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money banking financial markets

Questions and Answers of Money Banking Financial Markets

Describe how the time consistency challenge for monetary policy can make it difficult for a central bank to cap the value of its domestic currency.
Explain why, in the absence of the time consistency problem, you might expect a central bank to be effective at holding the value of its domestic currency at an artificially low level for a sustained
Consider a scenario where investors become nervous just before a key government election. As a result, the risk premium on sovereign debt in that country increases dramatically and its currency
Examine the real interest rate in Japan, plotting since 2000 the nominal interest rate on Japanese Treasury bills (FRED code: INTGSTJPM193N), the inflation rate based on the percent change from a
On December 15, 2015, the FOMC raised the target range for the market federal funds rate by 25 basis points (bp) to a range of ¼ to ½ percent. It also instructed the Open Market Desk at the Federal
Inflation, rather than the price level or nominal GDP, is the policy target of choice for many of the world’s central banks. Provide a reason why you think this is the case.
In June 2014, the European Central Bank (ECB) cut the interest rate it pays on excess reserves below zero. What was the rationale for this move and why would banks be willing to pay to keep deposits
The Taylor rule in Problem 9 is thought to be a reasonably good description of policy behavior in the United States in the absence of unusual financial market conditions or deflationary worries.
The overnight reverse repo rate (ON RRP) is a supplementary monetary policy tool of the Federal Reserve. Explain how this tool can set a floor under the market federal funds rate.
Why might the market federal funds rate deviate from the interest rate on excess reserves?
Consider a scenario where, over the next 10 years, the supply of aggregate bank reserves shrinks enough so that the reserve supply curve intersects the downward sloping part of the reserve demand
Using a graph of the market for bank reserves, show how, in the post-2008 environment, the Federal Reserve can control independently both the price and quantity of aggregate bank reserves.
Explain how the Federal Reserve would implement a rise in the target range for the federal funds rate? How does its action influence the market federal funds rate?
Explain the distinction between the “zero lower bound” and the “effective lower bound” on nominal interest rates. If interest rates were pushed below the effective lower bound, what would be
Use your knowledge of the money multiplier to explain why the massive increase in bank reserves that began in the 2007-2009 financial crisis has not resulted in uncontrolled inflation.
You read a story reporting a major scandal about the Federal Deposit Insurance Corporation that is likely to undermine the public’s confidence in the banking system. What impact, if any, do you
Is the money-multiplier model still useful for policymakers in the United States? If not, why not?
Its statement of July 27, 2016, indicated that the FOMC it would pursue policies to meet its “objectives of maximum employment and 2 percent inflation.” Plot since 2009 the evolution of the
Compare the communication strategies of the Federal Reserve and the ECB. In what ways are they similar? Identify two key elements of the Fed’s strategy that are not part of the ECB’s strategy and
Suppose a fellow student in your money and banking class made the following statement: “Given that the Federal Reserve now specifies a numerical target for inflation but not for maximum
Entering 2016, interest rates and inflation had been low for some time. The FOMC added to its annual statement of longer-run goals that it would be “concerned if inflation were running persistently
If you were charged with re-drawing the boundaries of the Federal Reserve districts, what criteria would you use to complete the task?
Explain how the statement by the FOMC in 2012 that an annual inflation rate of 2 percent over the long run is consistent with its mandate can help the Federal Reserve fulfill that mandate?
A central bank cannot operate effectively if it has negative net worth.” State whether you agree or disagree with this statement and provide a rationale for your choice.
Which do you think would be more harmful to the economy – an inflation rate that averages 5 percent a year that has a high standard deviation or an inflation rate of 7 percent that has a standard
What problems does a central bank face in a country with inefficient methods of tax collection?
How do long terms of office for central bankers help overcome the problem of time inconsistency in monetary policy?
The power of a central bank is based on its monopoly over the issuance of currency. Economics teaches us that monopolies are bad and competition is good. Would competition among several central banks
In 1900, there were 18 central banks in the world; today, there are about 185. Why does nearly every country in the world now have a central bank?
When banks failed in the 1929-1933 period, the lack of deposit insurance meant that depositors experienced sizable losses. How big were these losses? For September 1929 through February 1933, plot
In the period since the financial crisis of 2007-2009, several countries experienced very low rates of inflation and in some cases, outright deflation. Why might deflation be of particular concern to
Why were runs during the financial crisis of 2007-2009 not limited to institutions with large exposures to sub-prime mortgage lending?
Mutual funds allow small savers to pool their resources and purchase diversified portfolios of assets with low transaction costs. To see whether savers have taken advantage of these (and other)
Suppose a U.S. bank is considering providing its services abroad. List one possible advantage and one possible disadvantage of expanding via the acquisition of a controlling interest in a foreign
Consider three possible health insurance programs with the following characteristics:Program A: Participation in the program is voluntary and the policy premium charged varies with an individual’s
Use your knowledge of the problems associated with asymmetric information to explain why insurance companies often include deductibles as part of their policies.
After a protracted period of historically low interest rates in the wake of the financial crisis, many observers predicted that the Federal Reserve would follow its December 2015 rate tightening with
The financial crisis compelled banks to reduce their leverage sharply. Consider the following two views of the balance sheet of a bank before and after the financial crisis. Which balance sheet view
Suppose you were the manager of a bank with the following balance sheet. You are required to hold 10 percent of checkable deposits as reserves. If you were faced with unexpected withdrawals of
In response to changes in banking legislation, the past two decades have seen a significant increase in interstate branching by banks in the United States. How do you think a development of this type
Based on the information provided below about banks A and B, compute for each bank its return on assets (ROA), return on equity (ROE) and leverage ratio. a. Bank A has net profit after taxes of
What would you expect to happen to the mix between internal and external financing for new investment projects in a country that experiences a large increase in financial market uncertainty?
Upon graduation, both you and your roommate receive your first credit cards with identical features. You use your card extensively to make purchases, always paying your credit card balance in a
Define the term economies of scale and explain how a financial intermediary can take advantage of such economies.
Plot since 1999, without recession bars, the real exchange rate between U.S. goods and euro-area goods according to equation (2) in the text. Use the consumer price index (divided by 2.37 to set a
Exchange rates can experience sudden changes as well as long-run patterns.a. Plotthe daily U.S. dollar-British pound exchange rate (FRED code: DEXUSUK) for the first half of 2016 and identify the
The U.K. referendum vote described in Problem 21 also affected currencies other than the British pound. For example, the Japanese Yen strengthened as investors sought a “safe-haven” in the wake
Immediately following the June 2016 U.K. referendum vote to leave the European Union, the value of the British pound plummeted versus the U.S. dollar. Using a demand and supply framework for British
Suppose government officials in a small open economy decided they wanted their currency to weaken in order to boost exports. What kind of foreign exchange market intervention would they have to
Suppose that, driven by waves of national pride, consumers across the world (including in the United States), decide to buy home-produced products where possible. Explain how the demand and supply
You need to purchase Japanese yen and have called two brokers to get quotes. The first broker offered you a rate of 125 yen per dollar. The second broker, ignoring market convention, quoted a price
Is the VIX volatility index (FRED code: VIXCSL) an indicator of broader financial market volatility? Using weekly data ending on Fridays, plot from 1994 the VIX,with its scale on the left axis, and
Risk-averse investors care greatly about asset price volatility. Using the FRED “Notes” about the data series, briefly define the (VIX) Volatility Index (FRED code:VIXCLS) of the Chicago Board
You and a colleague both follow the movements of the VIX, an index based on options prices that reflects investors’ expectations for stock market volatility. Suppose, according to the VIX, implied
Suppose, prior to the European financial crisis, you were considering investing in Greek Government bonds but had some concerns about the creditworthiness of the Greek Government. Why, despite your
To see the impact of the bubble in internet stocks on household wealth, plot on a monthly basis since 1980 the NASDAQ stock index (FRED code: NASDAQCOM) on the left axis and the market value of
The NASDAQ stock market index (FRED code: NASDAQCOM) is comprised of stocks that tend to be relatively new and focused on technology, while the Wilshire 5000 (FRED code: WILL5000PR) includes all
Howwell does the stock market anticipate the behavior of the economy? Plot on a monthly basis since 1972 the percentage change from a year ago of the Wilshire 5000 index (FRED code: WILL5000PR). Is
Suppose a shock to the financial system were to disproportionately hit corporate bond markets making it much harder for companies to raise new funds via bond issuance. As a result, the proportion of
Memories of the 2007-2009 financial crisis have made you more risk averse, doubling the risk premium you require to purchase a stock. Suppose that your risk premium before the crisis was 4 percent
You are thinking about investing in stock in a company which paid a dividend of $10 this year and whose dividends you expect to grow at 4 percent a year. The risk free rate is 3 percent and you
If Professor Siegel is correct that stocks are less risky than bonds, then the risk premium on stock may be zero. Assuming that the risk-free interest rate is 2½ percent, the growth rate of
Suppose recent regulatory reforms relating to credit rating agencies are perceived to improve the reliability and accuracy of credit ratings of corporate bond issues. Imagine further that you manage
Consider again the economy described in Problem 14. Under which of the following scenarios would you expect the impact of the mineral discovery on bond yields to be larger? Before the discovery,
Considera struggling emerging-market economy where, in contrast to developed economies, the perceived risk associated with holding sovereign bonds is affected by the state of the economy. Suppose
Suppose your local government, threatened with bankruptcy, decided to tax the interest income on its own bonds as part of an effort to rectify serious budgetary woes. What would you expect to see
As economic conditions improve in countries with emerging markets, the cost of borrowing funds there tends to fall. Explain why.
Download the data from the graph you produced in Data Exploration Problem 3. Calculate the standard deviation of the annual inflation rate for the three time periods and compare these results against
Not long after the United Kingdom’s vote to leave the European Union, the yields on some British Government bonds (called gilts) turned negative. Assuming that these bonds were issued with a
During the euro-area sovereign debt crisis, the spread between the yields on bonds issued by the governments of geographically peripheral European countries (such as Greece, Ireland, Italy, Portugal,
Consider a U.S. Treasury Bill with 270 days to maturity. If the annual yield is 3.8 percent, what is the price?
For the period since 2005, plot on one graph the 30-year conventional mortgage rate (FRED code: MORTG) and a measure of an adjustable mortgage rate (FRED code: MORTGAGE5US). Explain their systematic
The plot shows several spikes in the DJIA volatility index, usually in periods when the Wilshire 5000 index is falling. For example, the volatility index peaked at nearly 60% in the crisis of
Consider again the U.K. referendum on membership of the European Union (EU) referred to in question 22, but this time from the perspective of an international investor. Assume that the downside
In June 2016, the United Kingdom (U.K.) held a referendum on whether the country should remain a member of the European Union (EU). A decision to leave the EU was commonly referred to as Brexit and
Banks pay substantial amounts to monitor the risks that they take. One of the primary concerns of a bank’s “risk managers” is to compute the value at risk. Why is value at risk so important for
Suppose analysts agree that the losses resulting from climate change will reach x dollars 100 years from now. Use the concept of present value to explain why estimates of what needs to be
An unusual development in the wake of the 2007-2009 financial crisis was that nominal interest rates on some financial instruments turned negative. In which of the following examples would the
A financial institution offers you a one-year certificate of deposit with an interest rate of 5 percent. You expect the inflation rate to be 3 percent. What is the real return on your deposit?
In Data Exploration Problem 3, you looked at changes in household net worth. In Data Exploration Problem 4 you examined stock market wealth. Aside from stock market wealth, what other assets
Do changes in stock values affect the wealth of households? Beginning in 1971, plot on a quarterly basis the percent change from a year ago of theWilshire 5000 (FRED code: WILL5000PR) and the percent
Plot the percent change from a year ago of the Wilshire 5000 (FRED code: WILL5000PR).Discuss the behavior of changes in the index before, during, and after recession periods, which are indicated by
The broadest stock index in the United States is the Wilshire 5000. Plot this index (FRED code: WILL5000PR)over the period from 1971 to the present.
How might broader access to finance benefit a country where access was previously very limited?
Give two examples of how greater financial inclusion might benefit a small farmer who previously did not have access to modern finance.
Has the distinction between direct and indirect forms of finance become more or less important in recent times? Why?
Which of the following would be more valuable to you: a portfolio of stocks that rises in value when your income rises or a portfolio of stocks that rises in value when your income falls? Why?
As the end of the month approaches, you realize that you probably will not be able to pay the next month’s rent. Describe both an informal and a formal financial instrument that you might use to
Is the challenge of making “time consistent” policy unique to fiat-based paper money?
Why might one doubt that current new forms of digital money, such as Bitcoin, will replace more traditional fiat currencies?
If money growth is related to inflation, what would you expect to happen to the inflation rates of countries that join a monetary union and adopt a common currency such as the euro?
As of July 2016, 19 European Union countries have adopted the euro, while the remaining member countries have retained their own currencies. What are the advantages of a common currency for someone
In December 2015, the Federal Reserve increased its policy interest rate target. This was the first increase since cutting the target to close to zero in December 2008 to combat the economy weakness
The Dodd-Frank Act, enacted in the United States in the aftermath of the 2007-2009 financial crisis, includes provisions aimed at enhancing the coordination of various regulatory agencies. Which two
In broad terms, explain how a central bank tries to maintain economic and financial stability and encourage economic growth.
If the U.S. Securities and Exchange Commission eliminated its requirement for public companies to disclose information about their finances, what would you expect to happen to the stock prices for
Suppose medical research confirms earlier speculation that red wine is good for you. Why would banks be willing to lend to vineyards that produce red wine at a lower interest rate than before?
Using Core Principle 2, under what circumstances would you expect a job applicant to accept an offer of a low base salary and an opportunity to earn commission over one with a higher base salary and
When you apply for a loan, you are required to answer lots of questions. Why?Why is the set of questions you must answer standardized?
Financial innovation has reduced individuals’ need to carry cash. Explain how.

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