Questions and Answers of Economics Of Money Banking And Financial Markets

How do the consequences of a one-off shock differ from a more persistent shock? How do inflation expectations come into play?
What is meant by “anchored” inflation expectations? Do these aid a central bank in stabilizing output and inflation? If so, how?
How do forward-looking financial markets shorten the time between departures of the economy from the intended path and the effects of policy actions in returning it to that path?
What is the purpose for SEC regulation of mutual funds? Why might some observers believe that mutual funds are SIFIs and should be regulated as such?
How does the pricing of money market mutual funds differ from that of other (longer‐term) funds? How does a loss resulting from default on a significant asset in a money fund’s portfolio or a
Why do you suppose the money market mutual fund industry is dominated by funds that use amortized cost pricing of their shares (over those that mark their portfolios to market)? Why are amortized
What has been happening to fees on open‐end funds? Why?
Go to the Fidelity Fund website (www.fidelity.com). Name three index mutual funds that they offer; three muni bond funds; and three international equity funds. Can you identify a fund of funds?
Explain the objective of target‐date mutual funds. What are they designed to accomplish? How do they achieve this?
How do shares in ETFs differ from those in open‐end funds?
Visit the Bloomberg public website. What is the current price of an SPDR S&P 500 ETF? How has it changed? What about the S&P INDU SELECT?
Contrast a closed‐end fund with an open‐end fund. How would you expect their asset composition to differ? How can you, as an investor, be able to buy shares in an open‐end fund? A closed‐end
Are successful hedge funds and efficient financial markets compatible? Explain why or why not.
How do hedge funds differ from open-end mutual funds? How are they similar?
Describe the organizational structure of hedge funds, VC funds, and private equity funds. How are the incentives of managers of these funds aligned with the goals of the (other) investors?
Describe the different types of hedge funds and how they are able to earn attractive returns. Why do you suppose that state-of-the-art information and order execution systems are vital to the success
Describe how hedge funds create economic value. Does this help or hinder the goals of monetary policy? How could they cause financial instability?
Do hedge funds increase or reduce asset price volatility? How can you tell?
Why do VC funds require longer-term commitments from investors? Private equity firms?
What sectors of the economy do VC funds focus on? Why might VC funds be better suited than commercial banks for financing the types of firms that they focus on? At what point might these firms become
How do VC funds provide attractive returns to their investors when roughly a third of the companies that they select for financing and other assistance fail?
How do VC funds create economic value? How do they affect macroeconomic performance?
How do private equity funds differ from VC funds?
Why is exit for VC and private equity funds regarded to be important? How is exit achieved for investors in each?
How do private equity firms create economic value? Affect macroeconomic performance?
How do hedge, VC, and private equity funds absorb and manage risk? How does the use of debt by hedge and private equity funds affect risk? How might leverage enhance monitoring of fund managers?
Why are private equity funds very controversial? Hedge funds?
How do the products offered to individuals by pension funds and LICOs differ from those of mutual funds? What is the outlook for each of these institutions as a growing share of the U.S. workforce
Why is it said that the benefits from DB plans are back‐loaded? (Hint: Work through a numerical example in which the benefits formula is based on an algorithm involving the product of tenure with
Why is it said that investment risk is borne by the employer in a DB plan and a worker in a DC plan? Why might employers favor DC plans over DB plans?Which plan requires the greater level of
How would very low interest rates affect the funding position of DB plans? Very high interest rates? Why does the very high concentration of DB plan assets in equities contribute to swings in the
Why would an individual favor accumulating assets in a DC plan rather than in a standard mutual fund? How are IRAs connected to DC funds?
Why do you think state and local government DB plans are generally less well funded than private DB plans?
For LICOs, how does the offering of annuities complement (involve economies of scope) the offering of life insurance? Does one line of activity act as a hedge for the other? If so, how?
Why does the pricing of permanent life insurance result in LICOs’ having more funds to invest in securities? Apart from this consideration, why do LICOs need financial assets to be able to provide
How might an individual combining a series of term insurance policies and a separate savings program be able to replicate the features of a permanent life insurance policy?
How would longer life expectancies affect the pricing of life insurance policies?Annuities?
What determines the pricing of P&C policies?
How does reinsurance affect the risk profiles of insurance companies—LICOs and P&C companies?
How do large institutional investors affect the transmission of monetary policy?How would they respond to information indicating that the central bank was about to pursue a more accommodative
How does credibility affect the ability of a central bank to stabilize output and inflation? Its ability to affect benchmark interest rates?
How might central bank independence affect its credibility? What other factors will affect its credibility?
How do lags in the effects of policy action on output and inflation bolster the case for central bank independence?
Under what circumstances would a money stock target be effective in stabilizing inflation? Output?
What is meant by a Taylor rule? What would the Taylor rule call for in the setting of the policy interest rate if inflation were 3 percent, the target for inflation were 1 percent, and there were a
How might an announced single goal of an inflation target help to achieve that objective? What would be the consequences for output and unemployment? In practice, how would you characterize
Go to the Board’s website and read the most recent statement issued by the FOMC. Identify the sentences that are intended to influence expectations held by the public.
What is meant by the zero-bound constraint? How has it affected the ability of the Fed to achieve its goals? How has the credit crunch affected the ability of the Fed to achieve its goals?
What is meant by a financial crisis? What is the role of financial institutions?
Could a large decline in asset prices occur without prompting a financial crisis? Any examples?
Why do major financial institutions face the need to sell assets during a crisis? Why are these sales frequently characterized as fire sales? During such times, why do markets for risky assets
How did the financial crisis of the 1930s contribute to the Great Depression?How did policymakers deal with this situation?
What is an adverse feedback loop? How does this work to worsen the financial system and the economy?
When net worth of financial institutions drops because asset prices fall, how does leverage of these institutions compound the need to cut back on lending?How is a credit crunch involved?
During a financial crisis, what do you suppose happens to the price of Treasury securities? Why?
What is meant by systemic risk? How does this relate to externalities as a microeconomic principle?
How did financial institutions other than commercial banks contribute to the financial crisis of 2008? What is meant by the shadow banking system?
What approach has the Dodd-Frank bill of 2010 taken to prevent financial crises from developing? Explain.
Why has so much attention focused on capital regulation in recent years?Liquidity regulation?
Why has the foreign exchange market grown so rapidly over recent decades? Do you expect it to continue to grow rapidly?
Describe the basic structure of the foreign exchange market. Who are the major players?
What is the difference between a spot and a forward exchange transaction? In what category does a foreign exchange swap appear?
If the 90‐day short‐term interest rate is 5 percent (annual rate) in the United Kingdom and 2 percent in Japan, what will be the 90‐day forward exchange rate of the pound? Suppose that the
What is the real exchange rate? Explain why economic decisions will be based more on movements in the real exchange rate than the nominal rate.
Suppose that the real exchange value of the dollar in terms of the euro appreciates 10 percent. As a result, will the choice to a U.S. consumer be any different if this takes place through a nominal
What is the law of one price? How does it relate to purchasing power parity?How is the law of one price achieved under fixed exchange rates? Floating exchange rates?
What must a country with a fixed exchange rate do to hit its target for the exchange rate if its currency is undervalued? Overvalued? Is the country also able to pursue other goals with monetary
How will a reduction in interest rates in the United States affect the exchange value of the dollar? An increase? How would an increase in interest rates outside the United States affect the exchange
Suppose the U.S. economy slips into recession and interest rates fall while other major economies hold up fairly well and their interest rates do not change. Will the movement in the exchange rate
China is experiencing inflationary pressures. How is this related to its exchange rate policy? Is its currency—the yuan—undervalued or overvalued? Why has China raised its reserve requirements on
What is meant by currency sterilization? Has China been engaging in sterilization? If so, how have they done this?
How do exchange controls aid a country with an overvalued currency that does not want to impose a contractionary monetary policy?
If a country has an adjustable peg exchange rate regime and wants to slow its inflation rate, how will it want to adjust its exchange rate? Explain how this works using Equation (16‐3).Data from
Compare a currency board with dollarization. Why might a country favor a currency board over dollarization?
Why are commercial banks deemed to be special? Why are they subject to more regulation and supervision than most other industries? Do the same arguments apply to savings institutions and credit
Explain why the United States has so many more commercial banks than other countries?
How does a universal bank common in some other parts of the world compare with a commercial bank in the United States? How does the U.S. holding company structure compare with a universal bank?
What is meant by economies of scale? Economies of scope? How have they influenced banking developments in the United States?
Why have smaller commercial banks been able to survive alongside larger banks?
What role is played by the interbank system? Is the interbank system more important in the United States than in places dominated by large branch banks or universal banks?
What role do commercial banks play in the payment system? Other depository institutions?
What is meant by the liquidity provision function?
How do depository institutions address asymmetric information?
What is meant by maturity transformation? How is this related to interest rate risk? How can depository institutions reduce interest rate risk? How does maturity transformation lead to vulnerability
What is meant by systemic risk? How is this related to economic externalities?How is systemic risk being addressed by the regulatory authorities?
How is the CAMELS system used by regulatory authorities to assess a depository institution’s safety and soundness? What does CAMELS stand for?
Why have bank supervisors from around the globe agreed to adopt common regulatory and supervisory standards? What is meant by Basel I, II, and III?What are some of the key features of Basel III?
Contrast the features of a mutual fund investment with those of retail deposits at commercial banks or other depository institutions. In particular, what are their differences in risk and return? Why
Why do mutual funds generally appeal more to retail investors than large investors?
Why do money market mutual funds appeal to institutional investors more than other funds? Do you think that institutional funds appeal more to larger or smaller businesses?
How have economies of scale affected concentration of large mutual fund complexes in the mutual fund industry? How have economies of scope affected the configuration of products offered by funds in
Describe the various functions performed by a mutual fund. Which of these functions are performed by the complex itself, and which are outsourced to other institutions? Why this separation?
Why do you think that large‐cap index funds have become a dominant product of the mutual fund industry? That is, which principles of economics and finance explain this phenomenon?
What is your outlook for mutual funds offering investments in foreign stocks in relation to those offering only domestic stocks? What about funds offering broad portfolios of domestic and foreign
Refer to Figure 21-1. Get the quarterly CANSIM data from 1968 to 2009 for the real GDP (series V41707150), GDP deflator (series V1997756), and M2 (gross; series V41552801) from the Textbook Resources
The governor of the Bank of Canada announces that over the next year, the rate of money growth will be reduced from its current rate of 10% to a rate of 2%. If the governor is believed by the public
Looking at the same site as you used in Question 1, www.fgn.unisg.ch/eurmacro/tutor/islm.html, the exogenous parameters in this simulation are the MPC (c), the sensitivity of money demand to income
John Maynard Keynes is among the most well known of early economic theorists. Go to http://en.wikipedia.org/wiki/John_Maynard_ Keynes and write a one-page summary of his life and contributions.
What is the advantage that monetary targeting, inflation targeting, and a monetary strategy with an implicit, but not an explicit, nominal anchor have in common?
The current exchange rate between Canada and Britain is 0.5268 per Canadian dollar. The threemonth forward rate between the British pound and the Canadian dollar is 0.4968 per dollar. What is the

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