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business
economics of money banking and financial markets

Questions and Answers of Economics Of Money Banking And Financial Markets

=+ Go to the Level Tables and answer the following questions.
=+ Go to http://www.federalreserve.gov/releases/Z1/ and find the most current release. You may have to get Acrobat Reader if your computer does not already have it; the site has a link for a free
=+produced by the Federal Reserve. This document contains data on most financial intermediaries.
=+1. One of the single best sources of information about financial institutions is the U.S. Flow of Funds report,
=+Which of the two financial intermediaries has experienced the most growth?
=+Transform the commercial bank assets series to quarterly by adjusting the Frequency setting to“Quarterly.” Calculate the percent increase in growth of assets for each series, from January 2000
=+2. Go to the St. Louis Federal Reserve FRED database, and find data on the total assets of all commercial banks (TLAACBM027SBOG) and the total assets of money market mutual funds (MMMFFAQ027S).
=+categories for the most recent quarter available.Repeat for the first quarter of 2000, and compare the results.
=+Using these series, calculate the total amount held and the percentage held in each of the three
=+1. Go to the St. Louis Federal Reserve FRED database, and find data on federal debt held by the Federal Reserve (FDHBFRBN), by private investors (FDHBPIN), and by international and foreign
=+ What does this say about the value of better information regarding risk?
=+certainty whether he will leave town without paying, would you pay the $150?
=+b. Suppose Option 2 is your only possibility. If you could pay your friend $150 to find out extra information about Mike that would indicate with
=+a. If you are risk-neutral (that is, neither seek out nor shy away from risk), which of the four options should you choose to maximize your expected return? (Hint: To calculate the expected return
=+Option 4: Put the money in an interest-bearing checking account that earns 2%. The FDIC insures the account against bank failure.
=+Option 3: Invest the money in a corporate bond with a stated return of 5%, although there is a 10% chance the company could go bankrupt.
=+Option 2: Loan the money to one of your friend’s roommates, Mike, at an agreed-upon interest rate of 8%, even though you believe there is a 7% chance that Mike will leave town without repaying
=+Option 1: Hold the money in cash and earn zero return.
=+23. Suppose you have just inherited $10,500 and are considering the following options for investing the money to maximize your return:
=+How would this help stabilize the financial system?
=+22. In 2008, as a financial crisis began to unfold in the United States, the FDIC raised the limit on insured losses to bank depositors from $100,000 per account to $250,000 per account.
=+21. Why would a life insurance company be concerned about the financial stability of major corporations or the health of the housing market?
=+20. If you were going to get a loan to purchase a new car, which financial intermediary would you use: a credit union, a pension fund, or an investment bank?
=+19. How can the provision of several types of financial services by one firm be both beneficial and problematic?
=+18. How do conflicts of interest make the asymmetric information problem worse?
=+a 5% interest rate at the bank and having the bank lend her the funds at a 10% interest rate, rather than lend her the funds yourself?
=+17. Why might you be willing to make a loan to your neighbor by putting funds in a savings account earning
=+16. “In a world without information costs and transaction costs, financial intermediaries would not exist.” Is this statement true, false, or uncertain? Explain your answer.
=+15. If there were no asymmetry in the information that a borrower and a lender had, could a moral hazard problem still exist?
=+14. If you are an employer, what kinds of moral hazard problems might you worry about with regard to your employees?
=+13. Why do loan sharks worry less about moral hazard in connection with their borrowers than some other lenders do?
=+ How does this demonstrate adverse selection?
=+12. One of the factors contributing to the financial crisis of 2007–2009 was the widespread issuance of subprime mortgages.
=+you are more likely to make a loan to a family member than to a stranger?
=+11. How can the adverse selection problem explain why
=+10. How does risk sharing benefit both financial intermediaries and private investors?
=+ How does this demonstrate both a benefit and a cost to the internationalization of financial markets?
=+9. A significant number of European banks held large amounts of assets as mortgage-backed securities derived from the U.S. housing market, which crashed after 2006.
=+the nineteenth century to build a railroad system. Why did this make both countries better off?
=+8. The U.S. economy borrowed heavily from the British in
=+7. What is the difference between a mortgage and a mortgagebacked security?
=+6. Describe who issues each of the following money market instruments:a. Treasury billsb. Certificates of depositc. Commercial paperd. Repurchase agreemente. Fed funds
=+important to the economy than primary markets are.”Is this statement true, false, or uncertain?
=+5. “Because corporations do not actually raise any funds in secondary markets, secondary markets are less
=+4. If you suspect that a company will go bankrupt next year, which would you rather hold, bonds issued by the company or equities issued by the company? Why?
=+3. Why is a share of Microsoft common stock an asset for its owner and a liability for Microsoft?
=+that they do not have well-developed financial markets.Does this argument make sense?
=+2. Some economists suspect that one of the reasons economies in developing countries grow so slowly is
=+Can you make a case for legalizing loan sharking?
=+Will I be better or worse off as a result of taking out this loan?
=+I take out a loan from Larry the Loan Shark at a 90%interest rate if no one else will give me a loan?
=+1. If I can buy a car today for $5,000 and it is worth$10,000 in extra income to me next year because it enables me to get a job as a traveling salesman, should
1.2. The Office of the Comptroller of the Currency is responsible for many of the regulations affecting bank operations. Go to www.occ.treas.gov/. Click on "Legal and Regulatory" and then on "Law and
1.1. www.fdic.gov/regulations/laws/important/index.html. This site reports on the most significant pieces of legis- lation affecting banks since the 1800s. Summarize the most recently enacted bank
1.15. How has the too-big-to-fail policy been limited in the FDICIA legislation? How might limiting the too-big- to-fail policy help reduce the risk of a future banking crisis?
1.14. How could higher deposit insurance premiums for banks with riskier assets benefit the economy?
1.13. Do you think that removing the impediments to a nationwide banking system will be beneficial to the economy? Explain your answer.
1.12. Do you think that eliminating or limiting the amount of deposit insurance would be a good idea? Explain your answer.
1.11. How can the S&L crisis be blamed on the principal- agent problem?
1.10. Some advocates of campaign reform believe that gov- ernment funding of political campaigns and restrictions on campaign spending might reduce the principal- agent problem in our political
1.9. What steps were taken in the FDICIA of 1991 to improve the functioning of federal deposit insurance?
1.8. The FIRREA legislation of 1989 is the most compre- hensive banking legislation since the 1930s. Describe its major features.
1.7. Why is regulatory forbearance a dangerous strategy for a deposit insurance agency?
1.6. Why did the S&L. crisis not occur until the 1980s?
1.5. What are the costs and benefits of a too-big-to-fail policy?
1.4. What bank regulations are designed to reduce moral hazard problems created by deposit insurance? Will they completely eliminate the moral hazard problem?
1.3. What bank regulation is designed to reduce adverse selection problems for deposit insurance? Will it always work?
1.2. If casualty insurance companies provided fire insurance without any restrictions, what kind of adverse selection and moral hazard problems might result?
1.1. Give one example each of moral hazard and adverse selection in private insurance arrangements.
=+b. What percentage increase is forecast for the next six months?
=+a. What is the Dow forecast to be in six months?
=+www.forecasts.org/data/index.htm, and click on FFC Home at the top of the page. Click on the Dow Jones Industrial link under Forecasts in the far-left column.
=+ 2. In Web 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://
=+b. Using the data from part (a), prepare a graph. Use the Excel Chart Wizard to properly label your axes.
=+a. Move the data into an Excel spreadsheet.
=+Stock Indices—Monthly option. Finally, choose the Dow Jones Industrial Average option.
=+www.forecasts.org/data/index.htm, click on Stock Index Data at the top of the page, and choose the U.S.
=+1. In this exercise, we will practice collecting data from the Web and graphing it using Excel. Go to http://
=+c. Compare the money growth rate and the 10-year interest rate for the most recent month available to the rates for January 2000. How do the rates compare?
=+b. In general, is there an obvious, stable relationship between money growth and the 10-year interest rate since the year 2000?
=+a. In general, how have the growth rate of the M1 money supply and the 10-year treasury bond rate behaved during recessions and during expansionary periods since the year 2000?
=+variable into the M1 growth rate by adjusting the units for the M1 money supply to “Percent Change from Year Ago.”
=+the 10-year treasury bond rate (GS10). Add the two series into a single graph by using the “Add Data Series” feature. Transform the M1 money supply
=+2. Go to the St. Louis Federal Reserve FRED database and find data on the M1 money supply (M1SL) and
=+the average of each of the 30-year rates and compare it to the average of the 30-year rates from January 2000. How do the averages compare?
=+d. For the most recent available month of data, take
=+compare it to the average of the three-month rates from January 2000. How do the averages compare?
=+c. For the most recent available month of data, take the average of each of the three-month rates and
=+How do the treasury rates compare to the respective commercial paper and mortgage rates?
=+b. In general, how do the three-month rates compare to the 30-year rates?
=+a. In general, how do these interest rates behave during recessions and during expansionary periods?
=+(TB3MS), the three-month AA nonfinancial commercial paper rate (CPN3M), the 30-year treasury bond rate (GS30), the 30-year conventional mortgage rate (MORTG), and the NBER recession
=+1. Go to the St. Louis Federal Reserve FRED database and find data on the three-month treasury bill rate
=+Which day would have been the worst? What would be the difference in pounds?
=+21. The following table lists foreign exchange rates between U.S. dollars and British pounds (GBP) during April. Which day would have been the best for converting $250 into British pounds?
=+investors as treasury bonds and bills. How do fluctuations in the dollar exchange rate affect the value of that debt held by foreigners?
=+20. Much of the U.S. government debt is held by foreign
=+What about an American company that is in the business of importing jeans into the United States?
=+ Are U.S. companies that manufacture jeans happier when the dollar is strong or when it is weak?
=+19. When the dollar is worth more in relation to currencies of other countries, are you more likely to buy Americanmade or foreign-made jeans?

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