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money banking financial markets

Questions and Answers of Money Banking Financial Markets

The Basel Accords attempted to address which of the following issues?a. Sufficient levels of bank capitalb. Different levels of deposit insurance in different countriesc. The lack of an international
Explain how depository institutions successfully “got around” Regulation Q without actually breaking the law.
Why is it that bank executives today may not want their banks to hold sufficient levels of bank capital, even if doing so would make their banks more stable?
What did the Riegle-Neil Act of 1994 allow US banks to do?a. For the first time offer deposits with FDIC insuranceb. Offer checking accounts that paid interestc. Have branches in many different
Ted argues that we should return to the “old days” when banks were forbidden from branching across state lines. Ted believes this will make banks safer because they will concentrate on one,
The Glass-Steagall Act of 1933 separated commercial banks, investment banks, and insurance companies. Explain how the act was slowly chipped away at before it was finally phased out in 1999.
You read that a bank’s net interest income has decreased. Why might this have occurred?a. Gross interest income increased more than gross interest expense decreased.b. Both gross interest income
Why is it that an increase in a bank’s ROE might be a sign that the bank is taking on more risk?
Explain why an increase in a bank’s ROA may or may not be a reason to purchase the bank’s stock.
Which of the following is a type of operational risk banks face?a. A borrower does not repay as promised.b. The bank’s computer system crashes.c. Interest rates increase, requiring the bank to pay
Explain how the Volcker Rule was designated to limit market risk banks face.
Explain how a bank that makes only loans in the domestic market can still face exchange rate risk.
Which of the following is not a source of liquidity for banks?a. Commercial paperb. Real estate holdings, such as a bank buildingc. Securitizing loansd. Deposits at the Federal Reserve
The Federal Reserve was established, in part, to be the “lender of last resort” to the banking system. Why can’t we rely on the Federal Reserve to ensure there is enough liquidity in the
Bill is confused about why liquidity risk management is such a problem for banks. He says, “It’s simple. If banks are worried about liquidity risk, why don’t they just hold a lot of liquid
You hold a portfolio of bonds. You read in the financial press that market interest rates have increased. Holding everything else constant, what has just happened to the duration of your bond
Explain the concept of duration to someone who has no training in economics.
Judy runs a bank and believes interest rates will increase in the future. Explain what size interest rate gap the bank should have and why.
Sunita is a loan officer at a bank. She is considering making a loan to a local business, but she is worried about the “conditions” variable of the five Cs of credit risk. What is Sunita
Explain why not every asset can be used as collateral on a loan.
Bob and Karen are both applying for a consumer loan. They both have the same current level of income and the same current level of debt. Why might Karen be more likely to get the loan if Karen is
Lisa runs a commercial bank and wants to hedge her interest rate risk. Which off balance sheet transaction is Lisa going to engage in on behalf of the bank?a. Standby letter of creditb. Credit
Many argue that when banks started to issue credit default swaps, they started to become insurance companies. Explain this argument.
Commercial letters of credit and standby letters of credit tend to be very profitable for banks, yet they seldom require banks to lend money. Explain why.
Debbie has owned her home for several years and has been paying her mortgage on time every month. She is building equity in her home, which can then be used for what type of personal loan?a. A first
Banks offer a wide variety of business loans. Explain why banks try to seek a balance between short-term and long-term loans in their loan portfolio. What are the advantages and disadvantages of
Explain the trade-offs banks face when they consider holding high-yield securities.
Demand deposit and NOW accounts are commonly referred to as:a. Savings accounts.b. Passbook accounts.c. Checking accounts.d. Non transaction accounts.
Not all financial assets are the right vehicle for everyone. Give an example of someone for whom a certificate of deposit would be useful. Also give an example of someone for whom a certificate of
Financial innovations can have dramatic effects. Explain how and why NOW accounts came about and the impact they have had on financial markets.
Which is currently the largest liability of banks?a. Cashb. Loansc. Depositsd. Bank capital
Banks usually hold a very small percentage of their assets in the form of cash. Recently, however, banks have been holding on to larger amounts of cash. What impact does this have on the other
Hank is confused as to what banks do. He reads that banks “transform assets,” but he has no idea what that means. How would you explain asset transformation to Hank?
Some believe identifying an asset bubble until it breaks is impossible, and thus monetary policy should not be used to deflate asset bubbles. Stiglitz argues this argument is false because it ignores
Stiglitz argues that the Fed’s focus on price stability actually contributed to the Great Recession. Explain Stiglitz’s argument. that if one wants economic stability, one must have price level
Tommy believes that markets are rational. Explain why Tommy thus would argue that asset bubbles don’t exist. How would economists such as Joseph Stiglitz counter Tommy’s argument?
According to the Taylor Rule, if the real federal funds rate equals 2%, the inflation target rate is 2%, the actual inflation rate is 4%, and the economy is at the full employment level of output,
What problems with the Taylor Rule does the Mankiw Rule attempt to address?
Which of the following are lags in monetary policy?a. Information lag and impact or effectiveness lagb. Velocity lag and turnover lagc. Interest rate lag and unemployment lagd. Output lag and
Explain why many economists argue the explicit inflation target for monetary policy is far too rigid to be effective.
Explain how the time inconsistency problem in monetary policy is used by many to argue in favor of central bank independence.
The “dual goals” of current monetary policy in the United States are:a. Long-run economic growth and balanced international trade.b. High employment and price level stability.c. Low interest
Opponents of the “financial market stability goal” of monetary policy believe it may be difficult for the Federal Reserve, or any central bank, to achieve this goal. Explain their argument.
Some argue the Federal Reserve should not have “high employment” as one of the goals of monetary policy because there are so many causes of unemployment that are beyond the Fed’s control. What
Under price level-targeting monetary policy, a sharp drop in the inflation rate today means what for the future?a. A return to the previous rate of inflation.b. An increase in the inflation rate to
Explain why some argue that a central bank’s goal of price level stability can hurt the middle class and working people while benefiting more wealthy individuals.
Explain why deflation leads to an increase in the real burden of debt.
If a central bank wants to pursue an expansionary monetary policy, it should change policies to ensure what happens to the required reserves ratio?a. The required reserves ratio should be set equal
You read in the press that a credit crunch is occurring. How will that affect the money supply multiplier and why?
Explain why (just mathematically) if people hold relatively more cash—that is, the currency ratio k increases—the money supply multiplier gets smaller.
If US Treasury and administration officials decide they want to see the dollar rise in value against the euro, what will happen to the monetary base?a. It will increase as bank reserves decrease.b.
Explain how changes in the Treasury’s tax and loan account balance may affect the monetary base. “tax and loan accounts,” at commercial banks across the country.
If bank depositors hold more cash and fewer deposits, the monetary base does not change, only the composition of it does. Explain why.
Which of the following are included in the monetary base?a. Coins in circulationb. Currency in circulationc. Bank reservesd. All of the above
Explain why the Federal Reserve has more control over the monetary base when it uses open market operations than when it uses discount window lending.
Explain how the Federal Reserve’s conduct of an expansionary open market operation affects the monetary base.
If the ECB is pursuing an expansionary monetary policy, it will do which of the following?a. Lower the minimum reserve requirementsb. Lower the interest rate paid by its deposit facilityc. Purchase
Explain how the European Central Bank’s interest payments on the deposits commercial banks have at the ECB provides an interest rate floor for the interbank lending rate.
The European Central Bank uses reserve transactions in its version of open market operations. Explain to someone with no training in economics what reserve transactions are.
Monetization of public debt often leads to which economic problem?a. Inflationb. Unemploymentc. Stock market asset bubblesd. Falling commodity prices
President Abraham Lincoln funded the Union Army during the Civil War by a “monetization of public debt.” What did Lincoln do?
Explain why Keynes thought monetary policy during the Great Depression was like “pushing on a string.” Was it similar during the Great Recession of 2008–2009? Why or why not?
Fred is holding on to cash because he thinks interest rates will increase in the future and thus bond prices will decrease, making the future a good time to buy bonds. Keynes would say Fred is
Explain why targeting interest rates is so difficult for central banks if the demand for money is unstable.
Irving Fisher explained the demand for money using the quantity theory of money demand. Explain this concept to someone who has no training in economics.
What is the Federal Reserve trying to twist in its “Operation Twist”?a. The shape of the yield curveb. The size of the government’s budget deficitc. The level of profits banks earnd. The
Explain why the Federal Reserve went from emergency lending to quantitative easing.
During the crisis of 2007–2008, the Federal Reserve created an alphabet soup of emergency lending programs: TSLF, PDCF, AMLF, MMIFF, CPFF, and TALF, among others. Why did the Fed feel compelled to
During a credit crunch we can expect interest rates to:a. Decrease rapidly because of a significant increase in savings.b. Increase rapidly as the economy expands quickly.c. Decrease rapidly because
Explain why the stigma effect may be heightened during an economic slowdown.
Why did the Federal Reserve feel it was necessary to create the term auction facility?
If the Federal Reserve wants to increase the level of reserves in the banking system, it will undertake:a. A dynamic contractionary transaction.b. A defensive expansionary transaction.c. A dynamic
Explain the steps the Federal Reserve goes through when conducting a contractionary open market operation. When and why might the Federal Reserve do this?
Explain the steps the Federal Reserve goes through when conducting an expansionary open market operation. Who is affected and how?
The financial and economic system in Canada functioned very differently from financial systems in other Western countries. In what way was Canada’s experience different? a. Canada entered an
How is the structure of the Bank of Canada similar to that of the Federal Reserve? How is it different?
How is the structure of the ECB similar to that of the Federal Reserve? How is it different?
Critics of the Bank of Japan argue that it played a role in the global financial crisis. What do these critics argue?a. The Bank of Japan raised interest rates too quickly as the crisis was
In what ways are the Bank of Japan and the Bank of England significantly different from the Federal Reserve?
In what ways are the Bank of Japan and the Bank of England similar to the Federal Reserve?
The main purpose of term auction lending was to:a. Reduce the rate of inflation.b. Increase market interest rates. c. Reduce the amount banks borrow from the Fed.
In what ways did the Fed’s balance sheet change in response to the global financial crisis?
What does it mean that the Federal Reserve is the “fiscal agent” of the US government?
The FOMC meets to decide which of the following? a. Who should be selected as Fed Chair? b. How operations of the Fed should be changed c. Changes to monetary policy d. How best
The voting structure of the FOMC means that the Fed governors have more votes than the Federal Reserve bank presidents. Why do you think this is the case?
Some look at the structure of the Federal Reserve and come to the conclusion that it is “undemocratic.” Why do you think they come to this conclusion? Do you agree with them?
Changes to the structure of the Fed during the Great Depression included: a. Creation of the FOMC. b. Consolidation of power in the board of governors.c. Increasing the political
The Federal Reserve Bank of New York has a great deal of influence over financial markets to this very day. Yet the New York Fed is not as powerful as many wanted it to be in the early part of the
When the Fed was created, one of its main purposes was to maintain the gold standard. What does this mean?
Which of the following is not an assumption of the simple deposit multiplier?a. Banks always earn a profit.b. Banks hold no excess reserves.c. Consumers hold no cash.d. There is one required reserve
You read a story in the press that there are growing fears of a credit crunch. What impact might this have in terms of the simple deposit multiplier?
Explain how architecture may have been used to avoid bank runs.
According to the simple deposit multiplier, what happens if there is a deposit and the required reserve ratio is zero?a. The money supply grows forever.b. The money supply equals zero.c. The growth
If $100 million is withdrawn from the banking system, what would happen to the money supply, according to the simple deposit multiplier, if the required reserve ratio is 4%? What if the required
If $100 million is deposited into the banking system, what would happen to the money supply, according to the simple deposit multiplier, if the required reserve ratio is 4%? What if the required
Which of the following has the highest level of liquidity?a. The stock of a Fortune 100 corporationb. A bond issued by the US Governmentc. A bank checking accountd. A bank savings account
Explain how banks offer diversification to savers even if a depositor puts all of their funds into a single bank account.
Explain why economies without banks suffer from high search costs.
High deductibles are used in which financial market to help address the moral hazard problem?a. Equity marketb. Bond marketc. Insurance marketd. Bank deposit market
Explain how compensating balances help to resolve the moral hazard problem in bank lending.

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