Chapter 13 primary question: Summarize the history of the banking sector in the United States (from the Civil War to today). Be sure to comment on the chartering system, the legal environment/major legislative changes, and the degree to which banks are getting concentrated.
Chapter 14 primary question: Describe the safety net that has been established for the financial sector and the consequences (positive and negative) that this safety net creates.
Chapter 15 primary question: Summarize the “stability” objectives of central banks and describe how they meet those objectives.
Chapter 16 primary question: Describe the special role of the New York Federal Reserve Bank.
Chapter 16 secondary question: Describe the composition and role of the Federal Open Market Committee.
Chapter 17 primary question: Detail the relationship between the Monetary Base and the money supply mathematically (defining all the terms as necessary) as well as verbally. Be sure to use realistic assumptions regarding the desire of people to hold cash and the desire of banks to hold excess reserves.
Chapter 17 secondary question: Summarize the assets in the Federal Reserve’s Holdings (making sure to distinguish between the traditional holdings and those that are not traditionally held.)
Chapter 18 primary question: Explain inflation targeting and its more specific application, the Taylor Rule.
example of a really good answer: Distinguish between idiosyncratic and systemic risk.
Idiosyncratic risk is the risk that results from owning a specific security in the form of a stock, bond, CD, etc. It is the risk you think of when you think about losing money investing in a specific thing. For example, if you bought a share of AMZN, and then earnings came out and they were disappointing and the stock price falls resulting in you losing money, you just suffered the consequences of idiosyncratic risk. You can diversify against idiosyncratic risk by purchasing many different securities so that when one does poorly, it doesnt affect you as much because the others are likely to not be suffering the same problems.
Systemic risk, on the other hand, is risk that affects many securities at once. These are often geopolitical events that result in the market as a whole being affected. For example, a highly infectious virus might originate somewhere in the world and start to spread aggressively causing economic slowdowns/lockdowns that in turn affect the performance of many securities at once. These sorts of things are generally out of the hands of individual investors, and cannot be so easily diversified against.
You might look at it this way. Youre on a ship in the middle of the ocean. There are things you can do to make sure you dont fall off of the ship. You can avoid the top deck, wear a restraint of some sort, make sure people are keeping track of you, etc.. Here, you are doing what you can as an individual to manage the idiosyncratic risk of falling of the ship. However, if the ship is sinking, that might be out of your hands. Now you have the systemic risk (the sinking ship) that you cant do much about. This will affect all of the passengers (securities) at once, and diversification (risk management) will not have helped that much.
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