Answer Sheet

Group Members:

Member 1: Student ID: Name:

Member 2: Student ID: Name:
Member 3: Student ID: Name:
Member 4: Student ID: Name:

I) Fill the answer to each multiply choice question in the following

table (1 marks each):

1 2 3 4 5 6 7 8 9 10
B D B C C B D D A A
11 12 13 14 15 16 17 18 19 20
B B D C B B B D B C
21 22 23 24 25 26 27 28 29 30
D A D B C B A A D D
31 32 33 34 35 36 37 38 38 40
C C C C B C A D A A
41 42 43 44 45 46 47 48 49 50
D C A B B A E D D A

II) Short answer questions (6 marks each)

SHORT ANSWER. Write the word or phrase that best completes each statement or
answers the question.
51) Distinguish between direct finance and indirect finance. Which of these is the most
important source of funds for corporations in the United States?
In direct finance funds flaw directly from the lender to the borrower WHILE indirect
finance funds do not flow directly, they flow from the lender or saver to a financial
intermediary then to the borrower or investor.
Indirect finance is the most important source for corporations in the US
52) How do regulators help to ensure the soundness of financial intermediaries?
By restricting who can set up a financial intermediary, conduct regular examinations,
restrict assets and by providing insurance to help insure soundness of financial
intermediaries

53) What factors have slowed down the movement to a system where all payments are
made electronically?
The necessary equipment to set up the electronic payment is system is costly. Also,
security of the information and privacy concerns appears to be issues that need to be put
into consideration before the system becomes global

54) Your bank has the following balance sheet

What would happen to bank profits if the interest rates in the economy go down? Is there
anything that you could do to keep your bank from being so vulnerable to interest rate
movements?
When the interest rates go down the profits will go down as well due to the fact that
I have more interest-rate sensitive assets than liabilities as seen above.
There is a way to keep my bank account from being vulnerable to interest rates
movements and that is by using financial derivatives such as interest rates swaps or
futures. The balance sheet could also be adjusted so that the profits are not vulnerable
anymore to interest rates
55) The government safety net creates both an adverse selection problem and a moral
hazard problem. Explain.
The adverse selection problem occurs since people who love taking risks might view
the banking system as an opportunity to use other peoples' funds knowing that those
funds are protected. The moral hazard problem comes about because depositors will not
impose discipline on the banks since their funds are protected and the banks knowing
this will be tempted to take on more risk than they would otherwise

III) ESSAY (10 marks each).

56) Explain the Fed's three tools of monetary policy and how each is used to change the
money supply. Does each tool affect the monetary base or the money multiplier?

57) Explain what inflation targeting is. What are the advantages and disadvantages of
this type of monetary policy strategy?