Eco 342 Banking and Financial Markets     Exam 1    Answer Key   Spring 2003

Multiple Choice
 
 
Form A, D
Form B
Form C
1
C
A
D
2
B
C
A
3
A
D
B
4
C
B
A
5
D
D
D
6
D
D
C
7
A
A
C
8
B
B
A
9
A
A
C
10
A
D
D
11
C
C
C
12
D
B
C
13
B
C
B
14
C
A
B
15
A
C
A
16
C
A
C
17
D
C
D
18
C
A
A
19
B
C
B
20
A
B
A

Short Answers

Explain how disclosure and insider trading regulations deal with the asymmetric information problem in financial markets.

In financial markets, some participants have access to more and better information than others.  Disclosure regulations ensure that some information, such as financial statements, is available to the public.  However, some corporate officers will always have access to better information about a company, so insider trading rules limit the use of that type of information.  Both types of regulation attempt to level the playing field so small investors are willing to participate in the markets, enhancing liquidity.
Describe the general trend of FOMC policy towards the federal funds rate target from 2000 to the present.  What economic conditions prompted these decisions?  What is the current federal funds rate target?
From 2000 to 2003 the FOMC repeated lowered the federal funds rate target (from about 6% to 1% today).  This was in response to an economic slowdown in 2000, the recession in 2001, and the recovery that followed.  Currently the lack of inflationary pressures has the FOMC keeping interest rates low.  The current federal funds rate target is 1%.
Describe the origins of the S&L crisis.  How was this crisis finally resolved?
Problems for S&Ls originated in the 1970s with rising short-term interest rates causes S&Ls to have a negative spread between deposit rates and the rates on their older long-term mortgages.  Also, Regulation Q ceilings made is difficult for S&Ls to attract funds.  The crisis continued through the 1980s and was not resolved until 1989 when the federal government issued long-term bonds to raise the funds to liquidate insolvent S&Ls and re-regulated the industry.
Consider equity mutual funds.  Contrast the objectives of a sector fund, an income fund and an index fund.
These funds differ in their investment objectives and thus how they select stocks.  Sector funds seek to gain from a specific sector of the economy doing well, so they target stocks in that sector, such as financials or healthcare.  Income funds seek stocks with high and stable dividends to provide its investors with current income.  Index funds seek to earn an average return as measured by a stock market index, such as the S&P 500 or the Wilshire 5000.  They acheive this by holding a stock portfolio that matches the chosen index.