Question.3043 - Financial Markets and Institutions 1) Explain Interest Rate Swaps and stock options. (10 points) 2) Explain the role that credit default swaps played in the financial crises. (5 points) 3) Explain 4 other things that led up to the financial crises and their impact on the financial markets, housing, prices and GDP. (20 points) 4) Compare and contrast the 3 different theories of money demand (15 points). 5) Given the quantitative theory of money: a) what happens to real GDP if the money supply is cut in half, velocity is stable and prices are sticky? (5 points) b) what happens to prices if the money supply doubles under the classical model assuming that velocity is stable? (5 points) 6) Compare and contrast the independence of the U.S Central Bank (Federal Reserve Bank) and the European Central Bank. Give the pros and cons of an independent central bank (10 points). 7) Explain the 4 tools of monetary policy and how they impact interest rates, financial markets, housing, and GDP (15 points). 8) Give 4 transmission mechanisms and explain how each impacts the financial markets and the overall economy (15 points)
Answer Below:
Financial xxxxxxx and xxxxxxxxxxxx Explain xxxxxxxx Rate xxxxx and xxxxx options xxxxxx Interest xxxx swaps xxxxxx speaking xxxxxxxx rate xxxxx are xxx exchange xx one xxx of xxxx flows xxx another xx is xxxxxxxxx an xxxxxxxxx between xxx parties xxxxx one xxxxxx of xxxxxx interest xxxxxxxx is xxxxxxxxx for xxxxxxx based xx a xxxxxxxxx principal xxxxxx Most xxxxx interest xxxx swaps xxxxxxxx a xxxxx payment xxx a xxxxxxxx payment xxxxxxxx payment xxx interest xxxxxxxx which xxx linked xx an xxxxxxxx rate xxx are xxxxxxxxxxx Stock xxxxxxx Stock xxxxxxx are xxxxxxxxx that xxxxxx its xxxxxx the xxxxx but xxx the xxxxxxxxxx to xxx or xxxx stocks xx the xxxxxxxxxx security xx a xxxxxxxxx price xx or xxxxxx a xxxxx date xxxx the xxxx is xxxxxxx the xxxxxx ceases xx exist xx the xxxxx hand xxx seller xx the xxxxxx is xxxxxxxxx to xxxx or xxx the xxxxxx to xx from xxx buyer xx the xxxxxx at xxx specified xxxxx if xxx buyer xxxxxxxx so xxxxxxx the xxxx that xxxxxx default xxxxx played xx the xxxxxxxxx crises xxxxxx Credit xxxxxxx swaps xxx are xxxxxxxxxx instruments xxxxx act xxxx an xxxxxxxxx contract xxxx a xxxxx purchases x CDS xxxxxx a xxxxxxx to xxx seller xx is xx return xxxxxxxxx against x credit xxxxx like x default xx a xxxxxxx Simply xxxxxxxx the xxxxxx of xxx CDS xxxxx the xxxxxxxxx of xxxxxxx in xxxx of xxx default xx a xxxxxx the xxxx is xxx transferred xx the xxx willing xx take xx At xxx time xx financial xxxxxx the xxxxxxxx loans xxxx collectively xxxxxxx into x derivative xxxxxxx and xxxx to xxxxxxxxx In xxx year xxxxx started xxxxx bad xx that xxxx there xxxx CDS xxx just xxx traditional xxxxxxxxx debt xxx also xxx mortgage-backed xxxxxxxxxx CDOs xxx secondary xxxx When xxxxxx were xxxxxxxxxx CDS xxxx cheap xxxx things xxxx haywire xxx price xx CDS xxxx up xxx anyone xxx had xxxx these xxxxx was xxxxxxx at xxxxxx on xxxx So xxx were xxx way xxxxxxxxxx on xxxxxxxx mortgages xxxxxxxxx write xxxxx at xxxxx financial xxxxxxxxxxxx It xxx worse xx banks xxxxxxx failing xxx people xxx had xxxx CDS xx their xxxx faced xxxx larger xxxxxx So xxx most xxxxx problem xxxx CDS xx that xxx insurers xxxxxxx them xxxx them xx excessively xxx prices xxx they xxxx facing xxxxx losses xxxxxxx other xxxxxx that xxx up xx the xxxxxxxxx crises xxx their xxxxxx on xxx financial xxxxxxx housing xxxxxx and xxx points xxxxx and xxxxxxxx is xxx housing xxxxxx which xxxxxx in xxx housing xxxxxx touched xxxxx peak xxx were xxxxxxxxxx high xxxxxx were xxxx concentrating xx investing xx properties xxxxxxxxxx which xxxx unrealistically xxxx priced xx order xx purchase xxxxxxxx invest xx property xxxxxx took xxxxx from xxxxx based xx their xxxxxx income xxxxxxxxxxxxx when xxx housing xxxxxx burst xx there xxxx not xxxx takers xx the xxxx property xxx investor x values xxx stuck xxxx unsold xxxxxxxx in xxxx Prices xxxxx a xxxxx decline xxxxxxxxxx Secondly xxxxx were xxxxx which xx order xx gain xxxxxxx market xxxxx and xxxxxx operations xxxxxxxx in xxxxxxxx loans xxxxxxxx and xxxx liberal xxxx loan xxxxxxxx exercise xxxxxxxx loans xxx loans xxxxx are xxxxxxx to xxxxxxxxx at x higher xxxxxxxx rate xxx to xxxxx risky xxxxxxx These xxxxxxxx loans xxxx later xxxxxxxxxxxx sold xx financial xxxxxxxxxxxx structured xx derivative xxxxxxxx Ultimately xxxx the xxxxxxxxx were xxxxxx to xxx the xxxx the xxxxxx was xxxxxxxxxxxx seen xx the xxxxxxxxx institutions xxxxx were xxxxxxxx nothing xxx junk xxxxxx The xxxxxx rating xxxxxxxx were xxxxxxx reason xxxxxx the xxxxxxxxx crisis xxx credit xxxxxxx are xxxxxxxxx which xxxx rating xx particular xxxxx based xx the xxxxxxxxx background xxx profile xxxxx The xxxxxx ratings xxxx gave xxxxxxx to xxxxxxxxxx products xx subprime xxxxx and xxxx unable xx judge xxxx correctly xxx gave xxxx ratings xxx to xxxxx it xxx easier xx sell xxxxxxxxxxxxx in xxx market xxxxxxx have xxxxxx that xxxxxx rating xxxxxxxx and xxxxxxxxx failed xx accurately xxxxx the xxxx involved xxxx mortgage-related xxxxxxxxx products xxxx but xxx the xxxxx the xxxxxxxxxxx also xxxxxx to xxxx its xxxx by xxx adjusting xxx regulatory xxxxxxxxx to xxxxxxx problems xx newly xxxxxxxxx financial xxxxxxx Compare xxx contrast xxx different xxxxxxxx of xxxxx demand xxxxxx The xxxxxxxxx theories xx money xxxxxx are xxxxxxxxx Quantity xxxxxx of xxxxx Keynes xxxxxxxxx Preference xxxxxx Friedman x Modern xxxxxxxx Theory xx Money xxxxxxxx theory xx money xx a xxxxxxxxx theory xxxx related xxx amount xx money xx the xxxxxxx to xxxxxxx income xx states xxx changes xx the xxxxxxxx of xxxxx tend xx affect xxx purchasing xxxxx of xxxxx inversely xxxx also xxxxx that xxxxxxxx a xxxxxx in xxx quantity xx money xxx eventually xxxxxx all xxxxxx it xxxx not xxx cannot xxxxxx all xxxxxx in xxx same xxxxxx to xxx same xxxxxx or xx the xxxx time xxxxxx Fisher xxxxxxxxx this xxxxxx with xxx following xxxxxxxx MV xx Where x is xxx quantity xx money xx money xxxxxx V xx velocity xxxxx serves xx the xxxx between xxxxx and xxxxxx P xx the xxxxx level x is xxxxxxxxx output xxxxxxxxx income xx is xxx total xxxxxx of xxxxxxxx on xxxxx goods xxx services xxxxxxxx in xxx economy xxx Keynes xxxxxxxxx preference xxxxxx rejects xxx notion xxxx velocity xx constant xxxx theory xxxxxxxxxx on xxxxx reasons xxxxxx why xxxxxx hold xxxxx a xxxxxxxxxxxx demand x precautionary xxxxxx c xxxxxxxxxxx demandLastly xxx Friedman x quantity xxxxxx of xxxxx stated xxxx the xxxxx demand xx influenced xx the xxxx factors xxxx influence xxx demand xxx any xxxxx The xxxxxx of xxxxx demand xxxxxxxxx that xxx demand xxx money xxxxxx be x function xx the xxxxxxxxx available xx individuals xxxxx wealth xxx the xxxxxxxx returns xx other xxxxxx relative xx the xxxxxxxx return xx money xxxxx the xxxxxxxxxxxx theory xx money x What xxxxxxx to xxxx GDP xx the xxxxx supply xx cut xx half xxxxxxxx is xxxxxx and xxxxxx are xxxxxx points xx the xxxxx supply xx cut xx half xx the xxxx run xxx price xxxxxx will xxxx cut xx half xxx it xxxxx have xxx impact xx the xxx However xx the xxxxx run xxx price xxxxx will xxxx down xxx so xxx real xxx The xxxxxx drop xx the xxxxx supply xxxxx that xxxxxx no xxxxxx hold xx much xxxx as xxxx want xxxx holdings xxxx be xxxxxxxxxxx and xxxxxx for xxxxxxxxxx else xxxxx drop xx other xxxxx aggregate xxxxxx falls xxxx the xxxxx level xxx dropped xx half xxxxxxx the xxxx value xx the xxxxx supply xx increase xxxx to xxx original xxxxx the xxxxxxxx imbalance xx rectified xxx aggregate xxxxxx recovers xx the xxxxxxxx however xxx economy xxxxxxx a xxxxxxxxx marked xx deflation xxx high xxxxxxxxxxxx b xxxx happens xx prices xx the xxxxx supply xxxxxxx under xxx classical xxxxx assuming xxxx velocity xx stable xxxxxx According xx quantity xxxxxx of xxxxx if xxx amount xx money xx an xxxxxxx doubles xxxxx levels xxxx double xxxxxxx inflation xxx percentage xxxx at xxxxx the xxxxx of xxxxxx is xxxxxx in xx economy xxxxxxx and xxxxxxxx the xxxxxxxxxxxx of xxx U x Central xxxx Federal xxxxxxx Bank xxx the xxxxxxxx Central xxxx Give xxx pros xxx cons xx an xxxxxxxxxxx central xxxx points xxxxxx overtime xxx independence xx the xxxxxxx Reserve xxx increased xxx European xxxxxxx bank xx considered xx one xx the xxxx independent xxxxx globally xx establishing xxx European xxxxxx of xxxxxxx Banks xxxxxxxxxxxx endowed xx with x high xxxxxx of xxxxxxxxxxxx from xxx governments xx the xxxxxx states xxx the xxxxxxxx Union xxxxx are xxxx structural xxxxxxxxxxx The xxxxxxx for xxx regional xxxxx in xxx Fed xxx established xx the xxxxx of xxxxxxxxx while xxx national xxxxxxx banks xx Europe xxx the xxxx who xxxxxxx the xxxxxxxxx Board xxxxx the xxxxxxxx voting xx the xxxxxxx FOMC xxxx to xxx seven-member xxxxx of xxxxxxxxx the xxxxxxxx central xxxxx in xxx ECB xxxxxxxxxxxx have x majority xx the xxxxxxxxx Council xxxxxxxxxxx to xxx FOMC xxxx up xx the xxxxxxxx central xxxx presidents xxx the xxxxxxx Executive xxxxx The xxx is xxxx involved xx the xxxxxxxxxxx and xxxxxxxxxx of xxxxxxxxx institutions xxxx the xxx is xx terms xx independence xxx Fed xxx more xxxx independence xxxxx the xxx is xxxx politically xxxxxxxxxxx The xxx is xxxx to xxxxxx both xxx unemployment xxx low xxxxxxxxx while xxx ECB xx mandated xx ensure xxxxx stability xxx ECB xx less xxxxxxxxxxx to xxxxxxxxx whims xxxxxxx since xxx change xx the xxx s xxxxxxxxx or xxxxxxxxxx would xxxxxxx a xxxxxxxxx change xx the xxxxxxxxxx Treaty xx all xxxxxxxxxxx highly xxxxxxxx whereas x change xx the xxx s xxxxxxxxxxxx and xxxxxxxxx could xx passed xx a xxxxxx majority xx Congress xxxx of xx independent xxxxxxx bank xxxxxxxxxxx central xxxx has xxxxxxxxxx objectives xxxxxxxxxxx don x Avoids xxxxxxxxx business xxxxx Less xxxxxx deficits xxxx be xxxxxxxxxxxx Cons xx an xxxxxxxxxxx central xxxx Fed xxx not xx accountable xxxxxxx coordination xx monetary xxx fiscal xxxxxx Fed xxx often xxxxxxxxx badly xxxxxxx the xxxxx of xxxxxxxx policy xxx how xxxx impact xxxxxxxx rates xxxxxxxxx markets xxxxxxx and xxx points xxx four xxxxx of xxxxxxxx policy xxx Open xxxxxx operations xxxx - xxx the xxxxxxxx and xxxx of xxxxxxxxxx in xxx open xxxxxx by x central xxxx This x key xxxx used xx the xxxxxxx Reserve xx the xxxxxxxxxxxxxx of xxxxxxxx policy xxx short-term xxxxxxxxx for xxxx market xxxxxxxxxx is xx adjust xxx supply xx reserve xxxxxxxx so xx to xxxx the xxxxxxx funds xxxx around xxx target xxxxxxxxxxx initially xxxxxxxxx inject xxxxx into xxxxxxx system xxx stimulate xxxxxx while xxxxx of xxxxxxxxxx do xxx opposite xxxxxxxx the xxxxxxx ratio x reserve xxxxxxxxxxxx are xxx age xx deposits xxxx institutions xxxx hold xx reserve xxx are xxx supposed xx lend xxxxxxxxxx the xxxxxxx ratios xxxxxxx the xxxxxx of xxxxxxxx that xxx be xxxxxxxxx by x given xxxxx of xxxxxxxx and xxxxxxx the xxxxx stock xxxxxxxxxx raising xxx cost xx credit xx the xxxxx hand xxxxxxxxxx the xxxxxxx ratio xxxxxx depositories xxxxxxxxx with xxxxxx reserves xxxxx can xxxxxx an xxxxxxxxx of xxxx credit xxx deposit xxxxxx and x decline xx interest xxxxx Changing xxx discount xxxx another xxxxx monetary xxxxxx implementation xxxx The xxxxxxxx is xxx rate xxxxxxx to xxxxxxxxxx banks xxx other xxxxxxxxxx institutions xx loans xxxx their xxxxxxx bank xxxxxxxxx higher xxxxxxxx rates xxxxxxxx that xxxx restrictive xxxxxxxx policies xxx in xxxxx while x lower xxxx might xxxxxx a xxxx restrictive xxxx The xxx of xxxx auction xxxxxxxx TAF xxxxxxx monetary xxxxxx program xxxx by xxx Federal xxxxxxx to xxxx increase xxxxxxxxx in xxx U x credit xxxxxxx As xxx TAF xxx Fed xxxxxxxx set xxxxxxx of xxxxxxxxxxxxxxxxx short-term xxxxx to xxxxxxxxxx institutions xxxxxxxxxxxx bid xxxx a xxxxxxx bid xxx at xx overnight xxxxxxx swap xxxx relating xx the xxxxxxxx of xxx loans xxx allows xxxxxxxxx institutions xx borrow xxxxx at x rate xxxx is xxxxx the xxxxxxxx rate xxxx transmission xxxxxxxxxx and xxxxxxx how xxxx impacts xxx financial xxxxxxx and xxx overall xxxxxxx points xxx transmission xxxxxxxx are xx follows xxxxxxxx rate xxxxxxx This xx the xxxx important xxxxxxxx mechanism x reduction xx long-term xxxxxxxx rates xxxxx to xxxxxx of xxxxxxxx investment xxx consumer xxxxxxxx on xxxxxxx goods xxxx leads xx a xxxxx in xxx demand xxxxx and xxxxxxxxxx reflects xx aggregate xxxxxx and xxxxxx Asset xxxxx channel xxxxxxxxxxxx monetary xxxxxx leads xx higher xxxxxx prices xxx makes xxxxxxxxxx more xxxxxxxxxx This xxxxx to xxxxxxxx in xxxxxx and xxxxxxxxxxx and xxxxxx the xxxxxxxxx demand xxxxx Exchange xxxx channel xxxx channel xxxxx through xxxx the xxxxxxxxx demand xxx supply xxxx On xxxxxx side xxxxxxxx rate xx lowered xx monetary xxxxxxxxx which xxxxxx about x real xxxxxxxxxxxx in xxxxxxxx currency xxxxxxx thus xxxx and xxxxxxxxxxxxxxxx get xxxxxxxx On xxx supply xxxx expansion xx monetary xxxxxx increases xxxxxx of xxxxxxx and xxxx raises xxxxxxxxx Monetary xxx credit xxxxxxxxxx Basic xxxxxx is xxxx the xxxxxxxx policy xxxx have xx effect xx price xxx output xxxxxxx credit xxxxxxxxx steps xx expansionary xxxxxxxx policy xxxxxxxxx firm x net xxxxx and xxxxxxx perceived xxxx risks xxxx makes xxxxx willing xx supply xxxx credit xxxx financing x rise xx aggregate xxxxxxMore Articles From Finance
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