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Chapter 15: Q. 15.3- Learning Objectives. (page 322)
Describe the basic structure and functions of the Federal Reserve System.
The Fed is split into two parts: A central authority, the Board of Governors, based in Washington, D.C., and a regional authority, the Fed System Banks.
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Determine the maximum potential extent that the money supply will change following a Federal Reserve monetary policy action.
Match each of the rationales for financial intermediation listed below with at least one of the following financial intermediaries: insurance company, pension fund, savings bank. Fxplain your choices.
a. Adverse selection
b. Moral hazard
c. Lower management costs generated by larger scale
Take a look at the map of the locations of the Federal Reserve districts and their headquarters in Figure. Today, the U.S. population is centered just west of the Mississippi River-that is, about half of the population is cither to the west or the east of a line running roughly just west of this river. Can you reconcile the current locations of Fed districts and banks with this fact? Why do you suppose the Fed has its current geographic structure?
Draw an empty bank balance sheet, with the heading "Assets" on the left and the heading "Liabilities" on the right. Then place the following items on the proper side of the balance sheet.
a. Borrowings from another bank in the interbank loans market
b. Deposits this bank holds in an account with another private bank
c. U.S. Treasury bonds
d. Small-denomination time deposits
e. Mortgage loans to household customers
f. Money market deposit accounts
Identify whether each of the following events poses an adverse selection problem or a moral hazard problem in financial markets.
a. A manager of a savings and loan association responds to reports of a likely increase in federal deposit insurance coverage. She directs loan officers to extend mortgage loans to less creditworthy borrowers.
b. A loan applicant does not mention that a legal judgment in his divorce case will require him to make alimony payments to his ex-wife.
c. An individual who was recently approved for a loan to start a new business decides to use some of the funds to take a Hawaiian vacation.
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