Problem Set #2

due Monday, Sept. 19 by 10:00pm via Canvas

Answers must be typed

Chapter 4
Textbook Questions & Problems
Questions & Problems: #7, 8, 9, 24

Chapter 5
Textbook Questions & Problems
Questions & Problems: #5, 6, 7, 13

Chapter 6
Textbook Questions & Problems
Questions & Problems: #3, 7, 10, 18

Data Exercise #1
This exercise serves as a summary of the data for chapters 2-6 which detail the major categories
of financial intermediaries in U.S. (and global) financial system. You are to address three sets of
questions questions regarding the evolution of data given your understanding of the material covered thus far in class. You will use two sources of data to answer the questions.
The first source is the Financial Accounts of the U.S. given by statistical release Z.1 of the Federal Reserve Board which provides aggregate balance sheet data by sector of the U.S. economy.
This data can be found at https://www.federalreserve.gov/releases/z1/. To download historical data, click the Data Download Program button. Then, click the Build Package
button. Choose the following options
1. Financial Accounts of the United States - Z.1
2. FL Levels NSA
3. Select the sector whose data you desire
4. Total Financial Assets
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5. Computed Series (If Computed Series is not available, select whichever option is available)
6. Annual
With items 1.-6. selected, click the Add to Package button. You can add additional series to your
download by clicking the Add More button. When you have selected all the data you would
like to download, click the Format package button. You will want to select dates from 1946 to
2015. Then select the Go to download button followed by the Download file button to retrieve
your data.
The second source of data is the Federal Reserve Bank of St. Louis Economic Database (abbreviated FRED). This database compiles an extremely large amount of data regarding the U.S. economy as well as select measures of foreign economies. The data are from a myriad of government
agencies. The web address for this database is https://fred.stlouisfed.org/. To download a time series, simply type the series name into the search box and hit enter. Navigate to the
desired series in the search results and select it. Choose the desired range of dates and click the
download button.
Question #1 This question examines the relationship between financial assets held privately and
aggregate investment in the U.S. economy. Plot the ratio of total financial assets of the private
domestic financial sector of the U.S. to gross private domestic investment (nominal, not real)
in the U.S. using annual data from 1946 to 2015. (Hint: Data for the numerator come from
the Z.1 database. Simply use the difference between total financial assets of the Domestic
Financial Sector and total financial assets of the Monetary Authority.)
1. How has the behavior of the computed ratio changed over time?
2. Given what youve learned about financial markets in this course so far, to what would
you attribute the changing behavior of this ratio? Explain.
Question #2 This question examines how total financial assets held in the private domestic financial sector of the U.S. are divvied up between depository institutions and non-depository
institutions. On a single graph, plot two time series. They are (1) the ratio of total financial assets held by private depository institutions to total financial assets held by the private
domestic financial sector of the U.S. and (2) the ratio of total financial assets held by nondepository institutions to total financial assets held by the private domestic financial sector
of the U.S. (Hints: The denominator of each ratio is the same variable used in the numerator of the ratio in Question #1. Also, as a short-cut, let total financial assets held by nondepository institutions be defined as total financial assets of the private domestic financial
sector less total financial assets of private depository institutions.)
1. How has the behavior of the computed ratios changed over time?
2. How does the distribution of financial assets within the domestic private financial sector inform your answer to Question #1 part 2? Explain.
Question #3 This question examines how the concentration of assets in each of the categories of
financial institutions studied in chapters 2-6 have evolved over time. On a single graph, plot
five time series. These five series correspond to the five chapters 2-6. Each series is a ratio
expressing the sum of total financial assets held by the institutions studied in a given chapter
divided by total financial assets of the private domestic financial sector. For instance, the first
series corresponds to chapter 2 and is total financial assets held by depository institutions
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relative to the private domestic financial sector. The second series corresponds to chapter
3 and is total financial held by finance companies relative to the private domestic financial
sector. And so forth.
1. Describe what you observe about the evolution of these five ratios.
2. How has the distribution of total financial assets held by the institutions studied in
chapters 3-6 specifically evolved over time?