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money banking financial markets

Questions and Answers of Money Banking Financial Markets

In July 2018 Yi Gang, Governor of the People’s Bank of China, said the fluctuations in the foreign exchange market were mainly due to factors like stronger U.S. dollar and external uncertainties.
The following table lists the foreign exchange rate between U.S. dollars and British pounds (GBP) during April 2017. Which day would have been the best for converting $250 into British pounds? Which
Visit the Bloomberg Markets website at www.bloomberg.com/markets/stocks. Their interactive graph allows you to see cumulative returns for individual stocks as well as market indices. Over the last
Eugene Fama and Robert Shiller recently won the Nobel Prize in economics. Go to http://nobelprize.org/nobel_prizes/economics/ and locate the press release on Eugene Fama and Robert Shiller. What was
You are considering purchasing a 10-year bond and follow the theory of rational expectations. If you have just read the annual report of the central bank in your country that states interest rates
Suppose that you are a trader at the stock market.T-Mobile’s stocks currently trade at $45 and the expected return is 9%. You have information that leads you to believe that by the end of year the
What are the implications of behavioral finance?
Compute the price of a share of stock that pays a \($5\) per year dividend and that you expect to be able to sell in one year for \($40\), assuming you require a 5% return.
After careful analysis, you have determined that a firm’s dividends should grow at 15%, on average, in the foreseeable future. The firm’s last dividend was $1.5.Compute the current price of this
The current price of a stock is \($55.04\). If dividends are expected to be \($1\) per share for the next six years, and the required return is 8%, what should the price of the stock be in six years
What do you understand by a bank lending policy in the context of a monetary policy?
A columnist in the Wall Street Journal argues:“Whether you’re a borrower or a saver, what matters isn’t the nominal interest rate but the ‘real,’ post-inflation rate of return.” Do you
What is an aggregate demand shock, and how does it affect the IS curve?
What is potential GDP, and how does its value change over time?
What is the relationship between the MPC and the multiplier? Would a larger value for the MPC tend to increase or decrease the stability of the economy? Briefly explain.
What is an output gap, and why is it negative during recessions?
What is the multiplier effect?
An article in the Economist magazine observes:“When inflation rises, for instance, bondholders will expect a higher nominal interest rate on new debt.” Briefly explain whether you agree with this
In a column in the New York Times, Harvard economist Edward Glaeser argues: “Theory and data both predict that the 1.2 percentage point drop in real interest rates that America experienced between
Why does a change in the real interest rate shift the aggregate expenditure line in the 45°-line diagram but not shift the IS curve?
An article in the Wall Street Journal in 2012 discussing Okun’s law observes: “The law has been unreliable lately. Under [Okun’s law], it would take growth between 4% and 5% to explain the
If households and firms change from expecting mild inflation to expecting mild deflation, how will the Phillips curve shift? Draw an output gap Phillips curve graph to illustrate your answer.
An article in the Economist magazine argues that the expected inflation rate in the United States followed “a steady downward trend” between December 2007 and May 2012.a. Holding other factors
Some economists believe that during a recession, business demand for investment in factories, office buildings, and machinery becomes less sensitive to changes in the real interest rate. If these
Some economists have suggested that structural changes in the construction industry and the automobile industry in the mid- to late 2000s may have resulted in a new higher natural rate of
Clearly explain the dynamics involved in the policy that the financial press referred to as “Operation Twist.”
Explain how the Fed’s open market operations result in expansionary or contractionary policies.
Define the term “quantitative easing.”
What is hyperinflation? Explain how it can severely harm an economy’s productive capacity.
Before 1980, which banks could receive discount loans? After 1980, which banks could receive discount loans? During the financial crisis of 2007–2009, how did the Fed’s discount lending expand?
To hit the target federal funds rate given in the FOMC’s policy directive, does the account manager adjust the demand for reserves, the supply of reserves, or both? What monetary policy tool does
Briefly describe the role of targeting in the monetary policies of the Bank of Canada, the Bank of England, the Bank of Japan, and the European Central Bank.
An article in the Economist magazine observed that when the Fed’s “policy rate is effectively zero and long-term rates are close to all-time record lows. . . . [doesn’t] additional easing
The natural rate of unemployment varies over time, with changes in demographics, the structure of the economy, and government policies.For its goal of high employment, why would it be crucial for the
The Fed continued to pursue unusual policy measures for several years after the end of the financial crisis of 2007–2009. Chairman Bernanke and other members of the FOMC continued to discuss an
If the exchange rate between the Japanese yen and the dollar changes from ¥85 = $1 to ¥95 = $1, will this change make U.S. industries more or less competitive relative to Japanese industries?
Writing in the Wall Street Journal in 2012, a hedge fund manager observes: “With inflationary expectations not yet unsettled by the Federal Reserve’s $2 trillion balance-sheet expansion, Mr.
In a column in the Wall Street Journal, two economists at the Council on Foreign Relations argue: “Simply put, the Fed must choose between managing the level of reserves and managing rates. It
Describe the liquidity preference theory.
What is a stabilization policy? What impact does it have on the business cycle?
What is meant by the full employment rate of unemployment?
What is the difference between dynamic and defensive open market operations?
What are the three categories of discount loans that the Fed gives to banks?
Suppose that the FOMC decides to lower its target for the federal funds rate. How can it use open market operations to accomplish this goal?How can the FOMC use open market operations to raise its
In a letter to a member of Congress, Fed Chairman Ben Bernanke made the following statement:The monetary accommodation provided by the Federal Reserve has substantially helped the U.S. economy by
The following statement appeared in a feature in the New York Times that provides an overview of the Federal Reserve System: “The federal funds rate is set by the Fed’s Open Market Committee,
In addition to commercial banks, other financial institutions, such as Fannie Mae, Freddie Mac, and the Federal Home Loan Banks borrow and lend in the federal funds market. (The 12 Federal Home Loan
During the financial crisis of 2007–2009, the Fed set up the following temporary lending facilities:the Primary Dealer Credit Facility, the Term Securities Lending Facility, the Commercial Paper
Using the Taylor rule, calculate the target for the federal funds rate for October 2012, using the following information: equilibrium real federal funds rate of 2%, target inflation rate of 2%,
What is the difference between a central bank carrying out a foreign exchange market intervention and carrying out a domestic open market operation?
What is the flexible exchange rate system? How is the managed float regime a variant of the flexible exchange rate system?
Explain how the gold standard is an example of a fixed exchange rate system.
Why did the monetary policy become ineffective under the mechanism of the gold standard?
What are the principal components of the balance-of-payments account?
Explain the role envisaged for the International Monetary Fund under the Bretton Woods System.
What is pegging? What are the advantages of pegging? What are the disadvantages? Briefly discuss the controversy over China’s pegging the value of the yuan.
In 2012, the Swiss National Bank (SNB) was intervening in foreign exchange markets to keep a “floor” of 1.2 Swiss francs = 1 euro in the exchange rate between the franc and the euro. An article
Can a foreign exchange intervention by the Fed change the exchange rate if the Fed does not change its target for the federal funds rate? If the Fed wanted to carry out a foreign exchange
Briefly explain in what sense a country can run a balance of payments surplus or deficit.How would a country finance a balance of payments deficit in this sense? What important differences are there
Why has support for a system of fixed exchange rates tended to be higher in Europe than in the United States?
An article in the Economist magazine in late 2012 observed:The euro was meant to buttress the single market, reducing transaction costs and removing the risk of competitive devaluation.Could it now
In 2012, an article in the New York Times observed that: “The financial consequences of a Greek departure from the euro monetary union could be severe.”a. What does the article mean by “a Greek
In 2010, arguing that the Chinese yuan was overvalued versus the U.S. dollar, President Barack Obama said he wanted “to make sure our goods are not artificially inflated in price and their goods
In late 2012, an article in the Wall Street Journal, observed that: “The once-predictable Chinese yuan has become increasingly volatile, a development that . . . poses greater foreign-exchange
What is the misperception theory? What does it explain?
Use a money market graph to show the effect of an open market purchase of U.S. Treasury securities by the Federal Reserve. Use the results from your graph to explain why the aggregate demand curve
An article in the Economist magazine observed:“Creating more inflation is harder than it sounds. . . . It requires aggregate demand to return to, and exceed, potential output.” Use an AD–AS
In a blog on the Economist web site, correspondent Matt Yglesias makes the following statement: “[We] need to note that rising oil prices represent both demand shocks and supply shocks to the
In a column in the Wall Street Journal, Michael Bordo, an economist at Rutgers University, argues that the slow recovery from the 2007–2009 recession:can largely be attributed to the unprecedented
In a blog entry on the Barron’s Web site, the head of emerging markets research at the Japanese investment bank Nomura was quoted as saying the following about the Brazilian economy: “We think
In April 2010, Christina Romer, who was then serving as chair of the President’s Council of Economic Advisers, argued:The overwhelming weight of the evidence is that the current very high—and
Writing in the New York Times in August 2012, Christina Romer, former chair of the President’s Council of Economic Advisers, argued that: “The academic literature shows that monetary policy can
What are the shortcomings of the expectations theory?
How does a change in default risk affect the interest rate on a bond?
Suppose that you have $1,000 to invest in the bond market on January 1, 2014. You could buy a one-year bond with an interest rate of 4%, a two-year bond with an interest rate of 5%, a three-year bond
A student says: “The interest rate on the one-year Treasury bill is currently 0.29%, while the interest rate on the 30-year Treasury bond is currently 3.10%. Why are any investors buying the
What is the yield to maturity on a Treasury bill that matures one year from now, has a price of $1,010, and has a face value of $1,000? If the consumer price index is expected to decline during the
In the spring of 2012, yields on Treasury securities increased. An article in the Wall Street Journal observed: “The immediate cause for the lift was the Federal Reserve’s more optimistic
In 2012, an article in the Wall Street Journal had the headline “As Corporate-Bond Yields Sink, Risks for Investors Rise.” Is the biggest risk of holding long-term corporate bonds at low interest
In 2012, an article in the Wall Street Journal contained the following observation: “The fact that Spanish short-term yields are shooting higher than long-term yields is a particularly bad sign.”
What is the relationship between a corporation and a stockholder?
Distinguish between the profit distribution for common stockholders and for preferred stockholders.
A student makes the following observation: “The Dow Jones Industrial Average currently has a value of 13,500, while the S&P 500 has a value of 1,500. Therefore, the prices of the stocks in the DJIA
An article in the Wall Street Journal notes that “investors tend to view [preferred stock] more like bonds than like [common] stock.”a. In what sense is preferred stock more like bonds than like
Ulrike Malmendier of the University of California, Berkeley, and Stefan Nagel of Stanford have shown that investors’ willingness to participate in the stock market is affected by the returns they
What is the relationship between the price of a financial asset and the payments investors will receive from owning that asset?
What is the Gordon Growth model? What does it help to measure?
A column in the Wall Street Journal observes that “while many people buy stocks in the hope of scoring profits down the road, dividends deliver cash right now.” If stockholders desire dividends,
An article in the Wall Street Journal in 2012 described investors’ behavior since 2000 as a “flight to safety” that has led to “a high equity risk premium.”a. What does “flight to
Suppose that you buy an Apple iPad, you like it, and you think it will be a big seller. You expect that Apple’s profits will increase tremendously as a result of booming iPad sales. Should you buy
In 2012, the wireless company T-Mobile sold some of its cell towers to the Crown Castle company.When the agreement was announced, the stock price of Crown Castle declined. An article in the Wall
In 2010, Toyota recalled millions of automobiles to fix a potentially hazardous problem known as “sudden acceleration.” Writing in the Wall Street Journal, James Stewart gave investors the
An article in the Wall Street Journal contained the following: “Burberry Group issued a surprise profit warning on Tuesday. . . . The announcement sent Burberry’s stock down 21%.”a. What is the
Suppose that Apple’s profits are expected to grow twice as fast as Microsoft’s. Which firm’s stock should be the better investment for you? Briefly explain.
Henry Blodget worked for Merrill Lynch during the dot-com boom. The New York attorney general accused Blodget of having praised Internet stocks in public and criticized the same stocks in private. In
An article in the Wall Street Journal noted that of the thousands of mutual funds investing in stocks or stocks and bonds, only 31 had managed to earn a higher rate of return than the S&P 500 in
Distinguish between the small firm effect and the January Effect.
What is inside information? How is it relevant to the efficient market hypothesis?
What do you understand by the term “insider trading”? Explain the legal provisions in this regard with examples.
According to an article in the Wall Street Journal, “Cyclical sectors such as tech typically lead in the second year of a bull market, which is on track for the beginning of March.”a. What is a

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