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1. Describe whether each of the following is an example of adverse selection or moral hazard, and explain why.

a. Those who are covered by life insurance are more likely to go skydiving.

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b. Those who like to go skydiving are more likely to sign up for life insurance.

c. I lent my brother $5000 for his kite company and he took a trip to Las Vegas.

d. The riskiest borrowers are more likely to apply for bank loans.

e. Neighborhoods with high levels of student housing and low levels of owner-occupied housing tend to deteriorate more quickly than other neighborhoods.

f.Those with health insurance tend to go to the doctor’s office more often.

g.Sick people are more likely to sign up for health insurance.

2. To find the current balance sheet for all commercial banks in the United States, go to the following website:
http://www.federalreserve.gov/releases/h8/current/…

Navigation instructions are included in Class 9 notes if the link is not working.

After looking at the balance sheet, please answer the following questions (Use pages 2 and 3, seasonally adjusted data):

a. What are the major categories of assets shown? What are the major categories of liabilities shown?

b. What percentage of banks’ assets consist of securities? (Use the latest week.)
(Compare lines 2 and 33 on pages 2 and 3)

c. What percentage of banks’ assets consist of loans and leases? (Use the latest week.)
(Compare lines 9 and 33 on pages 2 and 3)

d. What percentage of banks’ liabilities consist of deposits? (Use the latest week.)
(Compare lines 34 and 40 on page 3)

3. Suppose that FirstBank has the following simplified balance sheet. Assume that all other components of the balance sheet are equal to zero. (numbers in millions)

Assets Liabilities

reserves 1180 demand deposits 10,000

loans 8820

10,000 10,000

Assume that the reserve ratio is r = .10 (10%).

a. Does FirstBank have excess reserves? If so, of how much?

b. Suppose that FirstBank desires to hold no excess reserves, so it loans out its excess reserves to borrowers. How does the balance sheet change? Either use T-accounts or a new balance sheet to show.

c. Starting back in a), what is the maximum deposit outflow that FirstBank can sustain without affecting other parts of the balance sheet?

4. Using T-accounts for SecondBank, please show the initial effects of the following events.Use separate T-accounts for each question.

a. A cash deposit into a saving account of $4000.

b. A $2000 check is deposited into a checking account.

c. An open market purchase of $100 million. The Fed buys $100 million worth of securities from SecondBank.

5.To view the third segment of Bernanke’s lectures at George Washington University, visit the following web site:

http://www.federalreserve.gov/aboutthefed/discussi…

After viewing the lecture, briefly describe the ways in which the Federal Reserve responded to the financial crisis.

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