ECO 342 810           Banking & Financial Markets                    Homework #2                         due 2/20/04

1.   Rising short-term interest rates in the 1970s were problematic for all depository institution and the interest rate spread between their assets and liabilities.  Explain why S&Ls were ESPECIALLY susceptible to the interest rate risk that comes with maturity intermediation

2. Recently Federal Reserve Chairman Alan Greenspan testified before Congress and stated that inflation is not currently a big concern for the U.S. economy.  IF the Fed does become concerned about inflation, describe what actions would be taken by the FOMC and FRBNY

3. While many features of the Fed give it some independence from the President and Congress, the Fed is not completely independent.  IF the FOMC, citing a lack of inflationary pressures, were to hold off on raising interest rates this year, explain why some might feel this act is politically and not economically motivated.

4. Explain why property and casualty insurers would be expected to hold a greater proportion of cash and liquid assets relative to life insurers.

5. Typically a whole life insurance policy will have premiums 2-3 times as expensive as a term life insurance with the same death benefit.  Explain why.