Money, Banking and Financial Markets

STUDENT VERSION – PLACE IN DROPBOX

 

 

FINA 340 Bank Portfolio Simulation Worksheet – Round 3

Version 1.3

Name:

Bank Portfolio – Round 3[footnoteRef:0] [0: Accuracy score represents items calling for specific information in the multiple choice format. Analysis score relies upon an explanation (such as Q 12 or 15) .]

As shown in the FINA 340 course website, you are asked to adjust your bank’s balance sheet to reflect regulatory changes that require that you hold a minimum level of capital.  Bank regulators are now requiring banks to carry total shareholders’ equity equal to 4% of risk-weighted assets, which in this simulation are the three categories of loans. (Cash and T-Bills are assumed to be risk-free and thus have a risk weighting of 0%.) Note that different assets and liabilities have different returns and default rates based on the state of the world. Importantly, the responses in this worksheet are what determine your evaluation on the assignment.

 

Refer to: 1) the instructions in this worksheet, 2) the simulation handbook for previous versions of the exercise provided to you by your instructor (in PDF), and 3) information in the text, Cecchetti, S. G. and Schoenholtz, K (4e). Money, Banking, and Financial Markets.

 

1. Which of the following statements is most true concerning economic policy in the U.S.?  highlight your answer

 

A.	Monetary policymakers tend to have a long view while fiscal policymakers tend to ignore the long-run inflationary ramifications of their actions.
B.	Fiscal policymakers tend to focus on inflation and unemployment while monetary policymakers focus most of their attention on the money supply and the exchange rate.
C.	Fiscal policymakers tend to focus more on pleasing their constituents and so are willing to sacrifice the short run for the long run.
D.	Monetary policy independence is enshrined in the U.S. Constitution.

 

 

2. All of the following are consequences of an economy operating above its potential level except: highlight your answer

A.	high rates of inflation.
B.	high interest rates.
C.	low unemployment
D.	stable prices.

 

 

3. Higher than expected inflation will increase the: highlight your answer

A. real interest rate borrowers pay on fixed rate mortgages.

B. nominal amounts people need to save for retirement.

C. real interest rate savers earn on fixed rate CDs.

D. real interest rates both paid on mortgages and earned on CDs.

 

 

 

 

4. You are considering the best way to get a charter for your bank. Currently the requirement of holding a non-interest-bearing reserve account at the Fed must be met by:  highlight your answer

A.	all banks, member or not.
B.	only member banks.
C.	member banks and nonmember banks over $100 million in assets.
D.	only nationally chartered banks.

 

 

5. You believe it may be important to have your bank be a member of the Federal Reserve System. Which of the following is a false statement about the structure of the Federal Reserve System? highlight your answer

A.	banker and business interests are reflected.

….

B.	state and regional interests are reflected.
C.	government (public) and private interests are reflected.

.

D.	importer and exporter interests are reflected.

 

 

6. You are contemplating your funding for this Round. Which of the following statements is most correct? highlight your answer

A.	Discount loans are initiated by the Federal Reserve.

 

B.	Discount loans are made when banks need relatively small amounts of cash for the long term.

 

 

C.	Discount loans are made when banks need relatively large amounts of cash for the long term.

 

 

D.	Discount loans are made when banks need relatively small amounts of cash for the short term.

 

 

 

7. One of your bank’s clients is making an investment in technology. When the client purchases a $25,000 computer system by writing a check, the client’s balance sheet will: : highlight your answer

 

A.	show an increase in assets and liabilities of $25,000

 

 

B.	only show an increase in assets of $25,000.

 

 

C.	only show an increase in liabilities of $25,000.

 

 

D.	show the same total amount of assets as before the purchase.

 

 

8. You are contemplating a discount loan from the Fed. To obtain a discount loan from the Fed, your commercial bank must:  highlight your answer

A.	prove that it will fail if it does not obtain the loan.
B.	prove that the loan will be used to make loans.
C.	provide collateral.
D.	agree to more frequent examinations.

 

9. You reflect upon the best combination of funding for this Round. The fact that there is a market for federal funds enables banks to: highlight your answer

A.	make fewer loans than would occur otherwise.
B.	borrow more from the Fed.
C.	hold a lower level of excess reserves than would otherwise be the case.
D.	hold less in required reserves.

 

10. If the market federal funds rate were below the target rate, the response from the Fed would likely be to: highlight your answer

A.	raise the required reserve rate.
B.	purchase U.S. Treasury securities.
C.	sell U.S. Treasury securities.
D.	raise the discount rate.

 

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In Round 3 of the Simulation, you are asked to apply the Outcome, determined by chance, to your bank’s portfolio. Use the embedded Excel worksheet below to complete the assignment. To enter your values, place the cursor onto the table. Next, right click the mouse. Choose “Worksheet Object, Edit.” You will want to save your work and make sure it appears in the Word document you upload to DropBox.

 

11. Refer to your Start of Round 2 Bank Balance Sheet (previous assignment). With the Outcome determined by chance, complete the spreadsheet by opening it and using the drop down menu to determine your Bank’s balance sheet at the End of Round 3.

 

 

 

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