Economics: Principles & Policy
14th Edition
ISBN: 9781337696326
Author: William J. Baumol; Alan S. Blinder; John L. Solow
Publisher: Cengage Learning
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Chapter 29, Problem 2TY
To determine
The
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a)What is meant by market failure?
b)Why does increased volatility in financial markets with respect to the price of financial assets,interest rates,and exchange rates foster financial innovation?
c)Why is the holding of a claim on a financial intermediary by an investor considered an indirect investment in another entity?
d)Explain how a financial intermediary reduces the cost of contracting and information processing.
In 2008 there was an increase in uncertainty about the quality of structured financial products that were backed by mortgages (MBS - mortgaged backed securities). So that the market for these securities dried up (became less liquid). What policies the government could do to jump start (improve liquidity of) the market
Which of the following best defines a financial intermediary?
a collection of stocks and bonds issued to investors
an asset sold by a company which entitles the buyer to partial ownership
a claim by a buyer to a future payment by a seller
a financial institution that transforms investor funds into financial assets
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Economics: Principles & Policy
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- Explain the nature of the credit risks to a financial institution in a swap agreement.arrow_forwardWhy are financial intermediaries the most heavily regulated businesses in the economy? Explain why stock market is an important factor in business investment decisions? What is inflation? What explains inflation? If there is a recession, will it be more difficult to find a job when you graduate? Explain. What are the six types of regulations the government employs in an attempt to ensure the soundness of our financial intermediaries? Explain. Explain the difference between debt and equity markets. primary and secondary markets, exchange and over the counter markets and money and capital markets. What is the difference between foreign bond and a Eurobond? Which institutions are subject to Federal Deposit Insurance corporation (FDIC) regulations, and what is the nature of the regulations? What are the reasons for high transaction costs to exist in a barter economy? What separates the assets included in M1 from the assets included in M2? Does it matter what definition of money policy…arrow_forwarda) How do financial institutions benefit the overall economy? b) How do Fls reduce monitoring costs associated with the flow of funds from fund suppliers to fund investors? c) What is the Basel Agreement?arrow_forward
- 1.) Briefly define and explain how fractional reserve banking works. Both the textbook and the Segment 305 video on the Chapter 16 Resource Page may be of some help here (see the Federal Reserve Bank of Philadelphia - Educational Playlist.) 2.) Go to the Chapter 17 Resource page and watch the videos (Khan Academy and Investopedia) on the yield curve. Then, briefly describe what it is, the different types of yield curves, and what those different types of yield curves portend for the economy.arrow_forwardAn economist has estimated that, near the point of equilibrium, the demand curve and supply curve for 1 year bonds can be estimated using the following equations:Demand: Price = (-0.5)*Quantity + 930Supply: Price = Quantity + 500Assume the face of the bond is $1,000.1. What is the expected equilibrium price and quantity of bonds in this market to 4 decimal places? Price$ Quantity 2. Given your answer to part (a), which isarrow_forwardShow graphically the effect of a sudden increase in the volatility of gold prices on interest rates in the bond market.arrow_forward
- The liquidity preference theory focuses on the supply of or demand for liquidity assets. Most financial institutions follow this theory and framework. Select one: True Falsearrow_forwardDefine and discuss the portfolio-balance effect in terms of Quantitative Easing and its impact on bond and stockarrow_forwardWhat has happened to the profitability of financial firms in the US economy in recent decades? Why have they been able to increase their profits? Is this a good thing for the US economy as a whole?arrow_forward
- Below is the Demand and Supply Curves for $250,000 bonds that mature in 18 years: Qd=400,000 - 2(P) Qs=3(P) - 100,000 1. The current market price of these bonds? 2. The current equilibrium interest rate in that bond market? 3. If the Federal Reserve wished to move the interest rate to 5%, would they need to buy or sell bonds? 4. In order to achieve the Fed's goal in #3, the bond price would need to change to what?arrow_forwardExplain how capital adequacy requirements may affect a commercial bank’s dividend payout and growth potential. If the bank anticipates a decrease in its capital adequacy ratio (capital to total asset ratio), what options are available to prevent the decline? What risks, if any, are there in each strategy? Use the following balance sheet to answer questions 5-8 ($000) Cash 21 Demand Deposits 550 Securities 369 Fed Funds (Borrowings) 151 Loans 400 Equity 89arrow_forwardExcerpt from FOMC Statement Released November 16, 1999 “The Federal Open Market Committee today voted to raise its target for the federal funds rate by 25 basis points to 5-1/2 percent. In a related action, the Board of Governors approved a 25 basis point increase in the discount rate to 5 percent. Although cost pressures appear generally contained, risks to sustainable growth persist. Despite tentative evidence of a slowing in certain interest-sensitive sectors of the economy and of accelerating productivity, the expansion of activity continues in excess of the economy's growth potential. As a consequence, the pool of available workers willing to take jobs has been drawn down further in recent months, a trend that must eventually be contained if inflationary imbalances are to remain in check and economic expansion continue.” Identify whether the policy action is fiscal or monetary. Identify whether the policy action is expansionary or contractionary. Draw and label the change that…arrow_forward
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