throughout history.Go to the page at
It can be an interesting exercise to compare the purchasing power of the dollar over different periods in history. Go to https://www.bls.gov/data/inflation_ calculator.htm to find the inflation
The Federal Reserve has a listing of the nonconventional policy tools used for liquidity provision at https://www.federalreserve.gov/monetarypolicy/expiredtools.htm. Of those tools, which one was the
From August 2014 to August 2017, the Fed continued to reiterate that monetary policy was ‘accommodative.’And during this time, excess reserves by banks decreased from around $$2.67$ trillion to
Go to http://www.econlib.org/library/Enc1/Recessions.html and review the material on recessions.a. What is the formal definition of a recession?b. What are the problems with the definition?c. What
Leo Krippner, an economist at the Reserve Bank of New Zealand, publishes an ‘Effective Monetary Stimulus’ (EMS) measure, designed to gauge the stance of U.S.monetary policy. Go to the website
Identify the sources and discuss the consequences of bank runs, bank panics, and financial crises.
Explain why and how the government intervenes in the financial system, and the problems the government safety net creates.
Analyze how a government regulates and supervises the financial system to contain risk.
In the absence of limits on the behavior of large intermediaries, how might the perception of institutions being “too-big-to-fail” lead to increased concentration in the banking industry?
One goal of the regulatory reforms that followed the 2007-2009 financial crisis was to address the “too-big-to-fail” problem associated with large institutions.How did the reforms try to address
Deflation is the rate of decline in the aggregate price level. Why might unexpected deflation be of particular concern to someone managing a bank?
Explain how regulations that require banks to finance a greater portion of their activities with equity capital might hinder economic growth. How might such regulations help economic growth?
The collapse of banks and the banking system disrupts both the payments system and the screening and monitoring of borrowers.a. Intermediaries are insolvent when their liabilities exceed their
The government is involved in every part of the financial system.a. Government officials may intervene in the financial system in order to:i. Protect small depositors.ii. Protect bank customers from
Through regulation and supervision, government officials reduce the amount of risk banks can take, lowering their chances of failure. Regulators and supervisors:a. Restrict competition.b. Restrict
Regulators use macro-prudential tools to limit systemic threats to the financial system.Such risks usually arise from externalities—costly spillovers from the behavior of intermediaries. These
Explain the origin and functions of central banks.
In 1900, there were 18 central banks in the world; today, there are about 180.Why does nearly every country in the world now have a central bank?
Analyze the objectives of central banks.
Describe the features of an effective central bank.
Discuss the relationship between monetary and fiscal policy.
A euro-area country that runs very large public deficits or shows a persistently high and rising debt-to-GDP ratio violates the provisions of a 2012 treaty aimed at promoting fiscal stability.
How does the time consistency problem apply to the conduct of monetary policy?How might long terms of office for central bankers help overcome it?
While there is strong consensus among economists in favor of central bank independence, political support seems to be waning. What factors may have contributed to the rise in the political threat to
Consider the following data for Country A and Country B:Use these data to show that the ratio of public debt to GDP is expected to stabilize in Country A but not in Country B. How might this impact
In 2012, the Federal Reserve joined many other central banks by making explicit a numerical target for inflation. Explain how stating that an annual inflation rate of 2 percent over the long run is
The functions of a modern central bank are to:a. Adjust interest rates and other tools to control the quantity of money and credit in the economy.b. Operate a payments system.c. Lend to sound banks
The objective of a central bank is to reduce systematic risk in the economic and financial system. Specific objectives include:a. Low and stable inflation.b. High and stable growth and employment.c.
The best central banks:a. Are independent of political pressure.b. Are accountable to elected representatives and the public.c. Communicate their objectives, actions, and policy deliberations clearly
Fiscal policy can make the central bank’s job impossible because:a. Politicians tend to take a short-term view, encouraging doubt about the commitment to price stability or financial stability.b.
Explain the structure of the Federal Reserve System.
Assess the effectiveness of the Federal Reserve System.
Describe the European Central Bank and analyze the euro-area crisis.
Go to the ECB’s website and locate the most recent introductory statement made by the president of the ECB at the press conference following a Governing Council meeting. What was the Governing
During the euro-area crisis, interest rate spreads between the sovereign debt of peripheral countries and Germany widened most sharply when it was feared that one or more countries might leave the
Like most central banks around the world, the Federal Reserve currently does not provide deposit accounts for individuals. Suppose the Fed decided to issue digital currency by offering unlimited
The Federal Reserve System is the central bank of the United States. Its decentralized structure comprises three primary elements:a. Twelve Federal Reserve Banks, each with its own board of
The FOMC’s success in meeting its objectives is enhanced by:a. Its independence, which comes from its members’ long terms, budgetary autonomy, and the irreversibility of its policy decisions.b.
The European Central Bank (ECB) is the central bank for the countries that participate in the European Monetary Union—the euro area.a. The Euro system is composed of three distinct parts:i. The
Describe the central bank’s balance sheet and the monetary base.
Explain how the central bank’s balance sheet changes.
Calculate the deposit expansion multiplier.
Compute the impact on the money multiplier of a fall in the currency-to-deposit ratio from 10 percent to 8 percent when the reserve requirement is 10 percent of deposits, and banks’ desired excess
Analyze the link between the monetary base and the money supply.
Consider an open market purchase by the Fed of $5 billion of Treasury bonds.What is the impact of the purchase on the bank from which the Fed bought the securities.Compute the impact on M1 assuming
Suppose you observe a fall in reserves of $100 million on the central bank’s balance sheet as well as a fall of $100 million in securities held by the central bank.Do you think the size of the
Assuming normal financial and economic conditions, what are the main advantages of a central bank maintaining low-risk, short-term assets on its balance sheet?
The central bank uses its balance sheet to control the quantity of money and credit in the economy.a. The central bank holds assets and liabilities to meet its responsibilities as the government’s
The central bank can manage the size of its balance sheet.a. The central bank can increase the size of its balance sheet, raising reserve liabilities and expanding the monetary base, through:i. Open
Bank reserves are transformed into checkable deposits through multiple deposit creation. In the simplest case, this process is limited by the reserve requirement.a. When a bank’s reserves increase,

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