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
As stated in your textbook (page 60), "Banks were better equipped to cope with rising funding costs because bank portfolios were not dominated by old, fixed-rate mortgages as S&Ls were. A larger portion of bank portfolios consisted of shorter-term assets and other assets whose interest rate rest to market interest rates after short time periods."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
If concerned about inflation, the FOMC would increase the federal funds rate target at their meeting. Then the FRBNY would be responsible for selling Treasuries to meet the new, higher federal funds rate target.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.
If the FOMC decides to keep the federal funds rate target low, it could be argued that these low interest rates will continue to stimulate spending and the economy to the benefit of incumbent politicians. If the FOMC postpones a rate hike for these reasons, inflation may surface after the election and be more problematic to combat.4. Explain why property and casualty insurers would be expected to hold a greater proportion of cash and liquid assets relative to life insurers.
The issue here is the predictability of claims. As you book states (page 112), "The amount and time of claims on property and casualty insurance companies are more difficult to predict because of the randomenss of natural castastrophes and the unpredicatability of court awards in liability cases." Predicting the timing/amount of claims "is easier from an actuarial perspective for a life insurance company." So P &C companies much hold more cash to satifsfy sudden, large claims.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.
Term life insurance is only life insurance so the premium reflects the cost of insurance over a specific period. Whole life insurance insures over the lifetime and builds up cash value so the premium reflects both the average cost of insurance over the lifetime and investment capital.