Finance 462

Final Exam Outline

            The final exam is non-cumulative, and will therefore only cover the last few topics (Banking regulation/evolution, profit maximization and loan rates, money & output, and monetary policy).  You should be still familiar with the earlier material, but you don’t need to worry about the details. (E.g. you don’t have to calculate duration, but you should know what it is). 

Part I:  Commercial Banking

            Bankers actually face a pretty difficult problem.  You should be able to work through the basics.  Further, you should be familiar with the evolution of banking over the years. 

·        The basic strategies for banking regulation and the motivations

·       How informational problems are dealt with in banking

·        The mechanics behind bank profit maximization

·        Assessing interest rate risk in the banking sector

Part II: Money Demand/Supply and Money Market Equilibrium

            Short term interest rates are determined in the money market.  Money demand depends on how households allocate income between various assets (as interest rates rise, house allocate more money in savings accounts – therefore, M1 money demand falls) while money supply is determined by the Fed and commercial banks. The interest rates is determined through the equilibrium condition that demand equals supply. You should be familiar with:

·        Factors affecting money demand

·        Monetary Aggregates (M0, M1, M2)

·        How the Fed influences the money supply

·        How commercial Banks influence the money supply

·        How money demand/supply determine the equilibrium interest rate

Part III:  The Conduct of Monetary Policy

              You should understand how changes in the money supply influence the economy (increases in the money supply lower interest rates and raise output in the short run, but increase prices in the long run).  Further, you should understand the various dimensions that make up a monetary policy.  Specifically, you should know:

·        How money affects the economy in the short run/long run

·        Interest rate targets vs. money targets

·        Rules vs. Discretion

·        Implementation of Policy (i.e., given a particular policy, how should the fed respond to various economic shocks).