Midterm 1

Identifications: Identify and briefly explain the importance of any TWO (2) of the following:

1. Capital Adequacy Requirement
2. Regulatory Forbearance
3. Discount Yield
4. Incentive-compatible

Short Responses: For any THREE (3) of the following statements, state whether you AGREE, DISAGREE, OR CANNOT DECIDE. Explain your position in a paragraph. Your grade will be based largely on your explanations.

1. The shorter the maturities of a bank's liabilities, the more likely the bank is to become insolvent if interest rates rise.

2. In the United States wire transfers are relatively unimportant since they account for only .03 percent of all transactions.

3. There are no significant costs to a group of countries switching to a single currency system.

4. Intense competition coupled with branching restrictions has given rise to the proliferation of banks in the U.S.

5. Movements in the narrow monetary aggregates (those for which currency is a major component) no longer provide the came information as they have historically because of the size of overseas currency holdings.

6. The use of credit scoring increases the ease and reduces the cost of obtaining a small business loan.

Essays: In your SECOND BLUEBOOK, answer any TWO (2) of the following:

1. In 1998, flow of funds accounts show that assets of U.S. households in equities have surpassed real estate holdings. Analyze this conclusion with respect to the following: 1) note interpretive issues with the data underlying this conclusion; and 2) discuss what measures might be used to alter household portfolios if they are unbalanced with too great an emphasis on real estate holdings.

2. If the next chair of the Fed has a reputation for advocating a higher rate of money growth than the current chair, what will happen to interest rates? Discuss the possible resulting situations.

3. Turkey is currently undergoing a disastrous financial crisis. Invoking arguments from adverse selection and moral hazard, explain how increasing uncertainty, increasing interest rates, stock market decline and deterioration of bank financial health can explain such a crisis.

4. "Systemic risk arises when an institution's failure interferes with financial services consumers' ability to obtain important financial services in a timely manner to such an extent that overall economic activity is reduced."

Discuss how and to what extent FDICIA reduced financial market systemic risk. Assess the extent to which systemic risk still exists.