Homework 1_Econ 304_Fall 2011(1)

Homework 1_Econ 304_Fall 2011(1) - University of...

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1 University of Nevada-Reno College of Business-Department of Economics Econ 304: Money and Banking Fall 2011 Professor Federico Guerrero guerrero@unr.edu 784-6864 Office 318C-Ansari Building/MS0030 Homework 1: Financial crisis, asset bubbles Reading 1: The Origins of Financial Crises (70 points) This reading is based on chapters 4 and 5 of the book “The Origins of Financial Crises” written by Dr. George Cooper and published by Vintage in December 2008. Dr. Cooper holds a PhD from Durham University and is a principal of Alignment Investors. In the past he was a fund manager at Goldman Sachs and a strategist at both Deutsche Bank and J.P. Morgan). The Economist magazine describes the book “The Origins of Financial Crisis” as a “must-read”. So, please read the attached pdf file and then address the following questions. 1) Explain the idea of collateralized lending. Why do banks use it? What downside does it have and what solution have bankers found to the problem of under-collateralized loans? Explain “mark-to-market accounting” 2) Analyze the reaction of a bank giving collateralized loans to a fall in the price of collateralized assets and explain the effect of this action on the market prices of the implied assets. Does the bank action reinforce the initial price fall or counteract it? Compare with a similar price fall in the market for goods (Cooper, chapter 4); how does the baker react to a fall in the price of bread induced by a fall in demand? 3) Use supply and demand graphs to show what happens in the market for goods (say, the market for bread) when the supply curve is upward-sloping, demand is downward- sloping and the price is above equilibrium. 4) Now use demand and supply curves to study the market for assets when the demand
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Homework 1_Econ 304_Fall 2011(1) - University of...

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