Blog

In the market for reserves, if the federal funds rate is above the interest rate paid on excess reserves, an open market purchase ________ the supply of reserves and causes the federal funds interest rate to ________, everything else held constant.

Collateral requirements lessen the consequences of ________ because the collateral reduces the lender’s losses in the case of a loan default, and it reduces ________ because the borrower has more to lose from a default.

An example of indirect intervention by the Bank of Japan would be for the Bank of Japan to use interest rates to increase the value of the yen vs. the dollar.

The following regression analysis was conducted for the inflation rate information and exchange rate of the British pound:   eBP = ao + a1[(1+IU.S.)/(1+IU.K.) – 1] + µ   Regression results indicate that ao = 0 and a1 = 1. Therefore:

The interest rate on pounds in the U.K. is 8%. The interest rate in the U.S. is 5%. Interest rate parity exists. U.S. investors will earn a lower nominal return domestically than British investors earn domestically.

As information technology improves, the lending role of financial institutions such as banks should ______________.

Assume the Fed desires to strengthen the dollar. If it buys dollars and simultaneously buys Treasury securities, this is an example of sterilized intervention.

Consider an MNC that is exposed to the Taiwan dollar (TWD) and the Egyptian pound (EGP). 25% of the MNC’s funds are Taiwan dollars and 75% are pounds. The standard deviation of exchange movements is 5% for Taiwan dollars and 7% for pounds. The correlation coefficient between movements in the value of the Taiwan dollar and the pound is .7. Based on this information, the standard deviation of this two-currency portfolio is approximately:

Given a home country and a foreign country, purchasing power parity suggests that:

Briefly discuss why it is a problem to have banks that are considered too-big-to-fail, along with how the concern is currently managed and may be managed through future regulation.