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economics of money banking and financial markets

Questions and Answers of Economics Of Money Banking And Financial Markets

(b) Who would be more likely to purchase such an annuity: Mr X, whose life expectancy is short because of a medical condition he has developed, or Ms Y, whose family tends to live to a ripe old age?
(a) If someone purchases a lifetime annuity on retirement, does longevity risk disappear or is it transferred? Explain your answer.
2 Is there any case for state intervention in relation to the financial provision made for the elderly?
1 Does a pension system of a purely voluntary kind offer any advantages to individuals who wish to provide for their old age?
n How the different roles and different risks affect the structure of their balance sheets
n How DTIs and non-DTIs deal with these risks
n The different risks faced by DTIs and non-DTIs
n The different roles played by deposit and non-deposit intermediaries
n How financial systems differ
to the rest of the economy
n Why the performance of the financial system is relevant
n The distinctive features of financial markets
n The distinctive features of financial institutions
n Who uses it and for what purposes
What a financial system consists of
1. Robert Lucas won the Nobel Prize in Economics. Go to http://www.nobel.se/economics/ and locate the press release on Robert Lucas. What was his Nobel Prize awarded for? When was it awarded?
15. If, in a surprise victory, a new administration is elected to office that the public believes will pursue inflationary policy, predict what might happen to the level of output and inflation even
*14. How would your prediction differ in Problem 13 if the new Keynesian model provides a more accurate description of the economy? What if the traditional model provides the most realistic
*13. The chairman of the Federal Reserve Board announces that over the next year, the rate of money growth will be reduced from its current rate of 10% to a rate of 2%. If the chairman is believed by
12. How would your prediction differ in Problem 11 if the new Keynesian model provides a more realistic description of the economy? What if the traditional model provides the most realistic
11. Suppose that a treaty is signed limiting armies throughout the world. The result of the treaty is that the public expects military and hence government spending to be reduced. If the new
*10. Many economists are worried that a high level of budget deficits may lead to inflationary monetary policies in the future. Could these budget deficits have an effect on the current rate of
9. “The more credible the policymakers who pursue an anti-inflation policy, the more successful that policy will be.” Is this statement true, false, or uncertain?Explain your answer.
*8. “The Lucas critique by itself casts doubt on the ability of activist stabilization policy to be beneficial.” Is this statement true, false, or uncertain? Explain your answer.
7. What principle of rational expectations theory is used to prove the proposition that stabilization policy can have no predictable effect on aggregate output in the new classical model?
*6. “The new classical model does not eliminate policymakers’ability to reduce unemployment because they can always pursue policies that are more expansionary than the public expects.” Is this
5. The new classical model is sometimes characterized as an offshoot of the monetarist model because the two models have similar views of aggregate supply. What are the differences and similarities
*4. “The costs of fighting inflation in the new classical and new Keynesian models are lower than in the traditional model.” Is this statement true, false, or uncertain?Explain your answer.
3. Having studied the new classical model, the new chairman of the Federal Reserve Board has thought up a surefire plan for reducing inflation and lowering unemployment. He announces that the Fed
*2. If consumer expenditure is related to consumers’expectations of their average income in the future, will an income tax cut have a larger effect on consumer expenditure if the public expects the
1. If the public expects the Fed to pursue a policy that is likely to raise short-term interest rates permanently to 12% but the Fed does not go through with this policy change, what will happen to
If 2 percent growth is your break-even point for an investment project, under which outlook for the economy would you be more inclined to go ahead with the investment: (1) A forecast for economic
Suppose medical research confi rms 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?16.*
Suppose central bankers have fi gured out a way to eliminate recessions. What fi nancial and economic changes would you expect to see? Relate these changes to the core principle that stability
Merchants that accept Visa or MasterCard pay the issuer of the card a percentage of the transaction. For example, for each $100 charged on Visa cards, a merchant might receive only $98. Explain why
When you apply for a loan, you are required to answer a lot of questions. Why?Why is the set of questions you must answer standardized?
Financial innovation has reduced individuals’ need to carry cash. Explain how.6.* Many people believe that, despite ongoing fi nancial innovations, cash will always be with us to some degree as a
Socialists argue that, to reduce the power exerted by the owners of capital, the state should control the allocation of resources. Thus, in a socialist system, the state allocates investment
Describe the links among the six components of the fi nancial system and the fi ve core principles of money and banking.
Can you think of any examples of how you, or your family or friends, were affected by the failure of the fi nancial system to function normally during the fi nancial crisis of 2007–2009?
Try to list the fi nancial transactions you have engaged in over the past week.How might each one have been carried out 50 years ago?
* Duration analysis is an alternative to gap analysis for measuring interest-rate risk. (See footnote 8 on page 303.) The duration of an asset or liability measures how sensitive its market value is
If lines of credit and other off-balance-sheet activities do not, by defi nition, directly affect the balance sheet, how can they infl uence the level of liquidity risk to which the bank is exposed?
Looking again at Bank A and Bank B, based on the information available, which bank do you think is at the greatest risk of insolvency? What other information might you use to assess the risk of
* In response to changes in banking legislation, the past two decades have seen a signifi cant increase in interstate branching by banks in the United States. How do you think a development of this
Defi ne operational risk and explain how a bank manages it.
A bank has issued a one-year certifi cate of deposit for $50 million at an interest rate of 2 percent. With the proceeds, the bank has purchased a two-year Treasury note that pays 4 percent interest.
Banks carefully consider the maturity structure of both their assets and their liabilities. What is the signifi cance of the maturity structure? What risks are banks trying to manage when they adjust
On the Federal Reserve Board’s Web site, http://www.federalreserve.gov , under Economic Research and Data, Statistical Releases, and Historical Data, you will fi nd a weekly release called H.8,
Banks hold more liquid assets than most businesses do. Explain why.
The table below shows the yields on the fi xed and fl oating borrowing choices available to three fi rms. Firms A and B want to be exposed to a fl oating interest rate while Firm C would prefer to
1 Are business cycles and economic structures compatible so that we and others could live comfortably with euro interest rates on a permanent basis?
2 If problems emerge is there sufficient flexibility to deal with them?
3 Would joining EMU create better conditions for firms making long-term decisions to invest in Britain?
4 What impact would entry into EMU have on the competitive position of the UK’s financial services industry, particularly the City’s wholesale markets?
5 In summary, will joining EMU promote higher growth, stability and a lasting increase in jobs?Let us consider in turn what each of these involves.
1 Are business cycles and economic structures compatible so that we and others could live comfortably with euro interest rates on a permanent basis?
3 Would joining EMU create better conditions for firms making long-term decisions to invest in Britain?
1 Explain the reasoning behind each of the Maastricht convergence conditions.
2 What were the economic reasons for wanting monetary integration in Europe?
3 Consider the argument that monetary union was a necessary extension of the European single market.
4 Why was it important that Germany should be a member of the European single currency?
5 Why did Denmark, Sweden and the UK choose to stay outside the single currency when it was established? Were the reasons the same in each case?
6 Consider the difficulties in coming to a conclusion on each of the UK Treasury’s five economic tests for membership of the single currency.
7 What are the advantages and disadvantages of having a weakening currency?
8 What problems might economies such as those of Romania and Bulgaria face if they join the single currency too soon?
1 Explain the conflict between a low-inflation policy and a weak euro.
2 Why was it thought that a monetary union with many members would be more inflationary than one with only a few members?
3 Why might credit-rating agencies rate a country’s debt denominated in its own currency more highly than its debt denominated in a foreign currency?
4 Why might it be considered undesirable by all the members of a monetary union for one member to default on its government debt?
5 Does it matter if a country’s central bank is only weakly accountable to the country’s political institutions?
6 Compare and contrast the monetary policy system and practice of the Bank of England with those of the European Central Bank.
7 Why might interest rates differ in different countries, even within a monetary union?
8 In Table 23.1 compare 4 January 1999 with 6 December 2005 and then look at other dates on which the difference between the Fed funds rate and the refi was 1.75 per cent. Can one say anything about
9 What reasons are there for a country or monetary union wanting to have a strong currency?
n Why financial innovation takes place
n How regulation, technology and the changing economic environment combined in the stimulation of off-balance-sheet activity and liability management
n How financial innovation can pose problems for financial regulators and for the conduct of monetary policy
1 Why does financial innovation occur?
2 Explain, using examples, how regulation, technological change and volatility can encourage financial innovation.
3 Why has financial innovation been such a feature of the past 25 years?
4 Explain what is meant by ‘off-balance-sheet operations’ and give three examples.
5 Explain the basic principles underlying the creation of loan-backed securities.
6 What are the characteristics of a ‘passthrough’security? Why might these characteristics limit the attractiveness of this type of security for some types of investor?
7 What is meant by ‘retail liability management’?Explain how it has been encouraged by deregulation.
8 Discuss the impacts, potential and actual, of liability management on the demand for money.
9 Why has retail liability management made control of the money supply more difficult?
1 Why might the existence of asymmetric information lead bankers to be conservative in their lending policies?
2 How does asymmetric information produce a role for credit-rating agencies? What dangers might there be in the financial services industry becoming too dependent on credit-rating agencies?
5 Discuss the view that self-regulation cannot cope with the problem that what is good for the industry as a whole may not be good for individual practitioners.
6 Why has globalization of the financial services industry made the problems faced by regulators more difficult?
9 What aspects of the regulatory problem were highlighted by:(a) the collapse of Baring’s Bank in 1995?(b) the collapse of BCCI in 1991?(c) the Northern Rock difficulties of 2007?
1 Distinguish between the meanings which can be attached to ‘efficiency’ when applied to financial markets.
2 What forces tend to make financial markets informationally efficient?
3 Distinguish between the different forms of the efficient market hypothesis.
4 How might an investment strategy appropriate for a market which is informationally efficient differ from one appropriate for a market which is inefficient?
5 How might you test for ‘weak’ and ‘semistrong’efficiency?
6 You suspect that directors’ purchases/sales of shares in their own firms are an indicator of future share price movements. How would you test whether such information could be profitably
7 Explain what is meant by ‘investor sentiment’.
8 Why might arbitrage fail to eliminate mispricing?

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