Question 1 – Word limit: 1000
Answer the following question.
a. Explain the consequences of costs faced by investors in monitoring the projects that they finance. (10 points)
b. Do you think that government regulations can fully eliminate this problem? Discuss by providing real life examples. (10 points)
c. Do you think that similar consequences can also emerge in the banking sector as a result of depositors’ inability to monitor the actions of the banks? Fully explain your reasons. (15 points)
d. Discuss how the improvements in information technologies can alleviate the consequences of monitoring costs in finance. (15 points)
Question 2 – Word limit: 1000
Answer the following question:
a. Suppose that you are an economist working in a central bank. You observe that yield curves for government securities in your country have a negative slope. Discuss in detail how this information can be used by policy makers at the central bank. (15 points)
b. Suppose that you also observe a sharp increase in the difference between the yields on the BAA rated corporate bonds and AAA rated corporate bonds. What does this suggest about the possible lending behavior of commercial banks? (15 points)
c. Given the scenarios of questions 2.a and 2.b above, describe in as much detail as possible what policy recommendations you would make to the monetary policy committee. (20 points)
You must answer 1 question, using a separate document for each question (all questions of equal
weighting/the weighting is noted against the question/sub question).
Question 3 – Word limit: 1000
Answer the following questions.
(Total of 50 points)
1. Drawing on our in-class discussion of structural risk, describe the sources of bank failures, and discuss how failures at the individual bank level can turn into a risk of systemwide failure? (10 points)
2. How can the central bank and the government respond to the structural risks that you explained in part 3.1? In your answer, explain the resolution tools in detail and discuss the rationale behind such interventions by the government and central bank? (25 points)
3. Considering your discussions in parts 3.1 and 3.2 above, what are the lessons to be learnt for governments and for central banks from the financial crisis of 2007-2008? In your answer, also discuss the current regulations in the banking sector and why they are important
for the crisis time resolution. (15 points)
Question 4 – Word limit: 1000
Answer following questions
(Total of 50 points)
4.1 How do financial crises differ across advanced economies and emerging economies? In your answer,
i. provide a separate discussion on how financial crises occur in advanced and emerging economies by referring to at least one example for each part of your discussion (10 points)
ii. explain in detail how information asymmetries play a key role during crisis times. (10 points)
4.2 Considering the differences in the origins of financial crises in advanced and emerging economies, how do the banking risks differ across advanced and emerging economies? In your answer, discuss the banking risks separately and explain their role in financial crisis for both advanced and emerging economies. (15 points)
4.3. In light of your discussions in parts (4.1) and (4.2) above, what are the lessons to be learnt for governments and for central banks from the financial crisis of 2007-2008 and how do they differ for advanced and emerging economies? (15 points)
There are a few key ways that financial crises can differ across economies. One key difference is the level of development of the economy. Advanced economies tend to have more developed financial systems, which can make them more susceptible to crisis when things go wrong. In contrast, emerging economies often have less developed financial systems, and may be less exposed to global shocks.
Another key difference is the openness of the economy. Advanced economies are typically more open to trade and investment, which can make them more vulnerable to global shocks. Emerging economies, on the other hand, may be more closed off, and thus less affected by global events.
Finally, the level of regulation in an economy can also play a role in how crises play out. Advanced economies typically have more stringent regulation in place, while emerging economies may have less regulation or be less effective in enforcing it. This can lead to different outcomes during a crisis.
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