ECON 2408 Money and Banking
Practice Questions – Short Answer
The spread between the interest rates on Baa corporate bonds and Canada bonds was
very large during the Great Depression years 1930-1933. Explain this difference using
the bond supply and demand analysis.
If a higher inflation is expected, what would you expect to happen to the shape of the
yield curve? Why?
Explain how the use of collateral in financial markets can lessen the effects of
asymmetric information in the form of adverse selection.
Calgary Finance Bank has the following balance sheet:
The desired reserves ratio is 10%. Assuming that Calgary Finance Bank suffers a $10
million deposit outflow, describe how this withdrawal may affect the bank and its
balance sheet. What problem will this create and how can it be resolved?
Fraser Valley Bank has balance sheet as below:
The manager estimates the average duration of assets to be 2.5 years, and average
duration of liabilities to be 1.5 years. If interest rate rises from 2% to 3%, what will
happen to this bank’s net worth? How should the manager alter the duration of
liabilities to immunize the bank’s net worth from interest-rate risk?
(6) a) NewBank started its first day of operations with $6 million in capital. A total of $100
million in chequable deposits is received. The bank makes a $25 million commercial loan
and lends another $25 million in mortgage loans. If desired reserves are 8%, what does the
bank balance sheet look like?
b) NewBank decides to invest $45 million in 30-day T-bills. The T-bills are currently