For Professor Paul Only!!!

Question 1

Money and Banking

Class,
We’ve all been affected in one way or another by the mortgage meltdown, if not in declines in equity in our own homes, then by tightening of credit standards for borrowing money.  A lot of us benefited, though, by buying foreclosed (or greatly reduced in price) homes that perhaps were out of reach for us before. I really don’t want us to get into fault or blame here.  Let’s concentrate instead on the process of securitization, why it’s done, and what benefits it offers to loan originators and buyers of these packaged loans.  Can you see how securitization is essentially diversification, one of the few ways we have to manage risk? Moral hazard means, roughly, that the risk and reward aren’t going to the same person or institution, or that people take disproportionate risks if they’re not going to be the ones who incur the losses.  When someone starts to drive less carefully because they feel that their insurance company will accept the loss caused by their poor driving, this is an example of moral hazard. How did moral hazard play into the mortgage meltdown crisis, and how was this mess eventually resolved?  What role did Treasury play, and what role was taken by the Federal Reserve?  Why, especially, did borrowers apply for loans that they couldn’t hope to repay? What was TARP all about, and why was GM ‘bailed out’, rather than allowed to declare bankruptcy and just liquidate its assets?  What were the opportunity costs, either way?
Please don’t copy and paste anything into the threads.  Paraphrase instead.

 

Question 2

Monetary Policy and the Federal Reserve

Students,

 

The Federal Reserve System is this nation’s central bank, and has a variety of functions, including acting as the banker for the Treasury, supervising the banking system, examining banks and many more.

 

But the focus of this chapter is the money supply, and the way the Fed can influence it, through the tools it has in its arsenal. Specifically, the Fed controls the banking reserve requirement, the discount rate, it targets the overnight “Federal Funds” rate, but most important, it uses Open Market Operations. Open Market means just that, through a desk in the New York Fed the central bank can buy and sell government securities in the open market, just like any other market participant.

 

In doing so, when it sells securities, it exchanges securities, which are not cash, for cash, which obviously is cash, and so reduces the amount of cash in circulation. When it buys securities in the open market, it does just the opposite, exchanging cash for non-cash securities, and so increases the amount of money in circulation.

 

In this way the Fed can keep a close watch on the money supply. If the money supply is constant, then the other major factor influencing the price of money (the interest rate, ‘r’) is the demand for money. This demand can be influenced by a variety of things, like income and changing MPC, but for our purposes the major influence on demand is the price level. The higher prices are, the more transaction demand there is for cash, and so the higher ‘r’ will go, given a constant supply of money.

 

The Fed can overnight shift the supply curve of money through open market operations. Doing the same through other means takes quite a bit longer, and so those other tools (like the discount rate) are often used to signal the Fed’s intentions, rather than actually change the money supply. Google “moral suasion” and see what that’s all about.

 

After the next Fed FOMC meeting, changes to Fed policy will be announced. Based on what you know about the mortgage market today, what would be your best guess as to what steps the Fed will take after this meeting? Justify your answer. You might find the Beige Book useful for this exercise (there’s a recent one in Doc Sharing).

 

Please don’t copy and paste anything into the threads.  Use your own words.

      

Homework Assignment

Question: What is the “current macroeconomic situation” in the U.S. (e.g. is the U.S. economy currently concerned about unemployment, inflation, recession, etc.)? What fiscal policies and monetary policies would be appropriate at this time?

 

1. Write your individual answers to the questions listed above together in essay format (minimum of 300 words combined in APA style), using correct economic terms covered in the discussions. If you only write 300 words, you probably won’t be able to fully answer the questions. Use the APA Template in Doc Sharing as a guide. You will also find the grading rubric for this assignment in Doc Sharing.

 

2. Key concepts to include in your paper–data trends on unemployment, inflation, GDP growth, expansionary fiscal policy tools, FOMC, easy money policy tools and other terms from this class.

  

3. You must use at least one article. Note: The textbook is not an article and cannot be the only source for the assignments. Use the DeVry Library as a resource for finding your references.