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economics of money banking and financial markets

Questions and Answers of Economics Of Money Banking And Financial Markets

=+18. According to Figure 8, in which years would you have chosen to visit the Grand Canyon in Arizona rather than the Tower of London?
=+17. How can changes in foreign exchange rates affect the profitability of financial institutions?
=+16. How would an increase in the value of the Japanese yen affect American businesses?
=+15. How would a fall in the value of the pound sterling affect British consumers?
=+14. How does the current size of the U.S. budget deficit compare to the historical budget deficit or surplus for the time period since 1950?
=+about the activities of the Federal Reserve System?
=+13. Why do managers of financial institutions care so much
=+12. Is everybody worse off when interest rates rise?
=+11. When interest rates decrease, how might businesses and consumers change their economic behavior?
=+10. If history repeats itself and we see a decline in the rate of money growth, what might you expect to happen toa. real output?b. the inflation rate?c. interest rates?
=+9. Has the inflation rate in the United States increased or decreased in the past few years? What about interest rates?
=+ Has it made you better off or worse off? Why?
=+8. Can you think of any financial innovation in the past ten years that has affected you personally?
=+7. What are the other important financial intermediaries in the economy, besides banks?
=+6. What is the basic activity of banks?
=+5. What was the main cause of the recession that began in 2007?
=+4. Why are financial markets important to the health of the economy?
=+3. What effect might a rise in stock prices have on consumers’ decisions to spend?
=+2. What effect might a fall in stock prices have on business investment?
=+1. What is the typical relationship among interest rates on three-month Treasury bills, long-term Treasury bonds, and Baa corporate bonds?
1.1. Table 1 reports the balance sheet of all commercial banks based on aggregate data found in the Federal Reserve Bulletin. Compare this table to the most recent balance sheet reported by Bank of
1.15. 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
1.14. 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 aver- age duration of six years.
1.13. "Because diversification is a desirable strategy for avoid- ing risk, it never makes sense for a bank to specialize in making specific types of loans." Is this statement true, false, or
1.12. A bank almost always insists that the firms it lends to keep compensating balances at the bank. Why?
1.10. If a bank is falling short of meeting its capital require- ments by $1 million, what three things can it do to rectify the situation?
1.9. If a bank finds that its ROE is too low because it has too much bank capital, what can it do to raise its ROE?
1.8. If the bank you own has no excess reserves and a sound customer comes in asking for a loan, should you automatically turn the customer down, explaining that you don't have any excess reserves to
1.7. Why has the development of overnight loan markets made it more likely that banks will hold fewer excess reserves?
1.6. 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 Reserves $100
1.5. 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
1.4. What happens to reserves at the First National Bank if one person withdraws $1,000 of cash and another per- son deposits $500 of cash? Use T-accounts to explain your answer.
1.3. Using the T-accounts of the First National Bank and the Second National Bank, describe what happens when Jane Brown writes a $50 check on her account at the First National Bank to pay her friend
1.2. Rank the following bank assets from most to least liquid:a. Commercial loansb. Securitiesc. Reservesd. Physical capital
1.1. Why might a bank be willing to borrow funds from other banks at a higher rate than it can borrow from the Fed?
1.3. One of the countries hardest hit by the global financial crisis of 2008 was Iceland. Go to assets.openers.com/ rpts/RS22988_20081120.pdf and summarize the causes and events that lead to the
1.2. Go to the International Monetary Fund's Financial Crisis page at www.imf.org/external/np/exr/key/finstab.htm. Report on the most recent three countries that the IMF has given emergency loans to
1.1. This chapter discusses how an understanding of adverse selection and moral hazard can help us better understand financial crises. The greatest financial cri- sis faced by the United States was
1.20. How can a deterioration in bank balance sheets lead to a currency crisis?
1.19. How can a currency crisis lead to higher interest rates?
1.18. Why does the "twin crises" phenomenon of currency and banking crises occur in emerging market coun- tries?
1.16. How can opening up to capital flows from abroad lead to a financial crisis?
1.15. How did a decline in housing prices help trigger the subprime financial crisis starting in 2007?
1.14. True, false, or uncertain: Financial engineering always leads to a more efficient financial system.
1.13. Why is the originate-to-distribute business model sub- ject to the principal-agent problem?
1.12. What technological innovations led to the development of the subprime mortgage market?
1.11. Why do debt deflations occur in advanced countries, but not in emerging market countries?
1.10. What role does weak financial regulation and supervi- sion play in causing financial crises?
1.9. How can financial liberalizations lead to financial crises?
1.7. What are the two ways that spikes in interest rates lead to an increase in adverse selection and moral hazard problems?
1.6. 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 prob- lems?
1.5. How does a deterioration in balance sheets of financial institutions and the simultaneous failures of these insti- tutions cause a decline in economic activity?
1.4. How can a decline in real estate prices cause deleverag- ing and a decline in lending?
1.2. How does an unanticipated decline in the price level cause a drop in lending?
1.1. In this chapter we discuss the lemons problem and its effect on the efficient functioning of a market. This the- ory was initially developed by George Akerlof. Go to
1.20. Which provisions of the Global Legal Settlement do you think are beneficial, and which are not?
1.19. Which provisions of Sarbanes-Oxley do you think are beneficial, and which are not?
1.18. Describe two conflicts of interest that occur in account- ing firms.
1.17. How does spinning lead to a less efficient financial system?
1.16. Describe two conflicts of interest that occur when underwriting and research are provided by a single investment firm.
1.15. How can conflicts of interest make financial service firms less efficient?
1.12. Explain how the separation of ownership and control in American corporations might lead to poor manage- ment.
1.9. Wealthy people often worry that others will seek to marry them only for their money. Is this a problem of adverse selection?
1.8. 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?
1.6. Which firms are most likely to use bank financing rather than to issue bonds or stocks to finance their activities? Why?
1.4. How do standard accounting principles help financial markets work more efficiently?
1.2. Describe two ways in which financial intermediaries help lower transaction costs in the economy.
1.1. How can economies of scale help explain the existence of financial intermediaries?
1.2. The Internet is a great source of information on stock prices and stock price movements. Yahoo Finance is a great source for stock market data. Go to http://finance yahoo.com and click on the
1.1. Visit www.forecasts.org/data/index.htm. Click on "Stock Index" at the very top of the page. Now choose "U.S. Stock Indices-monthly." Review the indexes for the DJIA, the S&P 500, and the NASDAQ
1.20. "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
1.19. Can we expect the value of the dollar to rise by 2% next week if our expectations are rational?
1.18. "Foreign exchange rates, like stock prices, should fol- low a random walk. Is this statement true, false, or uncertain? Explain your answer.
1.17. 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 marketi expected, what do you think
1.16. "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.
1.15. "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
1.14. Can a person with rational expectations expect the price of a share of Google to rise by 10% in the next month?
1.13. If your broker has been right in her five previous buy and sell recommendations, should you continue listen- ing to her advice?
1.12. If you read in the Wall Street Journal that the "smart money on Wall Street expects stock prices to fall, should you follow that lead and sell all your stocks?
1.11. If the public expects a corporation 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
1.10. Suppose that increases in the money supply lead to a rise in stock prices. Does this mean that when you see that the money supply has had a sharp increase in the past week, you should go out
1.9. "If stock prices did not follow a random walk, there would be unexploited profit opportunities in the mar- ket." Is this statement true, false, or uncertain? Explain your answer.
1.8. If a forecaster spends hours every day studying data to forecast interest rates but his expectations are not as accurate as predicting that tomorrow's interest rates will be identical to today's
1.7. "Whenever it is snowing when Joe Commuter gets up in the morning, he misjudges how long it will take him to drive to work. Otherwise, his expectations of the driving time are perfectly accurate.
1.6. "Forecasters' predictions of inflation are notoriously inaccurate, so their expectations of inflation cannot be rational." Is this statement true, false, or uncertain? Explain your answer.
1.5. Some economists think that the central banks should try to prick bubbles in the stock market before they get out of hand and cause later damage when they burst. How can monetary policy be used
1.4. After careful analysis, you have determined that a firm's dividends should grow at 7% on average in the foresee- able future. The firm's last dividend was $3. Compute the current price of this
1.3. Compute the price of a share of stock that pays a $1 per year dividend and that you expect to be able to sell in one year for $20, assuming you require a 15% return.
1.2. Identify the cash flows available to an investor in stock. How reliably can these cash flows be estimated? Com- pare the problem of estimating stock cash flows to esti- mating bond cash flows.
1.1. What basic principle of finance can be applied to the valuation of any investment asset?
1.3. Investment companies attempt to explain to investors the nature of the risk the investor incurs when buying shares in their mutual funds. For example, Vanguard carefully explains interest-rate
1.2. Figure 7 shows a number of yield curves at various points in time. Go to www.bloomberg.com/markets/ rates/index.html and find the Treasury yield curve. Does the current yield curve fall above or
1.1. The amount of additional interest investors receive due to the various risk premiums changes over time. Some- times the risk premiums are much larger than at other times. For example, the
1.15. If expectations of future short-term interest rates suddenly fall, what would happen to the slope of the yield curve?
1.14. If the yield curve suddenly becomes steeper, how would you revise your predictions of interest rates in the future?
1.13. If the income tax exemption on municipal bonds were abolished, what would happen to the interest rates on these bonds? What effect would the change have on interest rates on U.S. Treasury
1.12. Predict what would happen to the risk premiums on corporate bonds if brokerage commissions were low- ered in the corporate bond market.
1.11. Predict what will happen to interest rates on a corpora- tion's bonds if the federal government guarantees today that it will pay creditors if the corporation goes bank- rupt in the future.
1.10. What effect would reducing income tax rates have on the interest rates of municipal bonds? Would interest rates of Treasury securities be affected, and if so, how?
1.9. If a yield curve looks like the one shown in Figure (b) below, what is the market predicting about the move- ment of future short-term interest rates? What might the yield curve indicate about

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