Directions:  Include a copy of the question with each of your answers. As a guideline, answer each essay question within 10-30 typed lines. If you use one or more sources of information in preparing your answer, provide a current APA-style reference, and cite a reference wherever it is used. Each question is equally weighted, and counts 10% of your exam grade. The exam is 20% of your course grade. Use the Assignment Feature to submit your exam answers to the Gradebook by the end of Seminar Six.

1.    a) Did deregulation in the early 1980s improve the ability of banks to compete against other financial institutions? Briefly discuss

b) Did financial market innovations in the last 20 years improve the ability of banks to compete against other financial institutions? Briefly discuss

c) Identify and briefly describe two problems, other than regulatory constraints, that have reduced bank profit margins in the last ten years.

d) What is the principal reason that many banks have had trouble increasing their equity capital in the past five years?

e) Briefly explain how downsizing can help banks increase their profit margin and capital ratio.

2.    For each of the following financial intermediaries, identify one type of financial instrument that they buy as an interest-earning asset:

a) Mutual fund companies

b) Pension fund companies

c) Insurance companies

d) Finance companies

e) How could banks increase their rate of return on equity, and how would this affect their market share?

3.    For each of the following financial intermediaries, identify one “financial instrument” that they sell, which some households or firms buy as a financial investment, rather than depositing their savings in a bank account:

a)    Mutual fund companies

b)    Pension fund companies

c)    Insurance companies

d)    Finance companies

e)    How could banks increase the rate of return they pay on bank deposits, and how would this affect their market share?

4.    Briefly explain why government regulators imposed the following regulations on commercial banks:

a)    Reserve requirements of the Fed

b)    Discount-Window borrowing from the Fed

c)    Requirement that federal banks buy FDIC insurance on deposits

d)    Glass-Steagall restriction on buying corporate stocks and bonds

e)    Briefly evaluate the following statement: “Government regulations on banks should be eliminated, since their social economic costs clearly exceed their social economic benefits. Now is the time to return banking to the free market.”

5.    a) What organization of the government controls the monetary policy in the U.S.?

b) State the principal short-run policy goal and the principal long-run policy goal of the monetary policymaker

c) Identify the three principal monetary policy tools and state how each can be used to increase the money supply

6.    a) Which monetary policy tool is the most commonly used, and why is it the most commonly used tool?

b) Identify two types of private market participants that can increase the money supply in the short-term, and state how much each could do this

c) Why do Keynesians propose that the Fed set a federal funds rate intermediate target instead of a money supply growth target?

d) Should the Fed’s decision-making process be more open to public input and evaluation? Briefly discuss

e) Monetarists have proposed that the Fed be eliminated and replaced with a small group of bureaucrats who simply increase the money supply (M2) by 3% per year. Briefly evaluate this policy proposal.

7.    State the principal change in market conditions that led to each of the following financial innovations since 1960, and explain how each innovation helps banks to profitably operate under these new market conditions:

a)    Adjustable-rate mortgages

b)    Securitization of loans

c)    Bank credit cards

d)    Money market deposit accounts

e)    Electronic banking services

f)     Individual retirement accounts (IRAs)

8.    a) What is the principal regulatory policy goal of the Fed?

b) Are the short-run policy goal and long-run policy goal of the Fed compatible or do they conflict? Briefly discuss

c) Does the Fed have the economic power, political power, and knowledge needed to achieve its goals? Briefly discuss

d) Does the historical evidence since 1970 suggest that the Fed has usually achieved its monetary policy goals and regulatory goals? Briefly explain

e) Briefly state the “political business cycle” theorists’ critique of monetary stabilization policy.

9.    Briefly state each of the following monetarist critiques of discretionary monetary stabilization policies:

a)    Natural rate hypothesis

b)    Policy lags

c)    Stop-go policies

d)    Acceleration hypotheses

e)    Forecasting business cycles critique

10.  In discussing monetary policies, it is often important to distinguish between “nominal effects” and “real effects” and equally important to distinguish between “short-run effects” and “long-run effects” of monetary policy. Briefly discuss whether the Fed, by using monetary policy, can achieve each of the following policy goals of the U.S. government:

a)    Maintain full-employment

b)    High rate of capital investment

c)    High rate of economic growth

d)    Price level stability, as measured by low, stable inflation rate

e)    Stable foreign exchange value of the U.S. dollar