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Questions and Answers of Money Banking Financial Markets

Go to the web site of the Federal Reserve Bank of St. Louis (FRED) (fred.stlouisfed.org) and download and graph both the interest rate on the 10-year Treasury note (GS10) and the interest rate on the
What is the present value of $1,200 to be received in one year if the interest rate is 5%?
Explain in which category of debt instrument the following belong:a. Car loanb. U.S. Treasury bondc. Three-month U.S. Treasury billd. Mortgage loan
Assume that the interest rate is 10%. Briefly explain whether you would prefer to receive (a) $75 one year from now, (b) $85 two years from now, or (c) $90 three years from now. Would your answer
Briefly explain why yields to maturity and bond prices move in opposite directions.
According to an article in the Wall Street Journal, “Companies and governments [in Europe] are increasingly borrowing at … terms of up to 100 years.” The article notes: “That is good news for
Suppose you are about to borrow $15,000 for four years to buy a new car. Briefly explain which of these situations you would prefer to be in:i. The interest rate on your loan is 10%, and you expect
Go to the web site of the Federal Reserve Bank of St. Louis (FRED) (fred.stlouisfed.org) and download the most recent values for the following five variables:(1) the 30-Year Conventional Mortgage
How is the price of a financial asset related to the payments an investor receives from owning it?
Suppose that you are considering subscribing to Economist Analyst Today magazine. The magazine is advertising a one-year subscription for $60 or a two-year subscription for $115. You plan to keep
Suppose that on January 1, 2018, you purchased a coupon bond with the following characteristics:• Face value: $1,000• Coupon rate: 8 3/8• Current yield: 7.5%• Maturity date: 2020If the bond
When will the real interest rate differ from the expected real interest rate? Would this possible difference be of more concern to you if you were considering making a loan to be paid back in 1 year
Go to the web site of the Federal Reserve Bank of St. Louis (FRED) (fred.stlouisfed.org) and download the most recent values and values from the same month one year and two years earlier for the
Suppose that Ford issues a coupon bond at a price of $1,000. Draw a timeline for the bond, assuming that it has the following characteristics:• Coupon rate of 5%• Par value of $1,000• Maturity
Consider the case of a two-year discount bond—that is, a bond that pays no coupon and pays its face value after two years rather than one year. Suppose the face value of the bond is $1,000, and
A student asks:If a coupon bond has a face value of $1,000, I don’t understand why anyone who owns the bond would sell it for less than $1,000. After all, if the owner holds the bond to maturity,
For several decades in the late nineteenth century, the price level in the United States declined. Was this likely to have helped or hurt U.S. farmers who borrowed money to buy land? Does your answer
Suppose that you just bought a four-year $1,000 coupon bond with a coupon rate of 6% when the market interest rate is 6%. One year later, the market interest rate falls to 4%. What rate of return did
Suppose that you are considering investing $1,000 in bank CDs.a. First, you consider one of the following CDs:• CD 1, which will pay an interest rate of 5% per year for three years• CD 2, which
A student looking at the timeline for a student loan on page 65 of the text makes the following observation:The text states that the interest rate on the loan is 9%, but this calculation is obviously
For each of the following situations, write the equation needed to calculate the yield to maturity. You do not have to solve the equations for i; just write the appropriate equations.a. A simple loan
Briefly explain whether you agree with the following statement:If interest rates rise, bonds become more attractive to investors, so bond prices will rise. Therefore, when interest rates rise, bond
Suppose that you are considering investing in a four-year bond that has a face value of $1,000 and a coupon rate of 6%.a. What is the price of the bond if the market interest rate on similar bonds
Suppose that on January 1, 2018, the price of a one-year Treasury bill is $970.87. Investors expect that the inflation rate will be 2% during 2018, but at the end of the year, the inflation rate
Some companies offer their employees defined benefit pension plans. Under these plans, employees are promised a fixed monthly payment after they retire. The federal government regulates some aspects
According to a New York Times article: “With yields on many municipal bonds extremely low … even a small increase in their price, which would cause the yield to go down, would cause a loss of
An article in the Wall Street Journal in 2016 noted: “Government-bond yields are heading higher around the world, a move typically linked to rising expectations of economic growth and inflation.”
In 2015, the Washington Nationals baseball team signed pitcher Max Scherzer to a contract to play for the team for 7 years. He would be paid $15 million dollars per year for 14 years—an additional
A few years ago, the British government was considering retiring, or buying back from investors, some outstanding consols that had annual coupons of £40.a. What is a consol?b. If the yield to
Ford Motor Company has issued bonds with a maturity date of November 1, 2046, that have a coupon rate of 7.40%, and it has issued coupon bonds with a maturity of February 15, 2047, that have a coupon
Many retired people buy annuities. With an annuity, a saver pays an insurance company, such as Berkshire Hathaway Insurance Company or Northwestern Mutual Insurance Company, a lump-sum amount in
A column in the New York Times noted that during the housing boom that ended in 2006: “Global banks had loaded up on these supposedly safe securities, and were at risk of becoming insolvent when
Consider the following information on two U.S. Treasury bonds:Briefly explain how two securities that have the same yield to maturity can have different asked prices. Asked Maturity Coupon Bid Asked
Consider the following analysis:The rise and fall of a bond’s price has a direct inverse relationship to its yield to maturity, or interest rate. As prices go up, the yield declines and vice versa.
When the inflation rate increases, what happens to the federal funds rate? Operationally, how does the Fed adjust the federal funds rate?When the inflation rate increases, what happens to the federal
Go to the St. Louis Federal Reserve FRED database, and find data on net exports (NETEXP), transfers, (A123RC1Q027SBEA) and the current account balance (NETFI).a. Calculate net investment income for
What are the advantages and disadvantages of currency boards and dollarization over a monetary policy that uses only an exchange-rate target?
“If a country wants to keep its exchange rate from changing, it must give up some control over its monetary policy.” Is this statement true, false, or uncertain? Explain your answer.
If the Federal Reserve sells dollars in the foreign exchange market but conducts an offsetting open market operation to sterilize the intervention, what will be the effect on international
How do the monetary policy tools of the European System of Central Banks compare to the monetary policy tools of the Fed? Does the ECB have a discount lending facility? Does the ECB pay banks an
“The independence of the Fed means that it takes the long view and not the short view.” Is this statement true, false, or uncertain? Explain your answer.
Consider a failing bank. A deposit of $350,000 is worth how much to the depositor if the FDIC uses the payoff method given the typical recovery rate? How much is the same deposit worth to the
Which relationship would you expect to exist between measures of corruption and living standards at the country level? Explain by which channel corruption might affect living standards.
The following table lists the foreign exchange rate between U.S. dollars and British pounds (GBP) during May 2017. Which day would have been the best for converting $200 into British pounds? Which
According to Figure 8, in which years would you have chosen to visit the Grand Canyon in Arizona rather than the Tower of London?
In many countries around the world, the population is aging and large segments of the population are retiring or close to retirement. What effect would this have on a countries’ long-run aggregate
If the public expects the Fed to pursue a policy that is likely to raise short-term interest rates permanently to 5%, but the Fed does not go through with this policy change, what will happen to
How would an unexpected change in the equilibrium real fed funds rate be an argument against using a Taylor rule for monetary policy implementation?
In Japan, the government and central bank have enacted policies recently to raise inflation permanently from persistently low levels, however inflation continues to remain near zero. How, if at all,
In general, if stock prices are rising, consumption growth is strong, house price appreciation is high, and unemployment is low, would you classify monetary policy as too tight, too loose, or just
In December 2015, the Fed raised the fed funds rate for the first time in nearly a decade, and gradually increased interest rates over a prolonged period of time after that. However, the Fed
“If the fed funds rate is at zero, the Fed can no longer implement effective accommodative policy.” Is this statement true, false, or uncertain? Explain.
Nobel Prize winner Franco Modigliani found that the most important transmission mechanisms of monetary policy involve consumer expenditure. Describe how at least two of these mechanisms work.
From early 2009 to fall 2017, the S&P 500 stock index increased by a cumulative 260%, or approximately 30% per year. Over the same period, one index of consumer confidence increased from 56 to
From 2008 to 2017, auto loan rates in the United States declined from around 8% to near historic lows of around 4.5%. At the same time, auto sales increased to near historic high levels by 2017. How,
In recent years, central banks have dramatically increased the amount of communication with market participants and the public, and at the same time in many of these countries, average inflation has
As part of its response to the global financial crisis, the Fed lowered the federal funds rate target to nearly zero by December 2008 and quadrupled the monetary base between 2008 and 2017, a
Suppose an econometric model based on past data predicts a small decrease in domestic investment when the Federal Reserve increases the federal funds rate. Assume the Federal Reserve is considering
In what ways can nonconventional monetary policy affect the real interest rate for investments when the economy reaches the zero lower bound? How are credit spreads affected?
In both the 1960s and the 1970s in the United States, inflation increased significantly. However, unemployment behaved very differently in the two decades. Why is this?
If a strike takes place in France, making it harder to buy French goods, what will happen to the value of the U.S. dollar?
For each of the following, identify whether they increase or decrease the current account balance: a. An American citizen’s purchase of an airline ticket from Air France.b. A Japanese
Suppose that you travel to Cali (Colombia), where the exchange rate is 1 USD to 2,900 Colombian pesos. As you enter a McDonald’s restaurant, you realize you need 17,400 Colombian pesos to buy a
Refer to the previous exercise. Which type of foreign market intervention must the central bank of Colombia conduct to keep the exchange rate at a level where the currency is not under- or
What would be the effect of a devaluation on a country’s imports and exports? If a country imports most of the goods included in the basket of goods and services used to calculate the CPI, what do
Why might a country that is suffering a recession not want to intervene in the foreign exchange market if its currency is overvalued? Assume this country participates in a fixed exchange rate
The IMF does not enjoy a great reputation in many countries that were recipients of IMF loans or bailouts. Explain why many citizens were not happy with the role played by the IMF.
Go to the St. Louis Federal Reserve FRED database and find data on the budget deficit (FYFSD), the amount of federal debt held by the public (FYGFDPUN), and the amount of federal debt held by the
Why might a central bank choose to monetize the debt, knowing that it could lead to higher inflation?
Consider two central banks: one with a history of maintaining price stability and low inflation, and the other with a history of high inflation and poor inflation management. All else equal, if the
Some payment technologies require infrastructure (e.g., merchants need to have access to credit card swiping machines). In most developing countries historically this infrastructure has either been
How would a decline in house prices, or decrease in stock market prices affect the IS curve?
If an increase in autonomous consumer expenditure is matched by an equal increase in taxes, will aggregate output rise or fall?
Inventories typically increase starting at the beginning of recessions, and begin to decline near the end of recessions. What does this say about the relationship between planned spending and
Financial frictions are not a problem for the economy, since they do not affect the safe policy rate which is controlled by the central bank.” Is this statement true, false, or uncertain? Explain
If an asset price bubble begins to form, assuming the central bank responds, how is it likely to respond, and what will be the effect on the MP curve?
If financial frictions increase, how will this affect credit spreads, and how might the central bank respond? Why?
Consider the economy described in Applied Problem 23.a. Derive expressions for the MP curve and the AD curve.b. Assume that π = 2. What are the real interest rate and the equilibrium level of
“The appreciation of the dollar from 2012 to 2017 had a negative effect on aggregate demand in the United States.” Is this statement true, false, or uncertain? Explain your answer.
In the aftermath of the financial crisis in the United States, labor mobility has decreased significantly. How, if at all, might this affect the natural rate of unemployment?
When aggregate output is below the natural rate of output, what happens to the inflation rate over time if the aggregate demand curve remains unchanged? Why?
Suppose the public believes that a newly announced anti-inflation program will work and so lowers its expectations of future inflation. What will happen to aggregate output and the inflation rate in
What happens to inflation and output in the short run and the long run when taxes decrease?
If stagflation is bad (high inflation and high unemployment), does this necessarily mean low inflation and low unemployment is good?
During 2017, some Fed officials discussed the possibility of increasing interest rates as a way of fighting potential increases in expected inflation. If the public came to expect higher inflation
On January 19, 2017, the Federal Reserve released its amended statement on longer-run goals and monetary policy strategy. It stated: “The Committee reaffirms its judgment that inflation at the rate
Go to the St. Louis Federal Reserve FRED database and find data on the personal consumption expenditure price index (PCECTPI), the unemployment rate (UNRATE), and an estimate of the natural rate of
In the United States, many observers have commented in recent years on the “political gridlock in Washington D.C.” and referred to Congress as a ‘Do Nothing Congress”. What type of policy lag
“If the data and recognition lags could be reduced, activist policy probably would be more beneficial to the economy.” Is this statement true, false, or uncertain? Explain your answer.
In the early 1970s, an unexpected productivity slowdown lead most economists to believe that potential output was larger than it actually was. How are policymakers likely to respond under this
If expected inflation drops in Europe, so that interest rates fall there, what will happen to the exchange rate on the U.S. dollar?
On June 23, 2016, voters in the United Kingdom voted to leave the European Union. From June 16 to June 23, 2016, the exchange rate between the British pound and the dollar increased from 1.41
If American auto companies make a breakthrough in automobile technology and are able to produce a car that gets 200 miles to the gallon, what will happen to the U.S. dollar exchange rate?
If nominal interest rates in America rise but real interest rates fall, predict what will happen to the U.S. dollar exchange rate.
Suppose the president of the United States announces a new set of reforms that includes a new anti-inflation program. Assuming the announcement is believed by the public, what will happen to the
Suppose that you are considering going on vacation abroad and that the euro has appreciated by 15% with respect to the U.S. dollar. Would you be more or less willing to visit Rome and Paris?
If the Fed has an interest-rate target, why will an increase in the demand for reserves lead to a rise in the money supply? Use a graph of the market for reserves to explain.
What does the Taylor rule imply that policymakers should do to the fed funds rate under the following scenarios?a. Unemployment rises due to a recession.b. An oil price shock causes the inflation
How can forward guidance as a tool of the central bank impact the policy instrument, intermediate targets, and goals?
Compare the monetary base to M1 on the grounds of controllability and measurability. Which do you prefer as an intermediate target? Why?

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