ECON 160 FINAL EXAM QUESTIONS
WITH 100% CORRECT ANSWERS
An important way in which the Federal Reserve decreases the
money supply is by selling bonds to the public. Using a supply
and demand analysis for bonds, show what effect this action has
on interest rates. Is your answer consistent with what you would
expect to find in the liquidity preference framework? - correct
answer- bond market: ms decrease,
liquidity pref: ms decrease, IR increase
????????
yes consistent
Are US companies that manufacture jeans happier when the
dollar is strong or when it is weak? - correct answer-
Weak
Assume a Financial Institution borrows $100,000,000 at 9% for
two years and invests $100,000,000 at 10% for one year.
,What happens if all interest rates in year two fall by 3%? -
correct answer- reinvestment risk Amat>Lmat
-2%
Assume a Financial Institution issues $100,000,000 of liabilities
(borrow/deposits) with a one year maturity to fund
$100,000,000 of assets (loans) with a two year maturity.
Year 1: Cost of liabilities = 9%;
Year 1: Return on assets = 10%
What happens if all interest rates rise in year two by 3%? -
correct answer- refinancing risk Amat<Lmat
-2%
Assume that a bank has assets located in London worth £150
million on which it earns an average of 8% per year. The bank
has £100 million in liabilities on which it pays an average of 6%
per year. The current spot rate is £1 = $1.50.
If the exchange rate at the end of the year is £1 = $1.25, will the
dollar have appreciated or depreciated against the pound?
, Given the change in the exchange rate, what is the effect in
dollars on the net interest income from the foreign assets and
liabilities?
What is the effect of the exchange rate change on the value of
assets and liabilities in dollars (not including the interest
payments)? - correct answer-
Assume that the Federal Reserve wants to weaken the USD
against the Japanese Yen. Describe how this could be done
through direct intervention (sterilized and unsterilized) and
indirect intervention (for a trade relationship and a financial
relationship).
What effect (if any) would these actions have on the money
supply and international reserves? - correct answer-
direct intervention unsterilized: buy ¥, sell USD. increases MS
(more USD out there now). Increases Int Res.
direct intervention sterilized: buy ¥, sell USD, buy treasuries. no
∆MS. Increases Int Res.
indirect intervention trade:
- increase inflation via OMpurchase (increases MS), or via lower
DR to incentivize to borrow from fed (increases MS)
- tariffs on imports to make JPN goods cheaper
WITH 100% CORRECT ANSWERS
An important way in which the Federal Reserve decreases the
money supply is by selling bonds to the public. Using a supply
and demand analysis for bonds, show what effect this action has
on interest rates. Is your answer consistent with what you would
expect to find in the liquidity preference framework? - correct
answer- bond market: ms decrease,
liquidity pref: ms decrease, IR increase
????????
yes consistent
Are US companies that manufacture jeans happier when the
dollar is strong or when it is weak? - correct answer-
Weak
Assume a Financial Institution borrows $100,000,000 at 9% for
two years and invests $100,000,000 at 10% for one year.
,What happens if all interest rates in year two fall by 3%? -
correct answer- reinvestment risk Amat>Lmat
-2%
Assume a Financial Institution issues $100,000,000 of liabilities
(borrow/deposits) with a one year maturity to fund
$100,000,000 of assets (loans) with a two year maturity.
Year 1: Cost of liabilities = 9%;
Year 1: Return on assets = 10%
What happens if all interest rates rise in year two by 3%? -
correct answer- refinancing risk Amat<Lmat
-2%
Assume that a bank has assets located in London worth £150
million on which it earns an average of 8% per year. The bank
has £100 million in liabilities on which it pays an average of 6%
per year. The current spot rate is £1 = $1.50.
If the exchange rate at the end of the year is £1 = $1.25, will the
dollar have appreciated or depreciated against the pound?
, Given the change in the exchange rate, what is the effect in
dollars on the net interest income from the foreign assets and
liabilities?
What is the effect of the exchange rate change on the value of
assets and liabilities in dollars (not including the interest
payments)? - correct answer-
Assume that the Federal Reserve wants to weaken the USD
against the Japanese Yen. Describe how this could be done
through direct intervention (sterilized and unsterilized) and
indirect intervention (for a trade relationship and a financial
relationship).
What effect (if any) would these actions have on the money
supply and international reserves? - correct answer-
direct intervention unsterilized: buy ¥, sell USD. increases MS
(more USD out there now). Increases Int Res.
direct intervention sterilized: buy ¥, sell USD, buy treasuries. no
∆MS. Increases Int Res.
indirect intervention trade:
- increase inflation via OMpurchase (increases MS), or via lower
DR to incentivize to borrow from fed (increases MS)
- tariffs on imports to make JPN goods cheaper
