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Week II Textbook Problems

FIN/366 – Financial Institutions

Week II Textbook Problems

Ch. 4 Questions and Applications

#1. The Fed Briefly describe the origin of the Federal Reserve System. Describe the functions of the Fed district banks

The United States experienced several banking panics in the 1800s and early 1900s and a major crisis in 1907. Congress established a central bank and in 1913, and the Federal Reserve Act was implemented, which established requirements for the commercial banks that chose to become members. The functions of the Fed district banks is to facilitate operations within the banking system by, replacing old currency, clearing checks, and to provide loans to depository institutions that need of funds.

#3. Open Market Operations Explain how the Fed increases the money supply through open market operations.

According to the text, The Fed’s purchase of government securities has a different impact than a purchase by another investor would have because the Fed’s purchase results in additional bank funds and increases the ability of banks to make loans and create new deposits. An increase in funds can allow for a net increase in deposit balances and therefore an increase in the money supply.

#4. Policy Directive What is the policy directive, and who carries it out?

If the FOMC determines a change it is reported through a statement; policy statement; to the Trading Desk that is carried out by the Feds.

#6. Reserve Requirements How is money supply growth affected by an increase in the reserve requirement ratio?

According to the text “when the reserve requirement ratio is reduced, the bank's deposits that can be lent out by depository institutions increases. When the loaned funds are spent, some of them will return to the depository institutions in the form of new deposits. The lower the reserve requirement ratio, the greater the lending capacity of depository institutions. A change in bank required reserves can cause a larger change in the money supply.

#14. The Fed's Impact on Unemployment Explain how the Fed's monetary policy affects the unemployment level.

Fed's monetary policy Each central bank has its own local interest rate that it might influence with monetary policy in order to control its local economy he Fed's monetary policy affects the unemployment level has a major influence so price stability (low inflation) and economic growth (low unemployment).

#15. The Fed's Impact on Home Purchases Explain how the Fed influences the monthly mortgage payments on homes. How might the Fed indirectly influence the total demand for homes by consumers?

The Fed's influence the monthly mortgage payments on homes because monetary policy affects interest rates. Their strong influence on the cost of borrowing can affect the amount of monthly payments on mortgages. Fed indirectly influence the total demand for homes by consumers because it determines what households can afford and therefore how much consumers spend.

#16. The Fed's Impact on Security Prices Explain how the Fed's monetary policy may indirectly affect the price of equity securities.

The Fed's monetary policy may indirectly affect the price of equity securities. The policy affects the prices of equity securities by affecting economic conditions, which influence the future cash flows generated by publicly traded businesses.

Ch. 5 Questions and Applications

#3. Passive Monetary Policy Describe a passive monetary policy.

According to the text passive monetary policy allows the economy to correct itself rather than rely on the Fed's intervention. The policy is an attempt to not allow the Feds to adjust money supply in order to improve economic conditions.

#11 Impact of Money Supply Growth Explain why an increase in the money supply can affect interest rates in different ways. Include the potential impact of the money supply on the supply of and the demand for loanable funds when answering this question.

If the money demand is smaller it tends to raise market interest rate. An increase will increase the supply for loanable funds and it can cause a decrease pressure on interest rates. But it can also cause an increase expectation for loanable funds and increase on interest rates.

#14. Interpreting the Fed's Monetary Policy When the Fed increases the money supply to lower the federal funds rate, will the cost of capital to U.S. companies be reduced? Explain how the segmented markets theory regarding the term structure of interest rates (as explained in Chapter 3) could influence the degree to which the Fed's monetary policy affects long-term interest rates.

A change in the federal funds rate could cause a change in short-term interest rates; but not in long-term interest rates because the direct impact is only on short-term rates. To the extent that maturity markets are segmented, the effect will be isolated on short-term rates.

References

Madura, J. (2015). Financial Markets and Institutions. (11 ed.). Cengage

Set 2

Week 2 Textbook Problems

Week 2 Textbook Problems

Ch. 4

#1. The Fed

There were two attempts to establish a central bank in the 1800’s that failed and in the late 1800’s and early 1900’s many banks went into panic, which led to another attempt to establish in 1913. The Federal Reserve Act was passed and had 12 districts across the Unites States. The Fed district facilitate operations within the banking system by clearing checks old currency, and providing loans to depository institutions in need of funds.

#3. Open Market Operations

The Fed can sell holdings of its Treasury securities to various depository institutions, which can cause a reduction in the account balance of these institutions.

#4. Policy Directive

A policy directive is a statement issued by the FOMC to the trading desk of New York Fed that directs monetary policy. A policy directive is established by the Fed and submitted to the trading desk. The manager of the trading desk must ensure that the directive is accomplished.

#6. Reserve Requirements

An increase in the reserve requirement ratio reduces the proportion of deposited funds, which a financial institution can lend to businesses or individuals, and it can reduce the rate for money that can be multiplied.

#14. The Fed’s Impact o Unemployment

The Fed’s monetary policy affects interest rates; cost of borrowing by households and businesses, and it affects their level of spending for products and services. The demand for products and services affects the number of people employed by businesses, which affects the unemployment level.

#15. The Fed’s Impact on Home Purchases

The Fed influences interest rates that affect the rate paid by homeowners on mortgages. If the Fed’s reduces interest rates it reduces the monthly payment on new mortgages, which can increase the demand for homes by consumers. Increased interest rates can reduce the demand for homes.

#16. The Fed’s Impact on Security Prices

The Fed’s monetary policy influences the demand for services and products, which affects the cash flow, generated by publicly traded businesses, and the value of stock in a business is influenced by the expectations of its future cash flow.

Ch. 5

#3. Choice on Monetary Policy

A stimulative monetary policy can be used to stimulate the economy if inflation is not a concern. Restrictive monetary can be used to slow down economic growth so they can reduce inflation fears. A stimulative-monetary policy can result in higher inflation. A restrictive monetary policy is a potential slowdown in the economy, which can result in higher interest rate and reduced spending.

#11. Impact of Money Supply Growth

An increase in money supply increases the supply for loanable funds, which can place downward pressure on interest rates. It can also cause inflation expectations, which can have an increased demand for loanable funds, which will have an upward pressure on interest rates,

#14. Interpreting the Fed’s Monetary Policy

Changes in federal funds rate will cause a change in short-term interest rates. It will not result in a change in long-term interest rates because the direct impact is only on short-term rates. Maturity markets are segmented the effect will be isolated on short-term rates.

Ch. 18

Effect on Bank Strategies on Bank Ratings premium.

A. All of the regulatory criteria will be affected because when they issue more stock, it will help the company grow, and by retaining more earnings, it will be able to expand its operations, and by reducing loans they have the ability to use the money for other projects.

B. Yes because when they save money then more money is available to be distributed to the shareholders at the end of the year.

C. Yes because the bank managers will have more funds to use so that they expand the business and work on new projects.

References

Madura, J. (2015). Financial Markets and Institutions. (11 ed.). Cengage