Explain why economists in the 1960s were so perplexed about why stagflation had occurred.
> you read in the financial press that the recent flight to quality is reversing. What will happen in the bond market?
> Offer an explanation to someone with no training in economics for why the yield on US government bonds is used as a substitute for the risk-free rate.
> Firms borrowing in developing countries such as Brazil often have to pay a higher default risk premium, ceteris paribus, than similar firms borrowing in the United States. Explain why this is the case.
> The Federal Reserve Bank of New York has a great deal of influence over financial markets to this very day. Yet the New York Fed is not as powerful as many wanted it to be in the early part of the twentieth century. Explain why the New York Fed is today
> When the Fed was created, one of its main purposes was to maintain the gold standard. What does this mean?
> If the market price for bonds is higher than the equilibrium price, what is the result, and what will change to bring about equilibrium as price falls, ceteris paribus?
> Private equity funds often earn high returns on their investments, in part because the interest that must be paid on debt issued by their portfolio firms can be used to reduce the amount of federal income tax the portfolio firms must pay. This is often r
> You read in the financial press that the economy of Finland is sliding into a recession. What will happen in the bond market and the loanable funds market in Finland, ceteris paribus?
> Robyn is an entrepreneur, and she is looking for a private equity firm to make an equity investment in her firm. How can Robyn tell the difference between the dumb money and smart money that various private equity firms are offering?
> Why do general partners in private equity funds pay such a low rate of tax on the income they generate?
> People who operate private equity funds can receive very high levels of compensation if the fund is able to sell its portfolio firms for a much higher price than what it paid for and invested in them. This return that is paid to the operators of private
> “Waterfalls are pretty things in nature; it is water falling off a cliff. But how do they function in private equity?” asks your friend. How do you answer this question?
> Sandy is confused about the terminology used in the private equity industry. How would you explain to her the differences between a limited partner and general partner in private equity?
> During what time periods did the size of investment banks change?
> Explain why so many people see a “revolving door” between the investment banking industry and the entities designed to regulate and oversee it.
> Rodney does not understand how investment banks work. In the Abacus case, Rodney assumes Goldman Sachs would lose money since the value of assets in Abacus declined drastically. How would you explain to Rodney how Goldman Sachs actually made money on Aba
> Your friend Cynthia works at an investment bank and tells you she is going on a “roadshow.” What will Cynthia be doing?
> Explain how proprietary, or prop, trading, when done by investment banks, can result in the bank’s customers becoming the bank’s competition.
> Explain why a change in the demand for loanable funds may not change the supply of bonds.
> The voting structure of the FOMC means that the Fed governors have more votes than the Federal Reserve bank presidents. Why do you think this is the case?
> David is a bit confused as to what investment banks do. For example, he has heard of insurance underwriters, but David can’t seem to understand what underwriting has to do with investment banks. How would you explain investment banking underwriting to Da
> You read in the financial press that market participants expect stock prices to increase dramatically in the near future, while at the same time business confidence is increasing. Explain in words and show graphically what will happen in the bond market
> If a three-year bond with a $1,000 face value has a coupon rate of 3.5%, and the current market interest rate is 2%, what is the market price of the bond?
> How did DIDMCA and the Garn-St. Germain Act cause more problems for Savings & Loans than they solved?
> Which of the following explain why Ronald Reagan and Paul Volcker agreed on economic policy?
> In the twenty-first century Paul Volcker is greatly respected, yet during the early 1980s he was one of the most disliked people in America. Why was Paul Volcker so disliked in the early 1980s? Why do you think so many people changed their opinion of him
> Explain why changes in the demand for bonds change the supply of loanable funds.
> A money market transaction in which one party sells a financial asset with the agreement to buy it back in the future is called:
> How might a firm use the issuance of commercial paper as a way to deal with its seasonal fluctuations in sales?
> Explain how the Federal Reserve paying interest on deposits created a floor in the federal funds market.
> Which of the following is not a characteristic of a Treasury Bill auction?
> Why do the DRY and the IRY result in different values? Explain why this difference, even though seemingly small, can be very important.
> Assume you are going to buy a 90-day Treasury bill with a face value of $1,000 for a price of $944. Calculate the DRY, or discount rate yield. Also calculate the IRY, or investment return yield.
> Which of the following is not a characteristic of money market instruments?
> Johanna is an institutional investor who is looking to “park” some of her investment funds for a short time. How would you explain to Johanna why money market instruments might be useful for her?
> Explain why the money market is really not “a market for money.”
> During times of crises, funds can flow from long-term debt markets to shorter term debt markets. This is often referred to as a:
> Explain, in words and graphically, how the financial crisis that started in the United States led to a worldwide flight to quality.
> Explain, in words and graphically, how private borrowers such as Harley-Davidson are negatively affected by a flight to quality.
> Which of the following correctly describes the role of the bond-rating agencies in the subprime mortgage asset bubble?
> Explain why some argue the “issuer pays” model creates a conflict of interest.
> Initially, bond ratings were paid for by the bond purchaser. Today bonding ratings are under an “issuer pays” model. Explain how the two forms are different.
> A convertible bond allows for a bond to be converted into what at a future date?
> Why do bonds have sinking funds? How are they different from a call provision?
> Jenny is considering purchasing a bond, but she notices that the bond has many covenants. She is unsure what they mean. How would you explain these covenants to Jenny?
> Sunita wants to earn the highest possible after-tax return on her savings. She has two options: a corporate bond and a tax-free government bond. The corporate bond yields 5%, and Sunita is in the 25% marginal tax bracket. What equivalent tax-free rate w
> Shoma is thinking about buying a municipal bond. She notices some are revenue bonds, whereas others are general obligation bonds, but she does not understand what these are. How would you explain this to Shoma?
> During the Reagan Administration in the 1980s, while the US government was running large government budget deficits, the rest of the world was also bringing large amounts of their savings to the United States. Using the loanable funds framework, explain
> Explain how TIPS, or Treasury inflation-protected securities, actually protect investors from inflation.
> If the ECB is pursuing an expansionary monetary policy, it will do which of the following?
> Explain how the European Central Bank’s interest payments on the deposits commercial banks have at the ECB provides an interest rate floor for the interbank lending rate.
> The European Central Bank uses reserve transactions in its version of open market operations. Explain to someone with no training in economics what reserve transactions are.
> Monetization of public debt often leads to which economic problem?
> President Abraham Lincoln funded the Union Army during the Civil War by a “monetization of public debt.” What did Lincoln do?
> Explain why Keynes thought monetary policy during the Great Depression was like “pushing on a string.” Was it similar during the Great Recession of 2008–2009? Why or why not?
> Fred is holding on to cash because he thinks interest rates will increase in the future and thus bond prices will decrease, making the future a good time to buy bonds. Keynes would say Fred is holding on to cash as part of which type of demand for money?
> Explain why targeting interest rates is so difficult for central banks if the demand for money is unstable.
> During the Reagan Administration in the 1980s, the US government ran large government budget deficits, which many argued would slow down the US economy. Using the loanable funds framework, explain in words and graphically why this argument was being made
> Irving Fisher explained the demand for money using the quantity theory of money demand. Explain this concept to someone who has no training in economics.
> What is the Federal Reserve trying to twist in its “Operation Twist”?
> Explain why the Federal Reserve went from emergency lending to quantitative easing.
> During the crisis of 2007–2008, the Federal Reserve created an alphabet soup of emergency lending programs: TSLF, PDCF, AMLF, MMIFF, CPFF, and TALF, among others. Why did the Fed feel compelled to do so?
> During a credit crunch we can expect interest rates to:
> Explain why the stigma effect may be heightened during an economic slowdown.
> Why did the Federal Reserve feel it was necessary to create the term auction facility?
> During what time period was the Bretton Woods System in place?
> Andy is completely confused about the Bretton Woods System. He does not understand how it functioned. What would you tell Andy?
> The financial and economic system in Canada functioned very differently from financial systems in other Western countries. In what way was Canada’s experience different?
> Why did the attempt to return to the gold standard after World War I not work out so well?
> You read in the business press that real, risk-adjusted interest rates in Switzerland have decreased relative to interest rates in the United Kingdom. What will happen in the foreign exchange market and thus in the goods market?
> Gary does not understand how purchasing power parity affects exchange rates. How would you explain this to him?
> Explain in words and show graphically why decreases in inflationary expectations can lead to currency appreciation.
> When a central bank seeks to offset the impact of its attempt to influence the exchange rate of its currency on the monetary base, this action is referred to as:
> Explain why the supply curve in the foreign exchange market slopes upward. Who causes it to have this shape and how?
> Explain why the demand curve in the foreign exchange market slopes downward.
> If the value of the Indian rupee decreases, which of the following will occur?
> Kari runs a firm in Los Angeles, California, that buys a lot of its inputs from a supplier in Australia. What would she like to see happen to the US dollar in terms of the Australian dollar? Why?
> Julie runs an export business in Austin, Texas, and sells a large amount in Mexico. What would she like to see happen to the US dollar in terms of the Mexican peso? Why?
> How is the structure of the Bank of Canada similar to that of the Federal Reserve? How is it different?
> Explain the steps the Federal Reserve goes through when conducting an expansionary open market operation. Who is affected and how?
> Savings & Loan Associations were established to lend money to households so that the households could:
> Why was there a push to economically and financially integrate western Europe after World War II?
> Rationing was used in the United States during World War II in part to:
> During World War II there was relatively little inflation in the United States. Why was this the case?
> There are three ways to finance a war. What are they? How were they used in the past?
> When an economy is suffering from deflation, the nominal or market interest rates tend to:
> In 1907 J. Pierpont Morgan was able to help end a financial crisis in great part by restoring confidence. Why weren’t a different set of banker’s actions enough to stop the financial crisis in October 1929?
> How is the structure of the ECB similar to that of the Federal Reserve? How is it different?
> Low interest rates may, or may not, signal that a central bank is pursuing an “expansionary” policy. Explain.
> The Panic of 1907 was primarily ended thanks to the actions of:
> F. Augustus Heinze tried to corner the market for shares of United Copper. What does this mean? How did it help to trigger the Panic of 1907?
> What role did Taylorism, or “scientific management,” play in the expansion of financial markets in the United States?
> If a central bank wants to pursue an expansionary monetary policy, it should change policies to ensure what happens to the required reserves ratio?
> You read in the press that a credit crunch is occurring. How will that affect the money supply multiplier and why?
> Explain why (just mathematically) if people hold relatively more cash—that is, the currency ratio k increases—the money supply multiplier gets smaller.
> If US Treasury and administration officials decide they want to see the dollar rise in value against the euro, what will happen to the monetary base?
> Explain how changes in the Treasury’s tax and loan account balance may affect the monetary base. “tax and loan accounts,” at commercial banks across the country.
> If bank depositors hold more cash and fewer deposits, the monetary base does not change, only the composition of it does. Explain why.
> Critics of the Bank of Japan argue that it played a role in the global financial crisis. What do these critics argue?
> Which of the following are included in the monetary base?
