Question
1
1a. Why is a share of Microsoft
common stock an asset for its owner and a liability for Microsoft?
1b. Why have some economists
described money during the hyperinflation as a “hot potato” that is quickly
passed from one person to another?
1c. Explain how the following events
will affect the demand for money according to the “portfolio theories” of money
demand:
a. The economy experience a business
cycle contraction.
b. Brokerage fees decline, making bond
transactions cheaper.
c. The stock market crashes (Hint:
consider both the increase in stock price volatility following a market crash
and the decrease in wealth of the stock holders).
Question
2
2a.
Is
it better for bond holders when the yield to maturity increases or decreases?
Explain.
2b.
‘Risk Premiums’ on corporate bonds are usually
anti-cyclical; that is, they decrease during business cycle expansion and increase
during recessions.
·
Why is this so?
2c.
If
a yield curve looks like the one
shown in the figure below, what is the market predicting about the movement of
future short-term interest rates?
·
What might the yield curve indicate about the market’s predictions
for the inflation rate in the future?
Question
3
3a
Which
firms are most likely to use bank financing rather than to issue bonds or
stocks to finance their activities?
3b.
Can
a person with rational expectations expect the price of “Google” to rise by 10% in the next month?
3c.
“Foreign
exchange rates, like stock prices, should follow a random walk”
·
Is this statement true? False?, or uncertain ?
·
Explain your answer
Question
4
4a.
During
the holiday season, when the public’s holdings of currency increase, what
defensive open market operations typically occur? And,
·
Why?
4b.
“Because inflation targeting focuses
on achieving the inflation target, it will lead to excessive output
fluctuations”
·
Is this statement true? False?, or, Uncertain?
·
Explain
4c.
Why
aren’t central banks more proactive at trying to use monetary policy to
eliminate asset-price bubbles?
Questions
5
5a.
Predict
what will happen to stock prices after a monetary easing.
·
Explain your predictions.
5b.
Economist
Franco Modigliani found that the most important transmission mechanisms of
monetary policy involve consumer
expenditure,
·
Describe how these mechanisms work.
5c.
If
Mexicans go on a spending spree and buy twice as much French perfume, Japanese
TVs, English sweaters, Swiss watches, and Italian Wine, what will happen to the
value of the Mexican peso?
Question
6
6a. How can a large balance-of-payments
surplus contribute to a country’s inflation rate?
6b. Why can balance-of-payments deficits
force some countries to implement a contradictory monetary policy?
6c. What are the advantages and
disadvantages of currency boards and dollarization over a monetary policy that
uses only an exchange-rate target?
Question 7
7a. How does the concept of asymmetric
information help to define a financial crisis?
7b. How can financial liberalizations
lead to a financial crisis?
7c. How can a decline in real estate
prices cause deleveraging and a decline in lending?
Question 8
8a. if a bank finds that its ROE is too
low because it has too much bank capital;
- What can it do to raise its ROE?
8b. If a bank is falling short of
meeting its capital requirements by $1 million, what three things can it do to
rectify the situation?
8c. If you are a banker and expect
interest rates to rise in the future, would you want to make short-term of
long-term loans?
8d. why are deposit insurance and other
types of government safety nets important to the health of the economy?
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