ECON 331: Money and Financial Institutions Assignment #8
Spring 2021 This assignment is due via Blackboard at 12:00pm (noon) on Friday April 30. For all questions, the process of how you arrive at an answer is as important as the answer itself. For full credit, you are therefore required to show all steps and work, clearly label graphs, and fully explain any answers that ask for an explanation. You can type your answers or write them by hand and scan them using the camera on your phone/tablet. In either case, submit the file as a single pdf document. If you type your answers, it is important to save as a pdf before submitting – equations often get jumbled between computers. 1. The financial crisis:
a. Describe the process of ‘securitization’ in your own words. How was securitization designed to
spread final default risk (from the perspective of investors)? What assumption about the underlying mortgage risks must hold for mortgage-backed securities to spread risk?
b. During the credit boom leading up to the 2008 financial crisis, many economic actors had incentives to focus on volume (i.e. making larger quantities of loans). What are three ways in which the system incentivized a greater volume of loans in the years leading up to the crisis?
2. Classify each of the following transactions as an asset, a liability or either for the Federal Reserve,
banks, and depositors. a. You get a $10,000 loan from the bank to buy an automobile. b. You deposit $400 into your checking account at the local bank. c. The Fed provides an emergency loan to a bank for $1,000,000. d. A bank borrows $500,000 in overnight loans from another bank.
3. Open market operations:
a. If the Fed buys $2 million of bonds from Number 1 Bank, what happens to reserve and the
monetary base? Use T-accounts (for the Fed and Number 1 Bank), and explain your answer. b. If the Fed sells $2 million of bonds to Number 1 Bank, what happens to reserve and the monetary
base? Use T-accounts (for the Fed and Number 1 Bank), and explain your answer.