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economics of money banking and financial markets

Questions and Answers of Economics Of Money Banking And Financial Markets

A lottery claims its grand prize is $10 million, payable over 5 years at $2,000,000 per year. If the first payment is made immediately, what is this grand prize really worth? Use an interest rate of
Calculate the present value of a $1,000 discount bond with five years to maturity if the yield to maturity is 6%.
If the interest rate is 10%, what is the present value of a security that pays you $1,100 next year, $1,210 the year after, and $1,331 the year after that?
Interest rates were lower in the mid-1980s than in the late 1970s, yet many economists have commented that real interest rates were actually much higher in the mid-1980s than in the late 1970s. Does
True or False: With a discount bond, the return on a bond is equal to the rate of capital gain.
If mortgage rates rise from 5% to 10% but the expected rate of increase in housing prices rises from 2% to 9%, are people more or less likely to buy houses?
A financial adviser has just given you the following advice: “Long-term bonds are a great investment because their interest rate is over 20%.” Is the financial adviser necessarily right?
Is it better for bondholders when the yield to maturity increases or decreases?
To pay for college, you have just taken out a $1,000 government loan that makes you pay $126 per year for 25 years. However, you don’t have to start making these payments until you graduate from
Write down the formula that is used to calculate the yield to maturity on a twenty-year 10% coupon bond with $1,000 face value that sells for $2,000.
Would a dollar tomorrow be worth more to you today when the interest rate is 20%, or when it is 10%?
Go to www.federalreserve.gov/ and select one topic on which the Federal Reserve has a written policy. Write a one-paragraph summary of this policy.
Go to www.federalreserve.gov/releases/h6/Current/.a. What has been the growth rate in M1 and M2 over the past twelve months?b. From what you know about the state of the economy, does this seem
The table below shows hypothetical values, in billions of dollars.a. Use the table to calculate the M1 and M2 money supply for each year, as well as the growth rates of the M1 and M2 money supply
Suppose that a researcher discovers that a measure of the total amount of debt in the U.S. economy over the past twenty years was a better predictor of inflation and the business cycle than M1 or M2.
In September 2008, the growth rate of the M1 money supply was zero, while the growth rate of the M2 money supply was about 5%. In July 2009, the growth rate of M1 was about 17%, and the growth rate
Assume that you are interested in earning some return on idle balances you usually keep in your checking account and decide to buy some money market mutual funds shares by writing a check. Comment on
For each of the following assets, indicate which of the monetary aggregates (M1 and M2) includes them:a. Currencyb. Money market mutual fundsc. Small-denomination time depositsd. Checkable deposits
It is not unusual to find a business that displays a sign saying “no personal checks, please.” On the basis of this observation, comment on the relative degree of liquidity of a checking account
Rank the following assets from most liquid to least liquid:a. Checking account depositsb. Housesc. Currencyd. Automobilee. Savings depositsf. Common stock
If you use an online payment system such as PayPal to purchase goods or services on the Internet, does this affect the M1 money supply, M2 money supply, both, or neither? Explain.
Why were people in the United States in the nineteenth century sometimes willing to be paid by check rather than with gold, even though they knew there was a possibility that the check might bounce?
Was money a better store of value in the United States in the 1950s than in the 1970s? Why or why not? In which period would you have been more willing to hold money?
Most of the time it is quite difficult to separate the three functions of money. Money performs its three functions at all times, but sometimes we can stress one in particular. For each of the
Three goods are produced in an economy by three individuals:Good Producer Apples Orchard owner Bananas Banana grower Chocolate Chocolatier If the orchard owner likes only bananas, the banana grower
In prison, cigarettes are sometimes used among inmates as a form of payment. How is it possible for cigarettes to solve the “double coincidence of wants” problem, even if a prisoner does not
Suppose you have just inherited $10,000 and are considering the following options for investing the money to maximize your return:Option 1: Put the money in an interest-bearing checking account,
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. How would this
Why would a life insurance company be concerned about the financial stability of major corporations or the health of the housing market?
Why might you be willing to make a loan to your neighbor by putting funds in a savings account earning a 5% interest rate at the bank and having the bank lend her the funds at a 10% interest rate
If there were no asymmetry in the information that a borrower and a lender had, could a moral hazard problem still exist?
How can the adverse selection problem explain why you are more likely to make a loan to a family member than to a stranger?
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.How does this demonstrate both a
The U.S. economy borrowed heavily from the British in the nineteenth century to build a railroad system. Why did this make both countries better off?
What is the difference between a mortgage and a mortgage-backed security?
For each of the following money market instruments, describe who issues the debt:a. Treasury billsb. Certificates of depositc. Commercial paperd. Repurchase agreemente. Fed funds
“Because corporations do not actually raise any funds in secondary markets, they are less important to the economy than primary markets are.” Is this statement true, false, or uncertain?
If I can buy a car today for $5,000 and it is worth$10,000 in extra income next year to me because it enables me to get a job as a traveling salesman, should I take out a loan from Larry the Loan
In Web Exercise 1 you collected and graphed the Dow Jones Industrial Average (DJIA). This same site reports forecast values of the DJIA. Go to www.forecasts.org/data/index.htm and click on FFC Home
In this exercise we will practice collecting data from the Web and graphing it using Excel. Use the example on pages 15–18 as a guide. Go to www.forecasts.org/data/index.htm, click on Stock Index
The following table lists foreign exchange rates between U.S. dollars and British pounds (GBP) during April.Which day would have been the best to convert $200 into British pounds? Which day would
Much of the U.S. government debt is held as treasury bonds and bills by foreign investors. How do fluctuations in the dollar exchange rate affect the value of that debt held by foreigners?
When the dollar is worth more in relation to currencies of other countries, are you more likely to buy American-made or foreign-made jeans? Are U.S. companies that manufacture jeans happier when the
How does the current size of the U.S. budget deficit compare to the time period since 1950?
When interest rates decrease, how might businesses and consumers change their economic behavior?
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?
2. The International Monetary Fund stands ready to help nations facing monetary crises. Go to www.imf.org. Click on the tab labelled “About the IMF.” What is the stated purpose of the IMF?How
1. Visit the Bank of Canada’s website at www.bankofcanada.ca.Click on “Statistics” and then “Exchange Rates.”a. What is the Canadian-dollar effective exchange rate index(CERI)?b. How many
2. Go to the St. Louis Federal Reserve FRED database, and find data on the monthly U.S. dollar exchange rate to the Chinese yuan(EXCHUS), the Canadian dollar (EXCAUS), and the South Korean won
1. Go to the St. Louis Federal Reserve FRED database, and find U.S.data on net exports (NETEXP), transfers (A123RC1Q027SBEA), and the current account balance (NETFI).a. Calculate net investment
23. Suppose the Mexican central bank chooses to peg the peso to the U.S. dollar and commits to a fixed peso/dollar exchange rate. Use a graph of the market for peso assets (foreign exchange) to show
22. Suppose the Bank of Canada purchases $1 million worth of foreign assets.a. If the Bank of Canada purchases the foreign assets with$1 million in currency, show the effect of this open market
21. Calculate the overvaluation of the Thai baht (THB) if you can get 34.6 THB per Canadian dollar at the exchange counter but a lunch menu that costs 25 Canadian dollars in Montréal sells for
20. When is exchange-rate targeting likely to be a sensible strategy for industrialized countries? When is exchange-rate targeting likely to be a sensible strategy for emerging market countries?
19. What are the key advantages of exchange-rate targeting as a monetary policy strategy?
18. How can the long-term bond market help reduce the timeinconsistency problem for monetary policy? Can the foreign exchange market also perform this role?
17. The IMF does not enjoy a great reputation in many countries that were recipients of IMF loans or bailouts. Explain why many citizens were not happy with the role played by the IMF.
14. Why is it that in a pure, flexible exchange rate system, the foreign exchange market has no direct effect on the money supply? Does this mean that the foreign exchange market has no effect on
13. “If a country wants to keep its exchange rate from changing, it must give up some control over its monetary policy.” Is this statement true, false, or uncertain? Explain your answer.
12. Why might a country that is suffering a recession not want to intervene in the foreign exchange market if its currency is overvalued? Assume this country participates in a fixed exchange rate
11. If a country’s par exchange rate was undervalued during the Bretton Woods fixed exchange rate regime, what kind of intervention would that country’s central bank be forced to undertake, and
9. “Inflation is not possible under the gold standard.” Is this statement true, false, or uncertain? Explain your answer.
8. What is the exchange rate between dollars and Swiss francs if one dollar is convertible into 1/20 ounce of gold, and one Swiss franc is convertible into 1/40 ounce of gold?
7. Under the gold standard, if Britain became more productive relative to Canada, what would happen to the money supply in the two countries? Why would the changes in the money supply help preserve a
6. What would be the effect of a devaluation on a country’s imports and exports? If a country imports most of the goods included in the basket of goods and services used to calculate the CPI, what
5. Refer to the previous exercise. Which type of foreign market intervention must the central bank of Colombia conduct to keep the exchange rate at a level where the currency is not under- or
4. Suppose that you travel to Cali (Colombia), where the exchange rate is 1 Canadian dollar to 2900 Colombian pesos. As you enter a McDonald’s restaurant, you realize you need 17 400 Colombian
3. For each of the following, identify whether they increase or decrease the current account balance:a. A Canadian citizen’s purchase of an airline ticket from Air Franceb. A Japanese citizen’s
2. If the Bank of Canada buys dollars in the foreign exchange market but does not sterilize the intervention, what will be the impact on international reserves, the money supply, and the exchange
1. If the Bank of Canada sells dollars in the foreign exchange market but conducts an offsetting open market operation to sterilize the intervention, what will be the effect on international
2. Go to the website that contains the most recent calculations of The Economist’s Big Mac Index, www.economist.com/content/bigmac-index.a. Plot the relationship between the local price of a Big
1. International travellers and business people frequently need to accurately convert from one currency to another. Go to www.oanda.com/convert/classic. This site lets you convert from any currency
2. Go to the St. Louis Federal Reserve FRED database, and find data on the daily dollar exchange rates for the euro (DEXUSEU), British pound (DEXUSUK), and Japanese yen (DEXJPUS). Also find data on
1. Go to the CANSIM database, and download monthly data from January 1974 to April 2017 (when applicable) on the Canadian dollar per U.S. dollar exchange rate (series V37426), the Canadian dollar per
24. If a strike takes place in France, making it harder to buy French goods, what will happen to the value of the Canadian dollar?
23. If the European Central Bank decides to pursue a contractionary monetary policy to fight inflation, what will happen to the value of the Canadian dollar?
22. If expected inflation drops in Europe so that interest rates fall there, what will happen to the exchange rate on the Canadian dollar?
21. If the price level recently increased by 20% in England while falling by 5% in Canada, by how much must the exchange rate change if PPP holds? Assume that the current exchange rate is 0.55 pound
20. In 1999, the euro was trading at US$0.90 per euro. If the euro is now trading at US$1.16 per euro, what is the percentage change in the euro’s value? Is this an appreciation or a depreciation?
19. The New Zealand dollar to U.S. dollar exchange rate is 1.36, and the British pound to U.S. dollar exchange rate is 0.62. If you find that the British pound to New Zealand dollar is trading at
18. If the Canadian dollar to U.S. dollar exchange rate is 1.28 and the British pound to U.S. dollar exchange rate is 0.62, what must be the Canadian dollar to British pound exchange rate?
17. A German sports car is selling for 70,000 euros. What is the dollar price in Canada of the German car if the exchange rate is 0.90 euro per dollar?
16. On June 23, 2016, voters in the United Kingdom voted to leave the European Union. From June 16 to June 23, 2016, the exchange rate between the British pound and the U.S. dollar increased from
14. Through the summer and fall of 2008, as the global financial crisis began to take hold, international financial institutions and sovereign wealth funds significantly increased their purchases of
11. If nominal interest rates in Canada rise but real interest rates fall, predict what will happen to the Canadian dollar exchange rate.
9. Suppose the governor of the Bank of Canada announces a new set of reforms that includes a new anti-inflation program.Assuming the announcement is believed by the public, what will happen to the
8. In the mid- to late 1970s, the yen appreciated in value relative to the U.S. dollar, even though Japan’s inflation rate was higher than the United States’. How can this be explained by
4. If the Japanese price level rises by 5% relative to the price level in Canada, what does the theory of purchasing power parity predict will happen to the value of the Japanese yen in terms of
1. Suppose that you are considering going on vacation abroad and that the euro has appreciated by 15% with respect to the Canadian dollar. Would you be more or less willing to visit Rome and Paris?
3. Many countries have central banks that are responsible for their nation’s monetary policy. Go to www.bis.org/cbanks.htm, and select one of the central banks (for example, the central bank of
2. It is possible to access other central bank websites to learn about these banks’ structures. One example is the European Central Bank. Go to www.ecb.int/index.html. On the ECB home page, find
1. Go to www.bankofcanada.ca, and click on “About the Bank” and then “What We Do.”a. Review the Bank of Canada’s main functions.b. How does the Bank of Canada’s monetary policy contribute
2. Go to the Bank of Canada’s website, and find quarterly data(under “Indicators of Capacity and Inflation Pressures for Canada”) on the output gap and the capacity utilization
1. Go to the Bank of Canada’s website, and find inflation data(under “Statistics,” then “Indicators,” and then “Summary of Key Monetary Policy Variables”) based on total CPI and core
25. Since monetary policy changes made through the overnight interest rate occur with a lag, policymakers are usually more concerned with adjusting policy according to changes in the forecasted or
23. What does the Taylor rule imply that policymakers should do to the overnight interest rate under the following scenarios?a. Unemployment rises due to a recession.b. An oil price shock causes the
22. How can forward guidance as a tool of the central bank affect the policy instrument, intermediate targets, and goals?
20. Compare the monetary base to on the grounds of controllability and measurability. Which do you prefer as an intermediate target? Why?
19. What procedures can the Bank of Canada use to control the overnight interest rate? Why does control of this interest rate imply that the Bank will lose control of nonborrowed reserves?
17. Classify each of the following as either a policy instrument or an intermediate target, and explain your choice.a. The 10-year Canada bond rateb. The monetary base c.d. The overnight interest rate

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