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1)    What are the main functions of:
    a) the Federal Reserve (details of how the Fed performs its functions, primary goal(s), targets; advantages and disadvantages of the Fed’s strategies…).  What about Fed independence—for or against?

    b) financial markets (differentiate direct and indirect finance); are economies of scale relevant?

 

 

 

2)    What is the money market; what are the primary variables, determinants;  use graphs to explain your response.

 

3)    What is the role and importance of non-borrowed reserves?

 

4)    Describe the business cycle and explain the Fed’s reactions to business cycle stages.

 

5)    Explain how Federal Reserve Balance sheet adjustments impact the monetary base and money supply.  Use T-Accounts to explain your response.

 

6)    Explain and discuss the Bond market; address supply of and demand for bonds, determinants and the behavior of the interest rate as determinants change.

 

7)    In 2007-2009, the U.S. experienced a financial crisis.  Explain in detail what is meant by “financial crisis” and explain how the crisis occurred in the U.S.

 

8)    The process of money creation in a fully developed financial system involves an evaluation of behaviors of multiple entities.  Discuss.

 

9)    What is meant by “too-big-to-fail”?

 

10)Use graphs to enhance your responses.

 

11)Does Federal Reserve Policy depend on a stable demand for reserves function? Discuss and use graphs to explain your response.

 

12)Discuss and explain the Taylor Rule.

 

Questions from the three examinations:

 

Explain the relationship between Money Supply (Ms) and the interest rate. 

 

àExplain two of the three theories of interest rate determination.  Identify each theory by name.

 

àSaintsBank started its first day of operations with $6m in capital.  $100m in checkable deposits is received.  The bank issues a $25m commercial loan and another $25m in mortgages, with the following terms.

 

·      Mortgages: 100 standard 30-year fixed-rate mortgages with a nominal annual rate of 5.25% each for $250,000.

 

·      Commercial loan: 3-year loan, simple interest paid monthly at 0.75% per month.

 

If required reserves are 8%, what does the bank’s balance sheet look like?  (Show it.)  

 

àSaintsBank decides to invest $45m in 30-day T-bills.  The T-bills are currently trading at $4986.70 (including commissions) for a $5,000 face value instrument.  How many do they purchase?    What does the balance sheet look like now?

 

àSuppose a country with a struggling economy suddenly discovered vast quantities of valuable minerals under government-owned land.  How might the government’s bond rating be affected?  Using the model of demand and supply for bonds, what would you expect to happen to the bond yields of that country’s government bonds?

 

àArlingtonBank started its first day of operations with $3m in capital.  $50m in checkable deposits is received.  The bank issues a $12.5m corporate loans and another $12.5m in mortgages, with the following terms.  If required reserves are 4%, what does the bank’s balance sheet look like? 

 

 

Next month ArlingtonBank experiences a deposit outflow of $5m.  Show what happens to the bank’s balance sheet. 

 

Explain one way Arlington Bank can respond to the deposit-outlow. 

 

 

 

àThe Federal Reserve bank recently reported results of a study that found evidence that points to the  likelihood of significant increases in the rate of business failures over the next five years beginning next year.  How might this news affect the bond market?  Using the model of demand and supply for bonds, what would you expect to happen to the bond yield. 

 

Explain the distinction between interest rates and returns. 

 

Explain two of the three theories of interest rate determination.  Identify each theory by name.