Problem Set 3

When the Federal Reserve buys a government bond from a bank, reserves in the banking system (......) and the monetary base (......), everything else held constant. A) Increase; increases B) Increase; decreases C) Decrease; increases D) Decrease; decreases

A) Increase; increases

Aggregate supply and demand analysis show that a contractionary monetary policy have the following effects in the short run: A) Investment falls, prices fall, GDP fall B) Investment falls, prices increase, GDP fall C) Investment increases, prices fall, GDP increase D) Investment increases, prices increase, GDP increase

A) Investment falls, prices fall, GDP falls

Suppose a bank has a pool of loans for US$ 2 million. This pool of loans (suppose home mortgages) has a BBB rating (they are not prime borrowers). It is true about overcollateralization: A) Overcollateralization would imply a face value of the MBS of less than US$ 2 millions B) Overcollateralization would imply a face value of the MBS of at least US$ 2.5 millions C) Subordination allows that the investors that bought the most secure tranches (usually AAA) eliminate the possibility of default D) Suppose that you create two tranches based on this pool of loans, the first AAA for 80% of the value of the security. This pool will be safe (will not register a loss) if the final default rate is higher than 20%

A) Overcollateralization would imply a face value of the MBS of less than US $2 millions

The ________ problem helps to explain why the private production and sale of information cannot eliminate ________. A) free-rider; adverse selection B) free-rider; moral hazard C) principal-agent; adverse selection D) principal-agent; moral hazard

A) free-rider; adverse selection

Balance sheet of a bank: Assets: Rate-sensitive- $30 million Fixed-rate- $70 million Liabilities: Rate-sensitive- $50 million Fixed-rate- $50 million If interest rates rise by 5 percentage points (for instance, from 4 to 9%), according to the gap analysis the bank profits will: A) Decline by $0.5 million B) Decline by $1.0 million C) Decline by $1.5 million D) Increase by $1.0 million

B) Decline by $1.0 million

Regarding our discussion about the monetary policy reaction to the recent crisis (2007-2008) and the figure below. Which of the following statements is true? A) The increase in R/D increased the money multiplier B) The increase in R/D occurred, among other reasons, because banks did not want to make loans C) The increase in R/D was related to the people willingness to open more deposits during the crisis. D) The new level of R/D (between 1.2 and 1.4) was not explained by the FED' s programs of large-scale asset purchases

B) The increase in R/D occurred, among other reasons, because banks did not want to make loans

The monetary liabilities of the Federal Reserve include A) securities and loans to financial institutions. B) currency in circulation and reserves. C) securities and reserves. D) currency in circulation and loans to financial institutions.

B) currency in circulation and reserves

Suppose bank A's balance sheets is the following in 2010: Assets: Reserves: $50 Loans: $950 Liabilities Deposits $85- Capital: $150 It is true that: A) the bank does not meet capital adequacy requirements (assuming required capital ratio of 10%) B) the bank can absorb losses up to 15 percent of total assets without getting into trouble (i.e. without becoming insolvent) C) The bank did not have liquidity problems in 2010 (assuming the required reserves ratio is 10%) D) this bank is insolvent

B) the bank can absorb losses up to 15 percent of the total assets without getting into trouble (i.e. without becoming insolvent

When $1 million is deposited at a bank, the required reserve ratio is 20 percent, and the bank chooses not to hold any excess reserves but makes loans instead, then, in the bank's final balance sheet, A) the assets at the bank increase by $800,000. B) the liabilities of the bank increase by $1,000,000. C) the liabilities of the bank increase by $800,000. D) reserves increase by $160,000.

B) the liabilities of the bank increase by $1,000,000

Regarding our discussion about the monetary policy reaction to the Great Depression, which of the following statements is true? A) During those years there were no banking panics in the US B) The increase in C/D reflects the fact that people wanted to hold less cash C) The increase in R/D determined a decrease in the money multiplier D) The difference between C/D and R/D determined the spread between the borrowing and lending rates of the market

C) The increase in C/D determined an increase in the money multiplier

Suppose that you've been given a task of producing a duration analysis for MidFirst Bank. You calculated, based on the balance sheet of the bank, that the value of the "representative" asset and liability could be expressed as P asset = 100/ (1+i) + 100/ (1 + i)^2 + 100/ (1 + i)^3 P liability = 100/ (1+i) + 100/ (1 + i)^2 What would you conclude using the duration analysis if interest rates increase? A) The result in terms of the bank's profits will depend on the difference between the interest the bank pays for its assets and its liabilities. The final outcome will be a reduction in the bank's profits, as generally the bank charges more for their loans than what it pays for its deposits B) Bank's profits will decrease C) The result will be a fall in the bank's capital D) The result will be an increase in the bank's capital E) the interest rate change is not expected to affect the bank's capital

C) The result will be a fall in the bank's capital

When you deposit $50 in currency at Old National Bank, A) its assets increase by less than $50 because of reserve requirements. B) its reserves increase by less than $50 because of reserve requirements. C) its liabilities increase by $50. D) its liabilities decrease by $50.

C) its liabilities increase by $50

In a situation of a bank insolvency it is true that (.....). Note: A=assets; L=liabilities; E=equity or capital A) A = L B) A > L C) E > 0 D) A < L

D) A < L