MONEY,BANK,FIN INST ECON 353
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Date Created: 09/26/15
ECONOMICS 353 L TesfatsionFall 07 EXERCISE 11 8 Questions 8 Points Total DUE Tues Dec 4 2007 210pm IMPORTANT REMINDER LATE ASSIGNMENTS WILL NOT BE ACCEPTED 7 NO EXCEPTIONS EXERCISE INSTRUCTIONS o 1 Please ll in your name and student ID number on Side 1 of your bubble sheet and write 353 Exercise 11 in the top margin of Side 1 o 2 Use a number 2 pencil to mark your answers on Side 1 of the bubble sheet to all eiqht questions Q1 through Q8 below which are in multiple choice format There is no Web Exercise question for Exercise 11 o 3 Each question Q1 through Q8 is worth 1 point Q1 According to Mishkin Chapter 8 during 1970 2000 was a more important source of EXTERNAL FUNDS for US corporations than A revenues from stock and bond issues loans from financial intermediaries B loans from foreign financial intermediaries loans from domestic financial intermediaries C loans from financial intermediaries revenues from stock and bond issues D loans from government agencies loans from financial intermediaries Q2 Some of the key reasons why banks and other financial intermediaries are able to reduce or eliminate information problems and transaction costs include A banks can spread their loan costs over large pools of depositors lenders B bank loans are typically made in private which gives bankers a greater incentive to engage in costly information gathering C banks can include collateral requirements in loan contracts which can act as a signal regarding the type of borrower high or low risk D all of the above Q3 Corporate BONDholders are generally LESS likely to be concerned about moral hazard prob lems than corporate SHAREholders because A corporate bondholders have priority over stockholders in case of bankruptcy B corporate bonds include restrictive covenants that condition payments on corporate pro t performance C corporate bond payments are not conditioned on corporate pro t performance except in extreme circumstances such as bankruptcy D both A and B E both A and C Q4 PRINCIPAL AGENT PROBLEMS are said to occur in financial markets when A ownership of assets is separated from the control of these assets B people who do not pay for information take advantage of the information that other people have paid for by observing their behavior C high risk borrowers are successfully able to pass themselves off as low risk borrowers when applying for loans D the cost per dollar loaned declines as the size of the loan increases Q5 The SARBANES OXLEY ACT OF 20027 introduced in the wake of sory oversight by increased supervi A the dotcom bubble burst giving Congress the authority to review independent audits of initial public offerings lPOs B the demise of the Arthur Andersen company due to the Enron crisis establishing the Public Company Accounting Oversight Board to supervise accounting rms and ensure independent audits C the Us savings and loan crisis creating a new Department of Con ict Resolution within the Federal Deposit Insurance Corporation FDIC D the US twin de cit problem directing the General Accounting Office to provide yearly detailed reports on US scal expenditures Q6 The ECONOMIC GROWTH of a country refers to A changes in its balance of payments B changes in the infrastructure organization and governance of its economy C changes in its money supply D changes in the size of its economy often measured by changes in GDP Q7 According to Mishkin Chapter 8 most US FINANCIAL CRISES have begun with one or more of the following trigger events A a rise in interest rates B a decline in the stock market C a deterioration in banks7 balance sheets D an increase in uncertainty resulting for example from a failure of a prominent nancial or non nancial institution E all of the above Q8 According to Mishkin Chapter 8 a key way in which US nancial crises have DIFFERED from financial crises in emerging economies such as Mexico is that A US regulators have not permitted insolvent financial institutions to stay in operation B foreign exchange crises eg speculative currency attacks have not played a dominant role in US financial crises C US nancial crises tend to be of far shorter duration D US nancial crises have not resulted in substantial bank failures Structure of Central Banks and the Federal Reserve System Origins of the Federal Reserve System I Resistance to establishment of a central bank quotl Fear of centralized power 7 Distrust of moneyed interests First US experiments with a central bank terminated in 1811 and in 1836 No lender of last resort or Nationwide bank panics on a regular basis fl Panic of 1907 so severe that the public was convinced a central bank was needed Federal Reserve Act of 1913 l Elaborate system of checks and balances or Decentralized Appoints 1hree Elect six directors to direciors to each FRB each FRB E E m N gt m g a Select if E w m u Establish Sets within limits 3 O O E 396 a FIGURE 1 Structure and Responsibility for Policy Tools in the Federal Reserve System 0 Seattle 0 Portland quotkmquot 9 1 2 Minneapolis 7 Boston 0 7 Detroit sumquot 12 3 New York Chicago Pittsburgh s F t Phlladelphra an ranmsco Salt Lake CleVe and Baltimore t City K my Cincinnati WASHINGTON arises new St Louis Rmhmond Louisville 5 8 Charlotte Los Angeles Memphis O Oklahoma City Lim Rock Bimmgham Atlanta Dallas 6 0 El Paso 39 6 Federal Reserve districts 11 JaCksonvme t Board of Governors of the Federal Houston Reserve System New Orleans San Antonio Miami Federal Reserve bank cities 0 Federal Fteserve branch cities Boundaries of Federal Reserve districts Alaska and Hawaii are in District 12 F G U R E 2 Federal Reserve System Source Federal Reserve Bulletin Federal Reserve Banks I Quasipublic institution owned by private commercial banks in the district that are members of the Fed system l Member banks elect six directors for each district three more are appointed by the Board of Governors i Three A directors are professional bankers i Three B directors are prominent leaders from industry labor agriculture or consumer sector quoti Three C directors appointed by the Board of Governors are not allowed to be officers employees or stockholders of banks Federal Reserve Banks cont d l Member banks elect six directors for each district three more are appointed by the Board of Governors cont d lquot Designed to reflect all constituencies of the public I Nine directors appoint the president of the bank subject to approval by Board of Governors Functions of the Federal Reserve Banks I Clear checks I Issue new currency I Withdraw damaged currency from circulation I Administer and make discount loans to banks in their districts I Evaluate proposed mergers and applications for banks to expand their activities the Federal Reserve Banks cont d I Act as liaisons between the business community and the Federal Reserve System I Examine bank holding companies and state chartered member banks I Collect data on local business conditions I Use staffs of professional economists to research topics related to the conduct of monetary policy Federal Reserve Banks and Monetary Policy I Directors establish the discount rate I Decide which banks can obtain discount loans I Directors select one commercial banker from each district to serve on the Federal Advisory Council which consults with the Board of Governors and provides information to help conduct monetary policy I Five of the 12 bank presidents have a vote in the Federal Open Market Committee FOMC Member Banks I All national banks are required to be members of the Federal Reserve System I Commercial banks chartered by states are not required but may choose to be members I Depository Institutions Deregulation and Monetary Control Act of 1980 subjected all banks to the same reserve requirements as member banks and gave all banks access to Federal Reserve facilities Board of Governors of the Federal Reserve System I Seven members headquartered in Washington DC I Appointed by the president and confirmed by the Senate I 14year nonrenewable term I Required to come from different districts I Chairman is chosen from the governors and serves fouryear term Duties of the Board of Governors I Votes on conduct of open market operations I Sets reserve requirements I Controls the discount rate through review and determination process I Sets margin requirements I Sets salaries of president and officers of each Federal Reserve Bank and reviews each bank s budget Duties of the Board of Governors cont d I Approves bank mergers and applications for new activities I Specifies the permissible activities of bank holding companies I Supervises the activities of foreign banks operating in the US Chairman of the Board of Governors I Advises the president on economic policy I Testifies in Congress I Speaks for the Federal Reserve System to the media I May represent the US in negotiations with foreign governments on economic matters Federal Open Market Committee FOMC I Meets eight times a year I Consists of seven members of the Board of Governors the president of the Federal Reserve Bank of New York and the presidents of four other Federal Reserve banks I Chairman of the Board of Governors is also chair of FOMC I Issues directives to the trading desk at the Federal Reserve Bank of New York FOMC Meeting I Report by the manager of system open market operations on foreign currency and domestic open market operations and other related issues I Green Book forecast lquot Goround I Current monetary policy and domestic policy directive L Blue book I Presentation on relevant Congressional actions I Public announcement about the outcome of the meeting 39 1 Chairman Runs the Show I Spokesperson for the Fed and negotiates with Congress and the President I Sets the agenda for meetings I Speaks and votes first about monetary policy I Supervises professional economists and advisers How Independent is the Fed I Instrument independent I Goal independent I Independent revenue I Structured by legislation from Congress and accountable for its actions I Presidential influence I II Influence on Congress I I Appoints members I II Appoints chairman although terms are not concurrent 39 1 Central Bank Behavior I Theory of bureaucratic behavior objective is to maximize its own welfare which is related to power and prestige u Fight vigorously to preserve autonomy u Avoid conflict with more powerful groups I Does not rule out altruism 39 1 Case for Independence I Political pressure would impart an inflationary bias to monetary policy I Political business cycle I Could be used to facilitate Treasury financing of large budget deficits accommodation I Too important to leave to politicians the principalagent problem is worse for politicians 20 39 1 Case Against Independence I Undemocratic I Unaccountable I Difficult to coordinate fiscal and monetary policy I Has not used its independence successfully 21