Exam 3: The What, How, and Why of Financial Intermediaries

Use the following information for questions Suppose there is one depositor who earns an income of $100 in each period.She spends $50 for consumption and the remainder goes to her savings account.Assume that a bank doesn't do anything with this money except safeguards it.The bank charges $5 for safeguarding fee. -Suppose the banking industry is competitive.If the bank charges a loan rate of 18%, safeguarding fee of $5, and there are five depositors and two merchants, what would be the deposit interest rate that the bank can offer to the depositors?

Which of the following statements is are false?

With respect to the discount rate policy, an increase in the discount rate, other things equal, will

The vulnerability of the fractional banking system is due to

The increased number of conversion from mutual S&Ls to stock S&Ls in recent years can be attributed to...

Suppose a bank doesn't have sufficient fund to meet the depositors' withdrawal In this case, to maintain stability and public confidence in the banking system the government can

Use the following information for questions Suppose there are assets whose owners wish to attract capital.Due to adverse selection problem, a cost must be incurred in order to learn the value of those assets.There are individuals who specialize in producing information about firms.It costs the information producer i.p. $5 to produce information.The i.p.is risk averse and has a utility function of where X is the i.p.'s wealth.Each i.p.has an alternative employment which provides a minimum level of expected utility of $30.Suppose that the owners of the assets approach the i.p.directly, and assume that they can monitor the i.p.to learn if the i.p.has invested in information production.The monitoring is noisy and it says that the i.p.produced information with probability 0.6 and did not produce information with probability 04.If the i.p.did not produce information, the signal says that he did with probability 0.5, and that he did not with probability 0.5.Suppose the asset owners tell the i.p.that they will pay $H if the i.p.produced information and $L if he did not. -What is the amount of compensation H and L) that will solve this problem?

The differences in the ownership structure of a stock S&L and a mutual S&L can lead to...

The trade-off faced by a goldsmith when deciding to print more receipts than the amount of gold available is

Fractional reserve system means that

Which of the following statements is are false?

Inside debt is

Why would a goldsmith ever want to print more receipts than the amount of gold deposited?

A possible solution to reduce the vulnerability of the fractional banking system is

Use the following information for questions Suppose there is one depositor who earns an income of $100 in each period.She spends $50 for consumption and the remainder goes to her savings account.Assume that a bank doesn't do anything with this money except safeguards it.The bank charges $5 for safeguarding fee. -Given that there are five depositors, 40% of them will withdraw at t = 1, and 2 merchants who need $100 each, will the bank have sufficient funds at t = 1 if the safeguarding fee is $5, and the monitoring cost is $3?

Use the following information for questions Suppose that the banking industry is competitive and it has zero equity.The effective legal reserve requirement is 25%.Assume that there are three banks, A, B, and C.Bank A initially receives $2,500 in deposits. -Suppose that the effective legal reserve requirement is now 40%.Bank A loans out its excess reserves, which are deposited in Bank B.How much excess reserves does Bank B have?

Use the following information for questions Suppose there are assets whose owners wish to attract capital.Due to adverse selection problem, a cost must be incurred in order to learn the value of those assets.There are individuals who specialize in producing information about firms.It costs the information producer i.p. $5 to produce information.The i.p.is risk averse and has a utility function of where X is the i.p.'s wealth.Each i.p.has an alternative employment which provides a minimum level of expected utility of $30.Suppose that the owners of the assets approach the i.p.directly, and assume that they can monitor the i.p.to learn if the i.p.has invested in information production.The monitoring is noisy and it says that the i.p.produced information with probability 0.6 and did not produce information with probability 04.If the i.p.did not produce information, the signal says that he did with probability 0.5, and that he did not with probability 0.5.Suppose the asset owners tell the i.p.that they will pay $H if the i.p.produced information and $L if he did not. -To make sure that the i.p.has an incentive to produce information, his compensation must satisfy

The following are major tools of monetary policy, except