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economics of money banking and financial markets

Questions and Answers of Economics Of Money Banking And Financial Markets

If a bank sells €10 million of bonds to the central bank to pay back €10 million on the discount loan it owes, what will be the effect on the level of chequable deposits?
If the central bank reduces reserves by selling€5 million worth of bonds to the banks, what will the T-account of the banking system look like when the banking system is in equilibrium? What will
If reserves in the banking system increase by€1 billion as a result of discount loans of €1 billion and chequable deposits increase by €9 billion, why isn’t the banking system in equilibrium?
If a bank depositor withdraws €1,000 of currency from an account, what happens to reserves and checkable deposits?
If the central bank buys €1 million of bonds from the Safe Bank, but an additional 10% of any deposit is held as excess reserves, what is the total increase in chequable deposits? (Hint: Use
Suppose that the central bank buys €1 million of bonds from the Safe Bank. If the Safe Bank and all other banks use the resulting increase in reserves to purchase securities only and not to make
Using T-accounts, show what happens to checkable deposits in the banking system when the central bank sells€2 million of bonds to the Safe Bank.
Using T-accounts, show what happens to checkable deposits in the banking system when the central bank lends an additional €1 million to the Safe Bank.
The Safe Bank receives an extra €100 of reserves but decides not to lend any of these reserves out. How much deposit creation takes place for the entire banking system?Unless otherwise noted, the
If the central bank lends five banks an additional total of€100 million but depositors withdraw €50 million and hold it as currency, what happens to reserves and the monetary base? Use T-accounts
If the central bank sells €2 million of bonds to Irving the Investor, who pays for the bonds with a briefcase filled with currency, what happens to reserves and the monetary base? Use T-accounts to
If the central bank sells €2 million of bonds to the Safe Bank, what happens to reserves and the monetary base? Use T-accounts to explain your answer.
While the ECB holds a press conference after each of its meetings, the Fed promotes secrecy by not releasing the minutes of the FOMC meetings to Congress or the public immediately. Discuss the pros
‘The independence of the ECB leaves it completely unaccountable for its actions.’ Is this statement true, false, or uncertain? Explain your answer.
Why could eliminating the central bank’s independence lead to a more pronounced political business cycle?
What are the reasons that compel some developing nations to adopt currency unions?
What the mechanisms are used to promote greater transparency of the ECB’s monetary policy?
On the ECB’s website, their mission is stated as have as their ‘primary objective the maintenance of price stability for the common good’. What reasons lie behind the ECB’s adoption of price
Why was the Federal Reserve System set up with twelve regional Federal Reserve banks rather than one central bank, as in other countries like the United Kingdom?
In what ways can the national central banks (NCBs) of the Eurosystem influence the conduct of monetary policy in the euro area?
Which entities in the European Central Bank and the Federal Reserve System control the tools of monetary policy?
Compare the structure and independence of the European System of Central Banks (ESCB) and the US Federal Reserve System.
What are the key characteristics of universal banking as found in, for example, Germany?
What are the key advantages to corporate borrowers and/or banks of using Eurodollars?
If the bank at which you keep your current account is owned by investors outside Europe (e.g. Saudi Arabians), should you worry that your deposits are less safe than if the bank were owned by
What are the key differences between the structure of commercial banking in the United Kingdom versus the United States?
Explain any economic benefits from bank consolidation across Europe.
How have the banks in Europe and elsewhere responded to the forces of competition?
What were the three phases of bank deregulation within the European Union?
Explain the key objectives of the Single Banking Market in Europe.
Why was the United States one of the last of the major industrialized countries to have a central bank?
What are the key objectives of the European Banking Authority (EBA)?
How might limiting the too-big-to-fail policy help reduce the risk of a future banking crisis?
Do you think that eliminating or limiting the amount of deposit insurance would be a good idea? Explain your answer.
Why is regulatory forbearance a dangerous strategy for a deposit insurance agency?
Why did the US Savings & Loans crisis not occur until the 1980s?
What are the costs and benefits of a too-big-to-fail policy?
Which bank regulations are designed to reduce moral hazard problems created by deposit insurance? Will they completely eliminate the moral hazard problem?
Which bank regulation is designed to reduce adverse selection problems for deposit insurance? Will it always work?
Suppose that you are the manager of a bank that has€15 million of fixed-rate assets, €30 million of rate-sensitive assets, €25 million of fixed-rate liabilities and €20 million of
Suppose that you are the manager of a bank whose€100 billion of assets have an average duration of four years and whose €90 billion of liabilities have an average duration of six years. Conduct a
If a bank finds that its Return on Equity (ROE) is too low because it has too much bank capital, what can it do to raise its ROE?
If a deposit outflow of €50 million occurs, which balance sheet would a bank rather have initially, the balance sheet in Problem 5 or the following balance sheet? Why? Assets Liabilities Reserves
The bank you own has the following balance sheet:If the bank suffers a deposit outflow of €50 million with a required reserve ratio on deposits of 10%, what actions must you take to keep your bank
What happens to reserves at the First Euro Bank if one person withdraws €1,000 of cash and another person deposits €500 of cash? Use T-accounts to explain your answer.
Using the T-accounts of the First Euro Bank and the Second Euro Bank, describe what happens when Ingrid Schmidt writes a €50 cheque on her account at the First Euro Bank to pay her friend Joe
Rank the following bank assets from most to least liquid:(a) Commercial loans(b) Securities(c) Reserves(d) Physical capital
Why might a bank be willing to borrow funds from other banks at a higher rate than it can borrow from the relevant central bank?
How can the deterioration in bank balance sheets lead to a sovereign debt crisis?
How can deterioration in bank balance sheets lead to a currency crisis?
How has the European sovereign debt crisis led to higher borrowing costs for governments?
How can a currency crisis lead to higher interest rates?
Why does the ‘twin crises’ phenomenon of currency and banking crises occur in emerging market countries?
Why are more resources not devoted to adequate prudential supervision of the financial system to limit excessive risk taking, when it is clear that this supervision is needed to prevent financial
How can opening up to capital flows from abroad lead to a financial crisis?
How did a decline in housing prices help trigger the subprime financial crisis starting in 2007?
True, false, or uncertain: financial engineering always leads to a more efficient financial system.
Why is the originate-to-distribute business model subject to the principal–agent problem?
What technological innovations led to the development of the subprime mortgage market?
Why do debt deflations occur in advanced countries, but not in emerging market countries?
What role does weak financial regulation and supervision play in causing financial crises?
How can financial liberalizations lead to financial crises?
How can government fiscal imbalances lead to a financial crisis?
What are the two ways that spikes in interest rates lead to an increase in adverse selection and moral hazard problems?
How does a general increase in uncertainty as a result of a failure of a major financial institution lead to an increase in adverse selection and moral hazard problems?
How does a deterioration in balance sheets of financial institutions and the simultaneous failures of these institutions cause a decline in economic activity?
How can a decline in house prices cause deleveraging and a decline in lending?
When can a decline in the value of a country’s currency exacerbate adverse selection and moral hazard problems?Why?
How does an unanticipated decline in the price level cause a drop in lending?
How can a bursting of an asset-price bubble in the stock market help trigger a financial crisis?
Which provisions of the global legal settlement do you think are beneficial, and which are not?
Which provisions of Sarbanes–Oxley do you think are beneficial, and which are not?
Describe two conflicts of interest that occur in accounting firms.
How does spinning lead to a less efficient financial system?
Describe two conflicts of interest that occur when underwriting and research are provided by a single investment firm.
How can conflicts of interest make financial service firms less efficient?
How does the provision of several types of financial services by one firm lead to conflicts of interest?
Why can the provision of several types of financial services by one firm lead to a lower cost of information production?
Explain how the separation of ownership and control in companies might lead to poor management.
How does the free-rider problem aggravate adverse selection and moral hazard problems in financial markets?
The more collateral there is backing a loan, the less the lender has to worry about adverse selection. Is this statement true, false, or uncertain? Explain your answer.
Wealthy people often worry that others will seek to marry them only for their money. Is this a problem of adverse selection?
Would you be more willing to lend to a friend if she put all of her life savings into her business than you would if she had not done so? Why?
How can the existence of asymmetric information provide a rationale for government regulation of financial markets?
Which firms are most likely to use bank financing rather than to issue bonds or stocks to finance their activities? Why?
Do you think the lemons problem would be more severe for stocks traded on the New York Stock Exchange or those traded over the counter? Explain.
How do standard accounting principles help financial markets work more efficiently?
Would moral hazard and adverse selection still arise in financial markets if information were not asymmetric?Explain.
Describe two ways in which financial intermediaries help lower transaction costs in the economy.
How can economies of scale help explain the existence of financial intermediaries?
‘Human fear is the source of stock market crashes, so these crashes indicate that expectations in the stock market cannot be rational.’ Is this statement true, false, or uncertain? Explain your
Can we expect the value of the euro to rise by 2% next week against the US dollar if our expectations are rational?
‘Foreign exchange rates, like stock prices, should follow a random walk.’ Is this statement true, false, or uncertain?Explain your answer.
If higher money growth is associated with higher future inflation, and if announced money growth turns out to be extremely high but is still less than the market expected, what do you think would
‘An efficient market is one in which no one ever profits from having better information than the rest.’ Is this statement true, false, or uncertain? Explain your answer.
‘If most participants in the stock market do not follow what is happening to the monetary aggregates, prices of common stocks will not fully reflect information about them.’ Is this statement
Can a person with rational expectations expect the price of a share of Google to rise by 10% in the next month?
If your broker has been right in her five previous buy and sell recommendations, should you continue listening to her advice?
If you read in the Financial Times that the ‘stock pickers’on Lombard Street expect stock prices to fall, should you follow that lead and sell all your stocks?
If the public expects a company to lose €5 per share this quarter and it actually loses €4, which is still the largest loss in the history of the company, what does the efficient market

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