In each issue of Wharton Magazine, we’ll test your knowledge with a question taken straight from an actual Wharton course exam. Submit the correct answer and you might just walk off with a great prize—a Wharton Executive Education program.
This issue’s Final Exam challenge comes from Jeremy Siegel, Wharton’s Russell E. Palmer Professor of Finance, who sent along this multi-faceted question from his Finance 602 final exam. You must answer all questions correctly to win the prize. Good luck!
The past year has witnessed the greatest upheavals in the credit markets since the Great Depression of the 1930s. The response of the Federal Reserve has been dramatic and Fed Chairman Bernanke has used everything in his power to avoid a repeat of the Great Depression.
Question No. 1: What major financial event of the 1930s have the Fed’s policies been designed to avoid?
Question No. 2: Name the two most important policies the Fed has undertaken to avoid this end.
Question No. 3: The Fed maintains it has some control over interest rates other than the Fed Funds rate that allows it to impact the economy. Name the two other interest rates the Fed is talking about here, and how can it impact them.
Question No. 1: The Fed’s policies are designed to avoid the collapse of the banking system and the loss of billions of dollars of depositors’ money.
Question No. 2: The Fed’s most important policies were guaranteeing and extending deposit insurance (and insuring money market funds), non-recourse lending to the banks and the provision of large quantities of excess reserves. (You must mention deposit insurance to get full credit.)
Question No. 3: The Fed has some control over long-term rates by buying long-term U.S. treasuries, and has some control over mortgage rates by buying mortgage-backed securities and lowering the spread with Treasuries. It can also buy packages of short-term securities, such as asset-back securities containing student loans, auto loans, credit card debt, etc.