FIN 366 Week Two Text Book Problems

Week Two Text Book Problems



Ch. 4, p.99, # 1

The Federal Reserve System was established in 1913 after a major banking crisis in 1907. Federal district banks are responsible for clearing checks, replacing old currency, providing loans to depository institutions, collect data on the economy, and research banking and economic trends.

Ch. 4, p.99, # 3

When the Fed buys back securities it increases the supply of money available to the public.

Ch. 4, p.99, # 4

Policy directive is a statement provided by the FOMC that specifies instructions for the federal funds rate. This is given to the manager of the Trading Desk who instructs traders on which securities to buy or sell depending on the directive.

Ch. 4, p.99, # 6

An increase in the reserve requirement ratio reduces the amount of money banks have available to give out loans.

Ch. 4, p.99, # 14

Since the fed has some control over hoe much businesses and consumers are willing to spend it also has some influence on whether or not organizations need to hire. They control whether or not an organization can take on a new project that requires more employees.

Ch. 4, p.99, # 15

The fed influences the willingness of borrowers and lenders alike. Since the fed controls the amount of money that is available for use this in effect it influences the cost of borrowing money. If interest rates are high then people are likely to wait to make purchases until interest rates decrease.

Ch. 4, p.99, # 16

The fed affects the price on securities when the are buying or selling treasury bills. The yields on securities are affected. The yields are lower if the price of securities increase because investors have to hold off until maturity and the yield may or may not be higher than the current price.

Ch. 5, p.126, #3

Stimulative monetary policy is used when the fed is trying to encourage homes and businesses to borrow money. They do this by increasing the supply of funds available which in effect means lower rates. Restrictive policy works the other way where less funds are provided for banks which in turn raises rates since there aren’t excess funds for the demand. Unfortunately lower interest rates results in lower return on savings. People like retirees are negatively affected by this since they might have to cut back on spending due to lower interest income on their retirement funds.

Ch. 5, p.126, #11

An increase in money supply results in lower interest rates. A decreased supply results in higher interest rates. The higher rates during the decrease in funds is a good time for investors to invest in securities since their return will be worth it. Demand will be higher when supply increases and demand will be less when supply decreases due to the effect on interest rates.