1.  A hedger has taken a long position in the wheat futures market. What is the hedger’s position? What does it mean to take a “long position”? Describe the risk that is hedged in this transaction.

2.  What are the risks and rewards of writing and buying options? Are there any circumstances under which you would get involved? Why or why not? (Hint: Think of a case in which you own shares of the stock on which you are considering writing a call.)

3.  How does the existence of derivatives markets enhance an economy’s ability to grow?

4.  Explain how a shock in one country can be transmitted to other countries. List three ways this can happen and give an example of each.

5.  Answer the questions below.

a. / Suppose the Federal Reserve raises the federal funds rate in the United States but people believe that the inflation rate will rise by more than the Fed raised the federal funds rate. What do you expect to happen to the exchange rate? Explain why.
b. / As the exchange rate changes in the direction you determined in part a, what happens to the prices of imports and exports in the United States and in other countries? Explain.
c. / What happens to net exports in the United States and in other countries that trade with the United States in the short run? In the long run? Explain.

6. In 2005, exchange rates were 1.74 U.S. dollars per British pound, 112 Japanese yen per U.S. dollar, and 1.20 dollars per euro. In 2000, the exchange rates were 1.62 U.S. dollars per British pound, 102 Japanese yen per U.S. dollar, and 0.94 dollars per euro. For each currency, explain whether it appreciated or depreciated from 2000 to 2005 versus the other two currencies.

7. Suppose the only good traded between Mexico, the U.S., and Canada is chicken, which is produced by all three countries. If the cost of producing a pound of chicken is 5 pesos in Mexico, 1 U.S. dollar in the U.S., and 2 Canadian dollars in Canada, and if the law of one price holds, what are each of the exchange rates between the three countries?

8. In a recent year, a bank earned $36 million in interest on its assets of $523 million, it paid out $9 million in interest on its liabilities (excluding capital) of $470 million, and it paid its workers $21.5 million in total compensation. Calculate the bank's spread and its return on equity.

9. Prior to the passage of the McFadden Act in 1927, what characterized a national bank?

10. The Dodd-Frank Act of 2010 set a limit to prevent a bank merger if the new bank would increase its liabilities to more than 10 percent of national bank liabilities. Why?

11. Describe the moral hazard problem of deposit insurance.

12. Why isn't the right to vote at FOMC meetings considered to be very important within the Fed?

13. Why are the deliberations of the FOMC kept secret?

14. How does the Fed's lack of political accountability affect its performance?