Questions and Answers of Financial System Of The Economy

Under lagged reserve accounting, how does the computation period correspond with the maintenance period? Under contemporaneous reserve accounting, how does the computation period correspond with the
Why and how has the Fed become more open about monetary policy decisions in recent years?
What are the special lending facilities created by the Fed in response to the financial crisis of 2007– 2009? What does each do? Why were they created?
Assume that checkable deposits are $500 billion, desired excess reserves are 1 percent of deposits, the required reserve ratio is 10 percent, and the amount of reserves is $50 billion. What is the
The Fed anticipates a seasonal reserve need of $10 billion over the next month. Is it more likely to use outright purchases or temporary transactions to meet this need? If the Fed supplies $20
Explain the following statement: Even though outright purchases account for less than 10 percent of Fed transactions, the Fed’s portfolio of securities consists mainly of securities bought outright.
Assume that the demand for required plus excess reserves is $50 billion, the level of discount borrowing is $100 million, and the actual level of nonborrowed reserves is $49 billion. What is the
What are the implications of the following Fed activities? a. The Fed sells securities using reverse repurchase agreements. b. The Fed buys securities using system repurchase agreements. c. The
Briefly explain the Bretton Woods exchange rate system. When was it created? When and why did the system collapse?
Under the Bretton Woods system, the U.S. dollar was the official reserve asset. How did this affect the U.S. balance of payments on current and capital accounts? Could the United States experience
Assume that you work at the central bank of a small country that is considering an expansionary monetary policy to speed up the level of economic activity. Given fixed exchange rates, advise the
Argue that fixed exchange rates are preferable to flexible exchange rates. Then present the opposite argument.
For each of the following situations, assuming fixed exchange rates, tell what will happen to the balance of payments on current and capital accounts in the United States, ceteris paribus:a. Domestic
What are the advantages of fixed exchange rates? What are the disadvantages? Does it matter if the country is large or small?
Briefly explain how interest rates on instruments of comparable risk and maturity will tend to be equalized in a world without capital barriers.
Under a flexible exchange rate system, what effect does contractionary monetary policy have on the exchange rate?
Why is a country limited in executing its own monetary policy under a fixed exchange rate system? How is it limited under a flexible exchange rate system?
How can monetary policy coordination among countries increase the degree to which monetary policy can be used to pursue macroeconomic goals under fixed exchange rates? Under flexible exchange rates?
Could high U.S. interest rates affect investment spending in foreign countries? Explain.
What is the Euro system? Briefly discuss how the Euro system conducts monetary policy.
What is full dollarization? How does it differ from a currency board? What is seigniorage?
The Fed exchanges $1 million for 139 million yen. If the Fed sells $1 million worth of T-bills in the open market, what will happen to domestic interest rates and the money supply? If the Fed does
On September 30, 2008, what percentage of bank assets did the smallest 40 percent of banks control? What percentage of bank assets did the largest 7 percent of banks control?
Briefly discuss the incentives that have led to a rapid pace of financial innovation in the last 45 years.
Discuss the factors that have contributed to the revolutionary changes in the structure of U.S. banking in recent years. Which factors are most important? Could regulators have prevented many of the
Will the revolutionary changes in banking increase or decrease the competitiveness of the industry? Why?
Discuss the following statement: The breakdown of barriers to interstate and intrastate banking means that competition in banking is decreasing.
What is the difference between a bank holding company and a financial holding company?
What is merchant banking?
What is disintermediation? When is it likely to occur? What factors can reduce it? If I take my funds out of my credit union and put them in a money market mutual fund, have I disintermediated? Why
Discuss the roles that technology and regulation play in aiding financial innovation. Will innovation always occur to exploit loopholes in regulations?
What are nondeposit liabilities? Give some examples. What are negotiable CDs? How do nondeposit liabilities differ from negotiable CDs? What are retail sweep accounts? What are credit derivatives?
What is Regulation Q? Regulation D? Discuss ways banks have found to get around both regulations.
What is securitization? How does it reduce interest rate risk? Name some types of liabilities that are now securitized.
Discuss some characteristics of the financial system in 2009 that make it different from earlier periods.
How have increased competition and price volatility affected financial innovation? What are some specific types of innovation that deal with these factors?
How do collateralized mortgage securities differ from mortgage-backed securities? Which has less risk?
Defend the following statement: Once an innovation appears, it will remain even after the impetus for its development disappears. Give an example.
What are derivatives? Define forward, futures, and option agreements. What are the underlying instruments in these agreements?
Discuss ways in which each of the following risks can be reduced: default risk, interest rate risk, liquidity risk, and exchange rate risk.
Why does financial intermediation inherently involve risk? Are FIs better at evaluating risks than you are? Why or why not?
What is a financial crisis? Why does an economic downturn often lead to a financial crisis? Explain why the reverse is also true.
Can sharp increases in interest rates increase the risk of a financial crisis? Explain.
What is a debt deflation and why is it so onerous for the economy?
Is a financial crisis more likely to be triggered by inflation or deflation? Explain.
What does “too big to fail” mean? What are the costs of such a policy? Under what circumstances would your funds be safer in a large bank that made risky loans rather than in a small conservative
What is moral hazard? Why does deposit insurance inherently involve moral hazard? What factors contribute to moral hazard on the inter national level?
Discuss the factors that contributed to the S&L debacle during the 1980s.
Define derivatives. Why can they be risky?
S&Ls had limited experience making commercial loans, while commercial banks were extremely experienced in dealing with them. Explain how this difference could have exacerbated the adverse selection
Can derivatives cause massive losses if they are used only to hedge?
Discuss the reasons for the crisis in mortgage markets in the first de cade of the 2000s.
What are some ways policy makers responded to the financial crisis of 2008– 2009?
Define hedge, speculative, and Ponzi spending units. What is the financial instability hypothesis?
If all prices and my income fall by 25 percent, by what percent does the real value of my debt increase?
List three factors that can cause a financial crisis.
How is the failure of an FI different from the failure of a video rental store? What do these differences imply about the need for regulation?
Discuss the major provisions of the FIRREA and the Reform Act of 2005.
What is redlining? How is the Community Reinvestment Act supposed to affect it? What are the classifications for depository institutions and the ratings under the current regulations? Could my bank
What is the Basel Accord? Why is it desirable to have uniform international capital standards for banks? What is the difference between Basel I and II?
What is the intent of the 25 core principles for effective bank supervision?
Some contend that the passage of the IBBEA is having little effect on the banking industry. What is the basis of their argument? On what date were banks allowed to branch across state lines by
What are the provisions of the Deposit Insurance Reform Act of 2005?
Would a wealthy individual with bank accounts of more than $100,000 prefer the FDIC to use the purchase and assumption method or the payoff method to liquidate failed banks? Why?
What is core capital? How do risk-adjusted assets differ from total assets?
Who regulates money markets? Capital markets?
What are the major provisions of the Depository Institutions Deregulation and Monetary Control Act of 1980? The Garn St. Germain Depository Institutions Act of 1982? Which act expanded the powers of
Explain the difference between risk-based capital standards and risk- based deposit insurance premiums.
What are the regulatory responsibilities of the Securities and Exchange Commission? What is insider trading? Who sets margin requirements?
Identify three self-regulating agencies and explain which industries they regulate. Speculate as to why an industry would self- regulate.
Explain the function of each: (a) National Credit Union Share Insurance Fund; (b) Pension Benefit Guaranty Corporation; (c) Securities Investor Protection Corporation; (d) FDIC
Explain the difference between the purchase and assumption method and the payoff method of resolving a bank insolvency. What does “too big to fail” mean?
What are the major provisions of the GLBA? What is an FHC? How does a bank holding company become an FHC? What conditions must be met to become an FHC?
Was investment banking effectively separated from commercial banking prior to the passage of GLBA? Explain.
What were the provisions of and purpose for the Emergency Economic Stabilization Act?
Assume that a bank has core capital of $1,000,000 and total capital of $2,000,000. Its total risk adjusted assets are $25,000,000 and total assets are $30,000,000. According to the Basel Accord
Define par (face) value, coupon rate, coupon payment, and current yield. What are call provisions and convertible provisions, and how do they affect the interest rates on newly issued securities?
What role do Moody’s and Standard & Poor’s Investors Ser vices play in the bond market?
What is the difference between debenture bonds, subordinated debenture bonds, and bonds backed by specific collateral? What are zerocoupon bonds?
What are inflation-indexed bonds? How do they reduce the risk of holding long-term bonds? Does the interest rate on inflation-indexed bonds change after they have been issued?
Why are interest rates on Treasury securities used as benchmarks to judge the riskiness and liquidity of other securities?
What are the advantages of investing in STRIPS rather than Treasury securities that make regular coupon payments?
Are revenue bonds as safe as general obligation bonds?
What are the reasons for differences in interest rates between Treasury securities and government agency securities? Between Treasuries and municipals? When will a bond sell in the secondary market
How is a mortgage similar to a bond? How is it different? What is the difference between a fixed interest rate and variable interest rate loan? What is amortization?
Explain the process by which a mortgage-backed security is created. What roles do Ginnie Mae, Fannie Mae, and Freddie Mac play?
If Sandi and Dave repay their mortgage early because they are refinancing or selling their home, what is the risk for the lender?
How can investing in a collateralized mortgage obligation entail less risk than investing in a mortgage-backed security? Can it ever entail more risk?
How would a fall in interest rates affect the value of previously issued mortgages?
What is the difference between the secondary market in mortgages and the secondary market in mortgage- backed securities?
Explain why the General Electric Capital Corporation bond in the “Cracking the Code” box on p. 290 is selling at a premium above par?
A Treasury bond pays a 4.250 percent coupon rate. What is the coupon payment per $1,000 face value? How is this related to its yield to maturity?
If the interest rate on a corporate bond is 10 percent, in equilibrium, what will be the rate on a muni with comparable risk, maturity, and liquidity if the marginal investor faces a marginal tax
How could a stock market crash affect the economy?
Assuming that other factors remain constant, is common or preferred stock riskier to hold?
Assuming that other factors remain constant, which pays a higher return to the stockholder: common or preferred stock?
To which market index would you refer to see how well the stock market is performing? Why? Why do you think the movements of the Dow and the S&P 500 are highly correlated?
Why are mutual funds generally perceived to be less risky than holding a market basket of individual stocks?
What are institutional investors, and what impact do they have on stock markets? What is program trading?
Who currently owns the NYSE and NASDAQ? How has the ownership structure changed over time?

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