F465 Exam 1

How can the adverse selection problem explain why you are more likely to make a loan to a family member than to a stranger? (Ch. 2)

By lending to a family member, you know their habits and if they're prone to losing your money. With strangers, you would most likely loan to someone who is a bad credit risk because they would be hounding you for the money. You don't have enough background information about them.

Which entities in the Fed system control the discount rate? Reserve requirements? Open market operations? (Ch. 9)

Discount rate: 12 banks; Reserve requirements: board of governors; Open market operations: FOMC

Give at least three examples of a situation in which financial markets allow consumers to better time their purchases. (Ch. 2)

- If you have a lot of money and don't want to spend it right now, you could put it in a savings account and earn interest on it. - If you want to buy a house but can't afford the full payment yet, you could take out a mortgage and pay it off after a while. - If you wanted to open up a new business but didn't have the funds for it, you could take out a loan and pay it off later.

Describe two similarities and two differences between the US experiences during the Great Depression and those during the Great Recession financial crises of 2007-2009. (Ch. 8)

- both weren't strict enough on lending, causing asset prices to decline substantially - both had issues when they were trying to restrict lending abilities, causing a decline in economic activity - 2007-2009 was caused mostly by mortgages and innovation - the Great Depression was caused mostly by agriculture issues

Given the set of new regulations included in the Dodd-Frank act of 2010, do you think this was an easy bill to pass? Discuss reasons why financial industry lobbyists argued against the passage of such regulations. (Ch. 18)

Absolutely not- it creates many more regulations and groups. Lobbyists might have argued against such regulations by claiming that they were too tight on the reins.

Would you recommend the adoption of a system of deposit insurance, like the FDIC in the US, in a country with weak institutions, prevalent corruption, and ineffective regulation of the financial sector? (Ch. 18)

Absolutely not. Without stable institutions, countries that try and adopt systems of deposit insurance are actually more likely to get hurt as they can't handle the structure.

If no decent leading opportunity arises in the economy, and the central bank pays an interest rate on reserves that is similar to other low-risk investments, do you think banks will be willing to hold large amounts of excess reserves. (Ch. 17)

Absolutely. Excess reserves are the most liquid of bank assets and banks can use them to meet obligations.

How does an increase in the value of the pound sterling affect American businesses? (Ch. 1)

American businesses that purchase foreign goods would experience an increase in the price of the goods.

How can a bursting of an asset-price bubble in the stock market help trigger a financial crisis? (Ch. 8)

Asset-price bubbles occur when assets are priced above their fair market value. When they burst, it means that stock prices drop and investors lose money. This causes more uncertainty and investors will begin to withdraw funds, hurting the economy and creating a financial crisis.

How does a deterioration in balance sheets of financial institutions cause a decline in economic activity? (Ch. 8)

Balance sheet deterioration causes a decline in economic activity because financial institutions may not be able to offer loans as much as they normally would. This means that companies and clients can no longer obtain loans to generate profits and stimulate the economy, causing an economic decline.

Why has the trend in bank supervision moved away from a focus on capital requirements to a focus on risk management? (Ch. 18)

Because banks are highly prone to making risky decisions in the hopes that they'll pay off.

Why has the development of overnight loan markets made it more likely that banks will hold fewer excess reserves? (Ch. 17)

Because banks have found that by manipulating the liabilities side of their balance sheets, they can issue and acquire more funds in a quicker manner.

What technological innovations led to the development of the subprime mortgage market? (Ch. 8)

Better computers enabled cheaper and quicker transactions. Securitization allowed for more investments into loans. The subprime mortgage market is where lower-credit clients are able to take out mortgages on homes. Banks received more money with technological innovation that decreased their pickiness with loaning to clients.

The US economy borrowed heavily from the British in the nineteenth century to build a railroad system. What was the principal debt instrument used? Why did this make both countries better off? (Ch. 2)

Bonds were the principal debt instruments. They helped the US by providing the rail roads and they helped British earn money on interest for the bonds.

How does a decline in the value of the pound sterling affect British consumers? (Ch. 1)

British consumers would experience a price increase in foreign goods.

What role do weak financial regulation and supervision play in causing financial crises? (Ch. 8)

By allowing financial institutions too much freedom, they can overextend their loans until prices collapse and balance sheets deteriorate, causing a financial crisis.

Why might you be willing to make a loan to your neighbor by putting funds in a savings account earning a 5% interest rate at the bank and having the bank lend her the funds at a 10% interest rate rather than lend her the funds yourself? (Ch. 2)

By going through a bank, you have less legal liabilities and your risk is much lower.

What are the benefits and costs for a bank when it decides to increase the amount of its bank capital? (Ch. 17)

By having more capital, returns on equity holders would be lower. The bank would be more stable because it would have more reserves and less risk of bankruptcy.

Which regulatory has the primary responsibility for supervising the following categories of banks? a. national banks b. bank holding companies c. non-federal-reserve-member state banks d. federal-reserve-member state banks (Ch. 19)

a. Office of the Comptroller of the Currency; b. The Fed; c. state banking authorities; d. FDIC and state banking authorities

What is the primary tool that Congress uses to exercise some control over the Fed? (Ch. 9)

passing legislature to control their actions

What types of risk do financial institutions face? (Ch. 1)

risk of bankruptcy due to financial crises, economic crashes, interest rates peaking too high or falling too low, customers not paying their loans back, etc.

What are the other important financial intermediaries in the economy besides banks? (Ch. 1)

savings and loan associations, credit unions, insurance companies, etc.

If a bank is falling short of meeting its capital requirements by $1 million, what three things can it do to rectify the situation? (Ch. 17)

sell off assets to other banks, take a loan from another bank, or take a loan from the Fed.

"If inflation had not risen in the 1960s and 1970s, the banking industry might be healthier today." Is this statement true, false, or uncertain? Explain. (Ch. 19)

this is true- the rise in inflation caused consumers to withdraw their money from banks and to seek higher-yielding investments.

Suppose that after a few mergers and acquisitions, only one bank holds 70% of all deposits in the US. Would you say that this bank would be considered too big to fail? What does this tell you about the ongoing process of financial consolidation and the government safety net? (Ch. 18)

It isn't too big to fail at this point. This is a huge issue that is a possibility due to the FDIC's policies. The government needs to work to classify too-big-to-fail companies in a more specific manner.

The Fed promotes secrecy by not releasing the minutes of the FOMC meetings to Congress or the public immediately. Discuss the pros and cons of this policy. (Ch. 9)

It keeps congress off of the Fed's back so that they can present unbiased information and make more effective decisions.

What steps were taken in the FDICIA legislation of 1991 to improve the functioning of federal deposit insurance? (Ch. 18)

It made the FDIC inspect bank's activities closer and act much faster if they suspected the possibility of a bank failure.

How could higher deposit insurance premiums for banks with riskier assets benefit the economy? (Ch. 18)

It will encourage the banks with riskier assets to perform thorough analyses of potential consumers in order to determine who are the best to take risky investments.

Financial regulation is similar, but not exactly the same, in industrialized countries. Discuss why it might be desirable-or undesirable-to have the same financial regulation across industrialized countries. (Ch. 2)

It would be undesirable. For example, the US is much more strictly regulated than in other industrialized countries. This makes US countries look to invest in foreign banks with less restrictions, generating economic growth for the foreign countries. The opposite can be true- the US' notoriously stable financial institutions can be very attractive from foreigner's perspectives. By having differences, people have more decisions in the types of investments they make.

People in general welcome actions that promote transparency, and in particular when they involve public or quasi-public institutions. Can you think of a reason why a more transparent communication strategy might be detrimental to the Fed's objectives? (Ch. 9)

More transparent communication may lead to more input and sway the Fed's decisions, even though public opinion may not be the most educated.

If there were no asymmetry in the information that a borrower and a lender had, could there still be a moral hazard problem? (Ch. 2)

No, because moral hazards are, by definition, issues that arise after a transaction due to asymmetrical information.

Suppose that Toyota sells yen-denominated bonds in Tokyo. Is this debt instument considered a Eurobond? How would your answer change if the bond were sold in NY? (Ch. 2)

No- it would be a regular bond because they are in their domestic currency. If they were sold in NY, they would be considered Eurobonds because they are in foreign currency.

Some countries do not advertise that a system of deposit insurance like the FDIC in the US exists in their banking system. Explain why some countries would want to do that. (Ch. 8)

Not advertising deposit insurance may reduce the problem of moral​ hazard, which is created by a system of deposit insurance.

After July 2010, bank customers using a debit card had to specifically opt-in to the bank's overdraft protection plan. Explain the effect of this regulation on bank's noninterest income. (Ch. 17)

Overdrafting occurs when a customer uses more money than they have in their account. By creating the plan, the banks increased their liabilities which then decreased net income.

The Fed is the most independent of all US government agencies. What is the main difference between it and other gov agencies that explains the Fed's greater independence? (Ch. 9)

The Fed has full control of it's money. However, if Congress feels as if the Fed is not spending it's money correctly, they can pass legislature to tighten the reins.

Provide one argument in favor of and one against the idea that the Fed was responsible for the housing price bubble of the early 2000s. (Ch. 8)

The Fed was partially responsible because they were set on lowering interest rates, which only enabled those who shouldn't have invested in homes to do so anyways. However, lenders not adequately evaluating risky clients were also at fault, not just the Fed.

What are the costs and benefits of a too-big-to-fail policy? (Ch. 18)

The cost would be that the government is less likely to want to shut them down because doing so could result in a financial crisis. Larger banks might also engage in riskier behavior and create moral hazard issues. Benefits are an emergence of large depositors because they can be assured that their money will be safe even in the case of a bank failure.

Why was the Fed set up with 12 regional Federal Reserve banks rather than one central bank, as in other countries? (Ch. 9)

The first two banks of America failed due to Americans' distrust of centralized banks. A compromise was made to have 12 regional banks in order to keep a better system of checks and balances.

Why has there been such a dramatic increase in bank holding companies? (Ch. 19)

The increase in regulation and state division lines effectively decreased competition, but bank holding companies are very relevant now because they do allow competition.

How did a decline in housing prices help trigger the subprime financial crisis starting in 2007? (Ch. 8)

The invention of securitization and better technology created more confidence in lenders. They began giving mortgages to clients with low credit scores who normally wouldn't have been able to afford the housing. The over-extension of mortgages caused a sharp decrease in housing prices and the economy crashed.

How can a change in interest rates affect the profitability of financial institutions? (Ch. 1)

When interest rates rise, consumers are less likely to spend money and instead want to play it safe and save up. Financial institutions will have a decrease in demand for loans and stocks will become less popular than bonds due to their riskiness.

State the relationship between the process of bank consolidation and the too-big-to-fail policy. (Ch. 19)

With bank consolidation, two banks merge and become a larger entity. With enough consolidations, banks can classify as "too-big-to-fail."

Why is the originate-to-distribute business model subject to the principal-agent problem? (Ch. 8)

With originate-to-distribute models, lenders take on many loans quickly so they can sell them as securities. This gives them less time to evaluate a prospective client's credit score. The lenders/principals didn't act in the best interests of their clients/agents.

Give one example each of moral hazard and adverse selection in private insurance arrangements. (Ch. 18)

With private insurance, moral hazards can arise because people can make riskier decisions just because they're insured. Similarly, adverse selection can arise because riskier people will go for insurance more.

Do you think that removing the impediments to a nationwide banking system will be beneficial to the economy? Explain. (Ch. 18)

Yes and no. Assuming it's feasible, it would definitely help the economy by always having perfect financial institutions. But because it is so difficult and costly to closely inspect every single bank and all of it's branches, it isn't feasible.

If you are a banker and expect interest rates to rise in the future, would you want to make short-term or long-term loans? (Ch. 17)

You would want to make more short term loans. Then, as they are paid off and interest rates rise, more income will be generated for the bank.

Explain the main difference between a bond and a common stock. (Ch. 1)

A bond is a form of debt financing while a stock is a form of equity financing. Stocks are used for investing in companies and are riskier. Bonds are safer investments for bondholders and determine interest rates.

What is a credit spread? Why do credit spreads rise during financial crises? (Ch. 8)

A credit spread is the difference between the interest rate on loans to households/businesses and the interest rate on completely safe assets that are sure to be paid back. Credit spreads rise as lenders decide to only lend to completely safe assets because of the high levels of uncertainty.

When interest rates rise, how might businesses and consumers change their economic behavior? (Ch. 1)

Consumers might become more hesitant to mortgage a new house and want to save their money in their bank accounts. Businesses might decide to delay new projects until the interest rates decrease the the projects become less costly

If you are an employer, what kinds of moral hazard problems might you worry about with your employees?

Employees could extend loans to people with risky credit scores because they know them personally.

What incentives have regulatory agencies cleaned to encourage international banking? Why have they done this? (Ch. 19)

Exemption from taxes. This encourages foreigners to do more banking business in the US.

True, False, or Uncertain: Deposit insurance always and everywhere prevents financial crises. (Ch. 8)

False, this is proven from the crisis of 2007-2009. Insurance was overextended to those who couldn't afford it, causing rates to drop too much and insurance companies to go bankrupt.

How does the concept of asymmetric information help to define a financial crisis? (Ch. 8)

Financial crises can happen a multitude of ways- but the most common seems to be managing risk poorly. With asymmetric information, borrowers and lenders don't have equal amounts of knowledge and lenders can manage risk poorly, over extending loans and causing uncertainty to increase, resulting in a market crash.

Define "financial frictions" in your own terms and explain why an increase in financial frictions is a key element in financial crises. (Ch. 8)

Financial frictions, to me, are issues that arise from companies and banks mishandling money and extending beyond their means. When financial frictions occur, they can lead to large corporations declaring bankruptcy and banks running out of money. When these things happen, people become unsettled and uncertain about the future. This harms the economy and can result in financial crises.

Can you think of a reason why emerging market economies should be very careful when engaging in financial innovation and financial liberalization? (Ch. 8)

Financial innovation and liberalization are great, but can result in financial institutions offering loans beyond their means. In the short run, institutions can go on lending sprees and cause economic crashes.

Explain the link between well-performing financial markets and economic growth. Name one channel through which financial markets might affect economic growth and poverty. (Ch. 1)

Financial markets help transfer money between people who have no use for it to people who do have a use for it. For example, by a bank giving a loan to a start-up business, the business could stimulate the economy. It could use the money to employ more people and generate profit, thus decreasing the levels of poverty.

If reserve requirements were eliminated in the future, as some economists advocate, what effects would this have on the size of money market mutual funds? (Ch. 19)

Getting rid of the reserve requirements would give banks the incentive to

William does not feel comfortable with the current level of the Fed's independence. Put yourself in William's shoes and state an argument against the current level of the Fed's independence. (Ch. 9)

The Fed has failed previously at maintaining a healthy economy (Great Depression, crisis of 2007-2009)

What are the fundamental differences between the styles of Greenspan and Bernanke and Yellen as chairs of the Fed? Do you think that the recent trend toward increased use of formal econometric analysis when making decisions about monetary policy is a good idea or not? (Ch. 9)

Greenspan was a much more effective economic forecaster. As a result, Bernanke and Yellen have had to rely more on the decisions of the board members. While formal analysis is helpful, Greenspan has proven that taking a step back and evaluating things from a less formal standpoint can be just as effective (if not more).

Maria has accumulated $15,000 in savings and wants to buy shares in a hedge fund. Explain why Maria cannot participate in this particular type of mutual fund. (Ch. 2)

Hedge funds are very exclusive and require investments of $100,000 minimum, upwards of $1 million.

Why have banks been losing cost advantages in acquiring funds in recent years? (Ch. 19)

Higher inflation rates have led to people withdrawing money and investing in higher-yielding investments- causing banks to have issues with raising funds. This increased competition and the costs to get funds, which means that they lost cost advantages over other financial institutions.

Do you think that before the National Bank Act of 1863 the prevailing conditions in the banking industry fostered or hindered trade across states in the US? (Ch. 19)

Hindered trade because it wasn't uncommon for banks to fail due to the loss in value of their bank notes.

"Banking has become a more dynamic industry because of more active liability management." Is this true, false, or uncertain? Explain. (Ch. 17)

I believe it's true. By discovering the ability to alter the liabilities side of the balance sheets, banks are open to more choices as to what sort of investments and operations it wants to choose.

Suppose that you have $300,000 in deposits at a bank. After careful consideration, the FDIC decides that this bank is now insolvent. Which method would you like to see the FDIC apply? What if your deposit was $200,000? (Ch. 18)

I would like the second method because I would still be owed $50k through the first method in which they'd pay me $250k. If my deposit was only $200k, then I'd prefer the first method so that I would be paid in full at a faster pace.

If you suspect that a company will go bankrupt next year, which would you rather hold, bonds issued by the company or equities issued by the company? Why? (Ch. 2)

I would rather hold bonds because they are less risky and must be paid back eventually. Equities are much riskier and you can lose as much money as you invest.

"In a world without information and transaction costs, financial intermediaries would not exist." Is this statement true, false, or uncertain? Explain your answer. (Ch. 2)

I'd say true, because transaction costs are the primary drivers for clients using financial intermediaries. Clients use financial intermediaries because they have fewer transaction costs and more information at better discounts.

How can changes in foreign exchange rates affect the profitability of financial institutions? (Ch. 1)

If the dollar becomes stronger, American financial institutions will become more prosperous because more businesses will invest and the economy will do well. The opposite is true as well.

What effect might a fall in stock prices have on business investment? (Ch. 1)

If the price of shares falls, so do the funds of a business. They will be unable to make new investments.

Explain how the net interest margin (NIM) would respond to increased competition for funds by the financial intermediation industry. (Ch. 17)

Interest costs would rise due to competition and the spread between interest gains and losses would increase, yielding a lower NIM.

Why is it that economists often refer to "the" interest rate, while there are many interest rates in any economy? (Ch. 1)

Interest rates are lumped together into "the" interest rate for simplicity and the fact that interest rates typically move in unison

Why might eliminating the Fed's independence lead to a more pronounced political business cycle? (Ch. 9)

It could become more politically-driven and bend to the objectives of the President or Congress.

How could the approval of international banking facilities (IBFs) by the Fed in 1981 have reduced employment in the banking industry in Europe? (Ch. 19)

It encouraged foreign banks to expand into the US, which meant reallocating capital and laying off employees in order to provide the funds for the expansion.

Creation of the FDIC encouraged reluctant depositors to put their money into the banking system. Aside from the benefit of reducing the probability of a bank run, what other positive impact has this policy had in the performance of the overall economy? (Ch. 18)

It has decreased the number of bank failures. Also, failed banks can merge with more powerful banks through the FDIC, which allows economic recovery.

How does a general increase in uncertainty as a result of a failure of a major financial institution lead to an increase in adverse selection and moral hazard problems? (Ch. 8)

People become uncertain about the future and may decide to invest less or to invest more in less risky securities (bonds). This causes the economy to deteriorate and moral hazards may increase as banks have less demand for loans. This can cause them to sell off assets as quickly as possible, creating a decline in asset pricing. This can result in bank failures.

Can you think of a reason why people in general do not lend money to one another to buy a house or a car? How would your answer explain the existence of banks? (Ch. 1)

People do not trust each other. Instead, they use banks as financial intermediaries that ensure that they get their car/money at the right time.sav

If I can buy a car today for $5,000 and it is worth $10,000 in extra income next year to me because it enables me to get a job as a traveling anvil seller should I take out a loan from Larry the loan shark at 90% interest rate if no one else will give me a loan? Will I be better or worse off as a result of taking out this loan? Can you make a case for legalizing loan-sharking? (Ch. 2)

Personally, I wouldn't take out the loan because you would pay (5000*1.9=9,500) and only earn $500. Assuming you'd end up being able to pay it off, your credit would look better after the loan so you could potentially be better off as a result, but it'd be very risky. The only case for legalizing loan-sharking is that it would allow people to buy things that they wouldn't otherwise be able to do because of poor credit.

What political realities might explain why the Federal Reserve Act of 1913 placed two Federal Reserve banks in Missouri? (Ch. 9)

Possibly to decentralize power from just the East coast (NY) and the West coast (Cali)

Some economists suspect that one of the reasons that economies in developing countries grow so slowly is that they do not have well-developed financial markets. Does this argument make sense? (Ch. 2)

Potentially- many developing countries struggle due to corruption that extends beyond the government. Corruption in financial markets is detrimental and would definitely prevent economic growth.

How does risk-sharing benefit both financial intermediaries and private investors? (Ch. 2)

Private investors are protected from too much risk exposure and financial intermediaries make profit from it.

Which components of operating expenses experience the greatest fluctuations? Why? (Ch. 17)

Provisions of loan losses fluctuate greatly because they respond extremely quickly to dips and rises in the economy.

If a bank doubles the amount of its capital and ROA stays constant, what will happen to ROE? (Ch. 17)

ROE would decrease by 50%

Some central banks do not pay interest on required reserves. Some bankers see this as a tax on their business. Can you explain why? (Ch. 17)

Reserves typically pay some type of low interest, but some don't. By not paying interest, bankers don't benefit from having reserves but must contribute a percent of their profits by law. In this way, bankers can consider reserves taxes.

Why do equity holders care more about ROE than about ROA? (Ch. 17)

Return on equity is the amount that they end up getting back from their investments. Return on Assets has less relevancy and so isn't considered as much.

Do you think that the 14-year nonrenewable terms for governors effectively insulate the Board of Governors from political pressure? (Ch. 9)

Since two are selected by one president (or four, if the president is elected twice), I do believe that the terms do help relieve political pressure. However, 14 years is a long time for one term.

Describe the process of "securitization" in your own words. Was this process solely responsible for the Great Recession financial crisis of 2007-2009? (Ch. 8)

Taking a bunch of smaller assets that wouldn't normally be seen as investments and bundling them together into one package. It wasn't solely responsible as moral issues also had a role. Less risk-adverse investors that invested beyond their means and lenders eagerly giving money to people with low credit scores were also responsible.

What forms does bank supervision take, and how do they promote a safe and sound banking system? (Ch. 18)

The CAMELS rating (capital, asset, management, earnings, liquidity. and sensitivity to risk), the requirement of a Charter, and general bank examinations are all forms of bank supervision. They promote a safe banking system in which it is more difficult to behave in risky or criminal ways.

Compare the structure and independence of the Fed and the EU System of Central Banks. (Ch. 9)

The EU system has complete control over their budget but is much less centralized.

Why do managers of financial institutions care so much about the activities of the Fed? (Ch. 1)

The Fed determines monetary policy and money supply. It affects interest rates and inflation.

In light of the recent financial crisis of 2007-2009, do you think that the firewall created by the Glass-Steagall Act of 1933 between commercial banking and the securities industry proved to be a good thing or not? (Ch. 19)

The recent financial crisis occurred partly because financial institutions didn't communicate with investment banks adequately enough. They became overzealous with selling mortgage packages and securities which eventually led to a downfall. The separation of commercial banks and securities industries did not do well in this instance.

What is the shadow banking system, and why was it an important part of the 2007-2009 financial crisis? (Ch. 8)

The shadow banking system consists of non-depository financial institutions (ex. hedge funds and investment banks). They supported the issuance of subprime mortgages and helped contribute to the crisis.

In what ways can the regional Federal Reserve banks influence the conduct of monetary policy? (Ch. 9)

They establish the discount rate, decide which banks can get discount loans, some can vote on open market operations

What special problem do off-balance-sheet activities present to bank regulators, and what have they done about it? (Ch. 18)

They help banks boost their liquidity ratios, even if their company isn't doing very well. Bank regulators have passed new risk-based capital requirements.

In what way might consumer protection regulations negatively affect a financial intermediary's profits? Can you think of a positive effect of such regulations on profits? (Ch. 18)

They must disclose and explain exactly what kinds of assets/packages they're selling to consumers, which might make consumers less likely to invest. It could be positive on profits because it results in more stable options that the consumers will be able to pay back realistically.

If the bank you own has no excess reserves and a sound customer comes in asking for a loan, should you automatically turn the customer down, explaining that you don't have any excess reserves to loan out? Why or why not? What options are available for you to provide the funds your customer needs? (Ch. 17)

They shouldn't automatically turn the customer down because they could still potentially offer the customer a loan. They have four options: borrow reserves from other banks, sell some securities to cover the loan, borrow from the Fed, or selling off the loan to another bank.

How would you argue in favor of the current trend toward central banks' independence? (Ch. 9)

They tend to have smaller inflation rates without affecting poverty rates.

Why do loan sharks worry less about moral hazard in connection with their borrowers than some other lenders do? (Ch. 2)

They themselves have very shoddy morals. Loan sharks typically threaten their customers and charge higher interest rates. They don't typically obey the law.

"Bank managers should always seek the highest return possible on their assets." Is this statement true, false, or uncertain? Explain your answer. (Ch. 17)

This is false. Higher return usually comes with higher risk. If a bank takes on many high-returning assets, it is more likely to lose leverage and become insolvent.

"the Fed resembles the US Constitution in that it was designed with many checks and balances." Discuss. (Ch. 9)

This is true. There are three main operations of the Fed: Open market operations, establishing the discount rate, and setting reserve requirements. These are determined by three sectors that all look over each other's work. directors are appointed between the sectors and by member banks.

If casualty insurance companies provided fire insurance without any​ restrictions, what kind of moral hazard problem might​ result? (Ch. 18)

Those that receive the insurance could set their property on fire to collect insurance.

"The banking industry in Canada is less competitive than the banking industry in the US because in Canada only a few large banks dominate the industry, while in the US there are around 6,000 banks." Is this true, false, or uncertain? Explain. (Ch. 19)

Uncertain- While more banks would seemingly up competition, the US still has it's top banks (Wells Fargo and BoFA are just two examples). These large banks are still able to compete with each other and definitely do on a daily basis. The same goes for Canada- even though there are fewer banks, there is still competition in the industry.