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business
natural resource economics

Questions and Answers of Natural Resource Economics

8. The Fed is the most independent of all U.S. government agencies. What is the main difference between it and other government agencies that explains the Fed’s greater independence?
6. Do you think that the 14-year nonrenewable terms for governors effectively insulate the Board of Governors from political pressure?
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. This chapter discusses how an understanding of adverse selection and moral hazard can help us better understand financial crises. The greatest financial crisis faced by the United States was the
21. How can a sovereign debt crisis make an economic contraction more likely?
19. Why are more resources not devoted to adequate, prudential supervision of the financial system to limit excessive risk taking, when it is clear that this supervision is needed to prevent
18. Why would haircuts on collateral increase sharply during a financial crisis? How would this lead to fire sales on assets?
17. What is the shadow banking system, and why was it an important part of the 2007–2009 financial crisis?
16. How did a decline in housing prices help trigger the subprime financial crisis starting in 2007?
15. True, false, or uncertain: Deposit insurance always and everywhere prevents financial crises.
14. Why is the originate-to-distribute business model subject to the principal–agent problem?
13. What technological innovations led to the development of the subprime mortgage market?
12. Describe two similarities and two differences between the U.S. experiences during the Great Depression and those during the Great Recession financial crisis of 2007–2009.
11. What role do weak financial regulation and supervision play in causing financial crises?
10. Provide one argument in favor of and one against the idea that the Fed was responsible for the housing price bubble of the early 2000s.
9. Describe the process of “securitization” in your own words. Was this process solely responsible for the Great Recession financial crisis of 2007–2009?
8. Some countries do not advertise that a system of deposit insurance like the FDIC in the United States exists in their banking system. Explain why some countries would want to do that.
7. What is a credit spread? Why do credit spreads rise during financial crises?
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 problems?
5. How does a deterioration in balance sheets of financial institutions cause a decline in economic activity?
4. Define “financial frictions” in your own terms and explain why an increase in financial frictions is a key element in financial crises.
3. Can you think of a reason why emerging market economies should be very careful when engaging in financial innovation and financial liberalization?
2. How can a bursting of an asset-price bubble in the stock market help trigger a financial crisis?
1. How does the concept of asymmetric information help to define a financial crisis?
2. This chapter discusses how an understanding of adverse selection and moral hazard can help us better understand financial crises. The greatest financial crisis faced by the United States was the
1. In this chapter we discuss the lemons problem and its effect on the efficient functioning of a market. This theory was initially developed by George Akerlof. Go to
4. You own a house worth that is located on a river. If the river floods moderately, the house will be completely destroyed. This happens about once every 50 years. If you build a seawall, the river
3. You wish to hire Ricky to manage your Dallas operations. The profits from the operations depend partially on how hard Ricky works, as follows.If Ricky is lazy, he will surf the Internet all day,
2. Now, you believe the dealer knows more about the cars than you. How much are you willing to pay? Why? How can this be resolved in a competitive market?
1. You are in the market for a used car. At a used car lot, you know that the blue book value for the cars you are looking at is between and . If you believe the dealer knows as much about the car as
20. Lucia, Cecilia, and Julia have to do a midterm project. While Lucia works hard on the project for two weeks, Cecilia and Julia do not even answer the phone. The project is a success and everybody
19. Which provisions of Sarbanes-Oxley do you think are beneficial, and which are not?
18. Describe two conflicts of interest that occur in accounting firms.
17. Which problem of asymmetric information are prospective employers trying to solve when they ask applicants to go through a job interview. Is that the end of the information asymmetry?
15. Suppose that in a given bond market, there is currently no information that can help potential bond buyers to distinguish between bonds. Which bond issuers have an incentive to disclose
14. How does the provision of several types of financial services by one firm lead to conflicts of interest?
13. Which specific asymmetric information problem do credit-rating agencies help to reduce in the bond market? Explain the effect of the subprime mortgage crisis on the trustworthiness of these
12. Explain how the separation of ownership and control in American corporations might lead to poor management.
10. “The more collateral there is backing a loan, the less the lender has to worry about adverse selection.” Is this statement true, false, or uncertain? Explain your answer.
9. Suppose you are applying for a mortgage loan. The loan officer tells you that if you get the loan, the bank will keep the house title until you pay back the loan. Which problem of asymmetric
6. Which relationship would you expect to exist between measures of corruption and living standards at the country level? Explain by which channel corruption might affect living standards.
5. Suppose you have data about two groups of countries, one with efficient legal systems and the other with slow, costly, and inefficient legal systems. Which group of countries would you expect to
4. How do standard accounting principles help financial markets work more efficiently?
3. Would moral hazard and adverse selection still arise in financial markets if information were not asymmetric? Explain.
2. Explain why dating can be considered a method to solve the adverse selection problem.
2. The Internet is a great source of information on stock prices and stock price movements. Go to http://finance.yahoo.com and in Search Finance enter Dow Jones Industrial Average and click to view
1. Visit http://research.stlouisfed.org/fred2/. Click on “Category,” then “Financial Indicators,” then “Stock Market Indexes.” Review the indices for the DJIA, the S&P 500, and the
2. If the public expects a corporation to lose a share this quarter and it actually loses , which is still the largest loss in the history of the company, what does the efficient market hypothesis
1. A company has just announced a 3-for-1 stock split, effective immediately. Prior to the split, the company had a market value of billion with 100 million shares outstanding. Assuming that the
14. Suppose that you work as a forecaster of future monthly inflation rates and that your last 6 forecasts have been off by minus 1%. Can you say that your expectations are optimal?
13. Assume that the efficient market hypothesis holds. Marcos has been recently hired by a brokerage firm and claims that he now has access to the best market information. However, he is the “new
11. 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 market expected, what do you think would
9. Suppose that in every last week of November stock prices go up by an average of 3%. Would this constitute evidence in favor of or against the efficient market hypothesis?
8. Can a person with optimal expectations expect the price of Google to rise by 10% in the next month?
6. Suppose that you are asked to forecast future stock prices of ABC Corporation, so you proceed to collect all available information. The day you announce your forecast, competitors of ABC
5. 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 rise in the past week, you should go out and buy
4. “If stock prices did not follow a random walk, there would be unexploited profit opportunities in the market.” Is this statement true, false, or uncertain? Explain your answer.
3. Suppose that you decide to play a game. You buy stock by throwing a dice a few times, using that method to select which stock to buy. After 10 months you calculate the return on your investment
2. “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. “Forecasters’ predictions of inflation are notoriously inaccurate, so their expectations of inflation cannot be optimal.” Is this statement true, false, or uncertain? Explain your answer.
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, go to https://personal.vanguard.com/us/
2. Figure 5.7 shows a number of yield curves at various points in time. Go to www.treasury.gov, and in the “Resource Center” at the top of the page click on “Data and Charts Center.” Find the
1. The amount of additional interest investors receive due to the various risk premiums changes over time. Sometimes the risk premiums are much larger than at other times. For example, the default
15. Predict the one-year interest rate three years from today if interest rates are 4%, 4.5%, 4.75%, and 5% for bonds with one to four years to maturity and the respective liquidity premiums are 0%,
14. You observe the following market interest rates, for both borrowing and lending: One-year rate = 5% Two-year rate = 6%One-year rate one year from now = 7.25% How can you take advantage of these
13. At your favorite bond store, Bonds-R-Us, you see the following prices: One-year zero selling for Three-year 10% coupon par bond selling for Two-year 10% coupon par bond selling for Assume that
12. Short-term (one-year) interest rates over the next 3 years are expected to be 2%, 3%, and 3.55%. If you are ready to buy a three-year bond that yields 3%, what is your minimum required liquidity
11. One-year T-bill rates are 2% currently. If interest rates are expected to go up after three years by 2% every year, what should be the required interest rate on a 10-year bond issued today?
10. Little Monsters, Inc., borrowed for two years from NorthernBank, Inc., at an 11.5% interest rate. The current riskfree rate is 2%, and Little Monsters’ condition warrants a default risk
9. Suppose that the expectations theory is true and that you can buy a three-year bond with an interest rate of 6% or three consecutive one-year bonds with interest rates of 4%, 5%, and 6%. Which
8. The one-year interest rate over the next 10 years will be 3%, 4.5%, 6%, 7.5%, 9%, 10.5%, 13%, 14.5%, 16%, and 17.5%. Assume that investors prefer holding short-term bonds so that a liquidity
7. Short-term (one-year) interest rates over the next 6 years will be 0.5%, 0.6%, 0.7%, 0.76%, 0.80%, and 0.84%. Using the expectations theory, what will be the interest rates on three-, four-, and
6. One-year T-bill rates are expected to steadily increase by 150 basis points per year over the next six years. Determine the required interest rate on a three-year T-bond and a six-year Tbond if
5. A municipal bond and a corporate bond of equal risk, liquidity, and maturity yield 6% and 10%, respectively. For which values of marginal tax rates would you prefer to buy the municipal bond?
4. Consider the decision to purchase either a five-year corporate bond or a five-year municipal bond. The corporate bond is a 12% annual coupon bond with a par value of . It is currently yielding
3. How does the after-tax yield on a municipal bond with a coupon rate of 8% paying interest annually compare with that of a corporate bond with a coupon rate of 10% paying interest annually? Assume
2. Government economists have forecasted one-year T-bill rates for the following five years, as follows:Year 1-Year Rate (%) 1 4.25 2 5.15 3 5.50 4 6.25 5 7.10You have a liquidity premium of 0.25%
1. Assuming that the expectations theory is the correct theory of the term structure, calculate the interest rates in the term structure for maturities of one to five years, and plot the resulting
11. If the income tax exemption on municipal bonds were abolished, what would happen to the interest rates on these bonds? What effect would it have on interest rates on U.S. Treasury securities?
10. Predict what would happen to the risk premiums of municipal bonds if the federal government guarantees today that it will pay creditors if municipal governments default on their payments. Do you
9. Predict what will happen to interest rates on a corporation’s bonds if the federal government guarantees today that it will pay creditors if the corporation goes bankrupt in the future. What
8. Suppose that the volume of corporate bonds traded declines. What would be the impact on the corporate bond risk premium? Which characteristics of a corporate bond might be affected?
7. If a yield curve looks like the one below, what is the market predicting about the movement of future short-term interest rates? What might the yield curve indicate about the market’s
6. If a yield curve looks like the one shown here, what is the market predicting about the movement of future short-term interest rates? What might the yield curve indicate about the market’s
5. Just before the collapse of the subprime mortgage market in 2007, the most important credit-rating agencies rated mortgage-backed securities with Aaa and AAA ratings. Explain how it was possible
4. “If bonds of different maturities are close substitutes, their interest rates are more likely to move together.” Is this statement true, false, or uncertain? Explain your answer.
2. Do you think that a U.S. Treasury bill will have a risk premium that is higher than, lower than, or the same as that of a similar security (in terms of maturity and liquidity) issued by the
1. Which should have the higher risk premium on its interest rates, a corporate bond with a Moody’s Baa rating or a corporate bond with a C rating? Why?
3. One of the points made in this chapter is that inflation erodes investment returns. Go to www.moneychimp.com/articles/econ/ inflation_calculator.htm and review how changes in inflation alter your
2. Increasing prices erode the purchasing power of the dollar. It is interesting to compute what goods would have cost at some point in the past after adjusting for inflation. Go to the Federal
1. One of the largest influences on the level of interest rates is inflation. A number of sites report inflation over time. Go to the Federal Reserve Bank of St. Louis, FRED database Web site at
6. The demand curve and the supply curve are estimated to be the same as in problem 4. As the stock market continued to rise, the Federal Reserve felt the need to increase the interest rates. As a
5. The demand curve and supply curve are estimated to be the same as in problem 4. Following a dramatic increase in the value of the stock market, many retirees started moving money out of the stock
4. An economist has concluded that, near the point of equilibrium, the demand curve and supply curve for one-year discount bonds can be estimated using the following equations: a. What is the
3. Last month, corporations supplied billion in one-year discount bonds to investors at an average market rate of 11.8%. This month, an additional billion in one-year discount bonds became available,
2. Consider a -par junk bond paying a 12% annual coupon with two years to maturity. The issuing company has a 20% chance of defaulting this year, in which case the bond would not pay anything. If the
1. You own a -par zero-coupon bond that has five years of remaining maturity. You plan on selling the bond in one year and believe that the interest rate next year will have the following probability
17. Suppose you are in charge of the financial department of your company and you have to decide whether to borrow short-or long-term. Checking the news, you realize that the government is about to
16. Suppose that people in France decide to permanently increase their savings rate. Predict what will happen to the French bond market in the future. Can France expect higher or lower domestic
15. The chairman of the Fed announces that interest rates will rise sharply next year, and the market believes him. What will happen to today’s interest rate on AT&T bonds, such as the of 2022?

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