Chapter 8 Questions and Problems
1. How do monetary policy actions made by the Federal Reserve impact interest rates?
a. Monetary policy actions made by the Federal Reserve impact interest rates to
create a better market and to control inflation rates. When the Federal Reserve
wants to slow down the market, strict monetary policy actions are taken to
increase interest rates, this allows assets and liabilities to decrease which then
allows loans and deposits to be refinanced.
2. How has the increased level of financial market integration affected interest rates?
a. The increased level of financial market integration affected interest rates by
increasing the interest rates and volatility. This increases the difficulty on the
Federal Reserve to manage the economic activity. Quick changes in interest rates
will then create interest rate risk for companies.
3. What is the repricing gap? In using this model to evaluate interest rate risk, what is
meant by rate sensitivity? On what financial performance variable does the repricing
model focus? Explain.
a. The repricing gap is the difference of value in assets and liabilities during a
certain period. If rates increase, asset value decreases while liability value
increases, creating a widened gap. Rate sensitivity exemplifies the time in which
repricing occurs. This model focuses on changes within the net interest income