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Questions and Answers of Money Banking Financial Markets

Over time, as the financial system expands and develops additional sources of financing for small to medium-sized firms, such as asset-backed securities, would the bank lending channel become more or
Classify each of the following as either a policy instrument or an intermediary target. Explain your answer.a. Long-term interest ratesb. Central bank interest ratesc. M2d. Reserve requirements
What are the main criteria for choosing a policy instrument?Why? Explain.
You are considering buying a bottle of wine. Suppose that the euro appreciates by 15% with respect to the U.S. dollar. Are you more or less likely to buy a bottle of Californian wine or French wine?
A German sports car is selling for €65,000. What is the dollar price in the United States for the German car if the exchange rate is 0.80 euro per dollar?
If the Canadian dollar to U.S. dollar exchange rate is 1.24 and the British pound to U.S. dollar exchange rate is 0.68, what must be the Canadian dollar to British pound exchange rate?
The New Zealand dollar to U.S. dollar exchange rate is 1.38, and the British pound to U.S. dollar exchange rate is 0.65. If you find that the British pound to New Zealand dollar is trading at 0.5,
The Mexican peso is trading at 11 pesos per dollar.If the expected U.S. inflation rate is 1% while the expected Mexican inflation rate is 15% over the next year, given PPP, what is the expected
If the price level recently increased by 19% in England while falling by 6% in the Canada, by how much must the exchange rate change if PPP holds? Assume that the current exchange rate is 0.58 pound
Go to the website that contains the most recent calculations of the Economist’s Big Mac Index, http://www.economist.com/content/big-mac-index.a. Plot the relationship between the local price of a
What is the exchange rate between dollars and Swiss francs if one dollar is convertible into 1/40 ounce of gold and one Swiss franc is convertible into 1/25 ounce of gold?
Calculate the overvaluation of the Thai baht (THB) if you can get 34.6 THB per USD at the exchange counter, but a lunch menu that costs 25 USD in Boston sells for 948.25 THB in Bangkok.
The New York Fed executes foreign exchange interventions for the Federal Reserve system. Go to https://www.newyorkfed.org/markets/quar_reports.html to see quarterly summaries of the Fed’s foreign
Suppose your bank has the following balance sheet:If the required reserve ratio is 10%, what actions should the bank manager take if there is an unexpected deposit outflow of $50 million? Assets
Suppose your bank has the following balance sheet:What would happen to bank profits if the interest rates in the economy go down? What actions could you take to reduce the bank’s interest-rate
Using the T-accounts of the First National Bank and the Second National Bank given in this chapter, describe what happens when Jane Brown writes a check for $90 on her account at the First National
What happens to reserves at the First National Bank if one person withdraws \($1\),100 of cash and another person deposits \($200\) of cash? Use T-accounts to explain your answer.
NewBank started its first day of operations with \($155\) million in capital. A total of \($92\) million in checkable deposits is received. The bank makes a \($28\) million commercial loan and lends
Suppose NewBank decides to invest \($273\) million in 30-day T-bills. The T-bills are currently trading at \($4\),981 (including commissions) for a \($4\),940 face value instrument. How many T-bills
Axle Bank reported an ROE of 16% and an ROA of 1.32%. What is the equity multiplier? How well capitalized is this bank?
Suppose you are manager of a bank whose \($200\) million of assets have an average duration of five years and whose \($160\) million liabilities have an average duration of seven years. Conduct a
Why can government safety nets create both an adverse selection problem and a moral hazard problem?
In some countries, governments and bank authorities adopt policies that impose restrictions on asset holdings.Why do they do this?
Banking crises have occurred throughout the world, like the Finnish banking crisis of 1990s, the 2002 Uruguay banking crisis, and the 2003 Myanmar banking crisis. In this context, what similarity do
Consider a failing bank. How much is a deposit of \($290\),000 worth to the depositor. if the FDIC uses the payoff method? The purchase-and-assumption method?Which method is more costly to taxpayers?
Consider a bank with the following balance sheet:The bank makes a loan commitment for $15 million to a commercial customer. Calculate the bank’s capital ratio before and after the agreement.
Oldhat Financial starts its first day of operations with \($11\) million in capital. A total of \($120\) million in checkable deposits are received. The bank makes a \($30\) million commercial loan
Early the next day, the bank invests \($35\) 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
To avoid insolvency, regulators decide to provide the bank with \($27\) million in bank capital. Assume that bad news about mortgages is featured in the local newspaper, causing a bank run. As a
Securitization changes the systemic (system-wide) risks in the regulated and unregulated “shadow” banking system.What is securitization? Does it pose a problem for effective banking systems?
According to Reuters, the People’s Bank of China has been using targeted increases in banks’ reserve requirement ratios (RRR) in recent months. Explain why central banks impose reserve
Why are the number of traditional banking systems in industrialized and developed countries declining?
Implementing a structural separation of commercial banking and investment banking activities is a way to reduce systemic risks when a potential bank failure threatens an entire economic system. Do
Identify two similarities and two differences between the Great Depression and the global financial crisis of 2007–2009.
Why is international regulatory cooperation important? What forms has it taken in the aftermath of the 2007–2009 financial crisis?
What role can self-regulation play in the future to avert financial crises?
The Financial Crisis Inquiry Commission was set up in the aftermath of the Great Recession as an independent group tasked with investigating the causes of the financial crisis of 2007–2009. Go to
What are the two basic causes of financial crises in emerging market economies?
Why might financial liberalization and globalization lead to financial crises in emerging market economies?
Why might severe fiscal imbalances lead to financial crises in emerging market economies?
What other factors can initiate financial crises in emerging market economies?
What events can ignite a currency crisis?
Why do currency crises make financial crises in emerging market economies even more severe?
How did the financial crises in South Korea and Argentina affect aggregate demand, short-run aggregate supply, and output and inflation in these countries?
What can emerging market countries do to strengthen prudential regulation and supervision of their banking systems? How might these steps help avoid future financial crises?
How can emerging market economies avoid the problems of currency mismatch?
Why might emerging market economies want to implement financial liberalization and globalization gradually rather than all at once?
Go to the World Bank’s databank website at http://databank.worldbank.org/data/reports. aspx?source=2&country=. Find the following annual data for South Korea (the Republic of Korea) and Thailand,
Go to the World Bank’s databank website at http://databank.worldbank.org/data/reports. aspx?source=2&country=. Find the following annual data for Argentina, for the past 25 years: (i) GDP at
What are the main difficulties encountered by the newly established central banks in transition economies?
A central bank decides by how much an interest rate should be changed in order to restore equilibrium.What are the tools it uses to take such decisions?
Go to http://www.federalreserve.gov/aboutthefed/. Click on “The Federal Reserve Board” and choose “Board Members.” Find biographical data of members of the Board of Governors by following the
Go to https://www.ecb.europa.eu/ecb/orga/escb/html/index.en.html. Click on “Organization” and choose “Independence.” What is the main argument used to defend the ECB’s political
For the following operations, what happens to the central bank’s and commercial bank’s reserves and the monetary base? Use T-account to show changes in balances. Assume that the amount is $10
Suppose the central bank of your country increases reserves by purchasing $1 million worth of bonds from banks and that the banking system in your economy is in equilibrium. What will happen to the
Suppose that the required reserve ratio is 9%, currency in circulation is \($620\) billion, the amount of checkable deposits is \($950\) billion, and excess reserves are \($15\) billion.a. Calculate
Go to http://www.federalreserve.gov/boarddocs/hh/ and find the most recent monetary policy report of the Federal Reserve. Read the first two parts of the report, which summarizes Monetary Policy and
Go to http://www.federalreserve.gov/releases/h6/hist/ and find the historical report of M1 and M2 by clicking on the “Data Download Program.” Compute the growth rate of each aggregate over each
An important aspect of the supply of money is reserve balances. Go to http://www.federalreserve.gov/Releases/h41/ and locate the most recent release. This site reports changes in factors that affect
Following the global financial crisis in 2008, assets on the Federal Reserve’s balance sheet increased dramatically, from approximately \($800\) billion at the end of 2007 to over \($4\) trillion
Suppose your country is concerned about inflation and has set a target rate for the year. The government believes that targeting inflation is the most important role of monetary politics. The central
Go to https://www.federalreserve.gov/monetarypolicy/fomc.htm. This site reports activity by the FOMC. Click on “Meeting calendars and information” and click on the statement released after the
Go to https://www.federalreserve.gov/releases/h15/.What is the current federal funds rate? What is the current Federal Reserve discount rate? (Define this rate as well.) Have short-term rates
Why does the free-rider problem occur in the debt market?
You are in the market for a used car. At a used car lot, you know that the Blue Book value of the car you are looking at is between $15,000 and $19,000. If you believe the dealer knows as much about
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
You own a house worth $800,000 that is located on a river bank. If the river floods moderately, the house will be completely destroyed. This happens about once every 50 years. If you build a seawall,
What are the transaction costs problems facing financial organizations? Explain how financial intermediaries can help reduce these problems.
What is a key function of credit-rating agencies? Do credit-rating agencies always provide reliable information?What was the role of credit-rating agencies in the sub-prime crisis of 2008?
Assuming the expectations theory is the correct theory of the term structure, calculate the interest rates in the term structure for maturities of one to four years, and plot the resulting yield
Assuming the expectations theory is the correct theory of the term structure, calculate the interest rates in the term structure for maturities of one to four years, and plot the resulting yield
In this exercise, we will practice collecting data from the Web and graphing it using Excel. Go to http://www.forecasts.org/data/index.htm, click on Stock Index Data at the top of the page, and
In Exercise 1, you collected data on and then graphed the Dow Jones Industrial Average (DJIA). This same site reports forecast values of the DJIA. Go to http://www.forecasts.org/data/index.htm, and
Assume that a carpenter borrowed $2,000 to be paid off in a year to finance a machine that would make him work faster. As a result, she is able to take on more projects and collect $400 more earnings
Suppose a few investors are looking for an investment opportunity that will yield high returns. They are willing to invest in private securities instead of government bonds. However, their analyst
Suppose you have just inherited $10,400 and are considering the following options for investing the money to maximize your return:Option 1: Put the money in an interest-bearing checking account that
Suppose that the cost of a movie ticket is \($12\), and a latte costs \($6\). Why would the theater management say the cost of admission is \($12\) and not two lattes? Explain why it is more
Over several hundred years, payments systems used in countries across the world have evolved. For each of thefollowing situations identify the type of payment utilized and at least one reason why
Explain the concept of liquidity. Rank the following assets from most liquid to least liquid:a. Landb. The inventory of a merchandiserc. Cash in handd. A savings account at a local banke. A one-year
Go to http://www.federalreserve.gov/releases/h6/Current/.. a. What have been the growth rates of M1 and M2 over the past 12 months?b. From what you know about the state of the economy, do these
Would $200, which is to be received in exactly one year, be worth more to you today when the interest rate is 12% or when it is 17%?
What is the formula used to calculate the yield to maturity on a 20-year coupon bond with a current yield of 12% and \($1\),000 face value that sells for \($2\),500.
If interest rates decline, which would you rather be holding, long-term bonds or short-term bonds? Why?Which type of bond has the greater interest-rate risk?
If the interest rate is 15%, what is the present value of a security that pays you \($1\),100 next year, \($1\),250 the year after, and \($1\),347 the year after that?
Calculate the present value of a $1,300 discount bond with seven years to maturity if the yield to maturity is 8%.
A lottery claims its grand prize is \($15\) million, payable over five years at \($3\),000,000 per year. If the first payment is made immediately, what is this grand prize really worth? Use an
What is the yield to maturity on a \($10\),000-face-value discount bond, maturing in one year, which sells for \($9\),523.81?
What is the yield to maturity on a simple loan for \($1\),500 that requires a repayment of \($15\),000 in five years?
Which \($10\),000 bond has the higher yield to maturity, a 20-year bond selling for \($8\),000 with a current yield of 20% or a 1-year bond selling for \($8\),000 with a current yield of 10%?
Consider a bond with a 6% annual coupon and a face value of $1,000. Complete the following table. What relationships do you observe between years to maturity, yield to maturity, and the current
Consider a coupon bond that has a \($900\) par value and a coupon rate of 6%. The bond is currently selling for \($860.15\) and has two years to maturity. What is the bond’s yield to maturity?
What is the price of a perpetuity that has a coupon of $70 per year and a yield to maturity of 1.5%? If the yield to maturity doubles, what will happen to the perpetuity’s price?
Property taxes in a particular district are 2% of the purchase price of a home every year. If you just purchased a \($150\),000 home, what is the present value of all the future property tax
A \($1\),100-face-value bond has a 5% coupon rate, its current price is \($1\),040, and it is expected to increase to \($1070\) next year. Calculate the current yield, the expected rate of capital
Assume you just deposited $1,250 into a bank account.The current real interest rate is 1%, and the expected rate of inflation over the next year is 5%. What nominal interest rate should the bank
In this chapter, we discussed long-term bonds as if there were only one type, coupon bonds. In fact, investors can also purchase long-term discount bonds. A discount bond is sold at a low price, and
Explain why you would be more or less willing to buy long-term Delta Air Lines bonds under the following circumstances:a. The company just released its financial statements, indicating that income
Name two institutions that are not important financial intermediaries in an economy.
What is one of the reasons for inflation in your country?Provide empirical evidence to support your answer.
When there is an increase in the value of the European Union’s euro, all else equal, how will American businesses be affected? What will happen when there is a decrease in the value of the American

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