Reference no: EM133197579 , Length: 10 Pages
Assignment:
Reading the chapter:
Why Study Money, Banking, and Financial Markets?
What Is Money?
1. What is a barter system? What are the problems of the barter system? Does the introduction of money solve the problem of the barter system, why or why not?
2. 1) What is adverse selection? Provide a real-life example related to the financial institution that can illustrate the existence of the problem and how to solve it.
2) What is moral hazard? Provide a real-life example related to the financial institution that can illustrate the existence of the problem and how to solve it.
3. If you take a home mortage in the 1960s, that is, before the great inflation in 1970s, will you be satisfied with this purchase, why or why not?
4. According to the book/video: What are the functions of the Federal Reserve System? For each function of the Federal Reserve System, please use a real-life example to illustrate why this function is important.
5. According to the book/video: How independent is the Fed ? What are the arguments for and against Federal independence?
6. 1) What is the Euro system?
2) Which is more independent, the Federal Reserve or the European Central Bank? Why?
7. What is credit rationing? What are the two forms of credit rationing? For each form of credit rationing, explain the rationale of why financial instituion is engaging in it.
8. 1) According to the book/video:How does the bank deals with credit risk?
2) According to the book/video:What are the off-balance sheet activities by banks, Which activitygive rise to the principle-agent problem and how does the bank solve it?
9. 1) What is the theory of Portfolio choice?
2) Which factor will cause shifts in demand of bonds, and which is direction of the shift? e.g., An increase in Factor A cause the bond demand to shift to the right.
3) Which factor will cause shifts in supply of bonds, and which is direction of the shift? e.g., An increase in Factor A cause the bondsupply to shift to the right.
10. 1) What is a liquidity preference framework?
2) Which factor will cause a shift in demand for money, and which is direction of the shift? e.g., An increase in Factor A cause the demand for money to shift to the right.
3) Which factor will cause shifts in supply of money, and which is direction of the shift? e.g., An increase in Factor A cause the supply for money to shift to the right.
4) Please graphically explain how the interest rate will change in response to a decrease in Money supply using the liquidity preference framework.
11. Please illustrate the following process using a T-account.
1) Situation A: Let's say that Jane Brown has heard that the First National Bank provides excellent service, so she opens a checking account with a $200 bill. Please show its T-account.
2) Situation B1: As you know, the bank is obliged to keep a certain fraction of its checkable deposits as required reserves. If the fraction (the required reserve ratio) is 10% and the excess reserves the bank holds is $180. Please rewrite its T-account.
3) Situation B2: Suppose the banks wants to hold the $180 as Loans (not excess reserves). Please rewrite its T-account.
4) Which one is more profitable, Situation B1 or Situation B2, why?
12. A lottery claims its grand prize is $5 million, payable over 5 years at $1,000,000 per year. If the first payment is made immediately, what is this grand prize really worth? Use an interest rate of 2%.