The Iowa Electronic Markets
Predicting Federal Reserve
Policy
Evaluation Questions
Predicting Federal Reserve Policy
Short Answer Sample Questions
1. The figure below provides hypothetical information from the FedPolicy market of the Iowa
Electronic Markets. Use this information to answer the questions below.
Trader: XXXXX
US$: X.XX
Iowa Electronic Markets
11/22/99 2:50:20 PM
FedPolicy
Contract
LastPrice
FRup1299
0.402
FRsame1299
0.651
FRdown1299
0.003
a.
BestBid
BestAsk
0.330
0.410
0.720
0.020
0.720
0.003
How is the "winning" contract determined in this market on the day the market closes?
b. If you wanted to obtain a share of the Frup1299 contract immediately at the cheapest price,
how would you do it, given the information above? How much would you have to pay?
Explain.
2. Note: This problem would need to be updated to include the most recent FedPolicy market
information. The figures below are provided as an illustration.
The figure below provides information from the current FedPolicy market of the Iowa
Electronic Markets. Use this information to answer the questions below.
Trader: XXXXX
Iowa Electronic Markets
US$: X.XX
11/22/99 2:50:20 PM
Contract
LastPrice
FRup1299
0.052
FRsame1299
0.881
FRdown1299
0.003
FedPolicy
BestBid
BestAsk
0.052
0.099
0.940
0.020
0.940
0.003
The contract descriptions are provided below:
Name
FRup1299
Description
$1.00 if the fed-funds rate target rises on 12/21/99; $0
otherwise
FRsame1299 $1.00 if the fed-funds rate target remains unchanged on
12/21/99; $0 otherwise
FRdown1299 $1.00 if the fed-funds rate target falls on 12/21/99; $0
otherwise
a. According to this information, what are IEM market participants expecting the Federal
Reserve to do at its meeting in 12/99? Explain how you came to this conclusion. Why do
IEM market participants have these expectations? Provide at least two reasons.
b. What type of new information about the economy could cause these bid and ask prices to
change between now and the end of December (when these contracts liquidate)? Give an
example and explain what effect this information would have on the bid and ask prices in
this market and why.
Multiple-Choice Sample Questions
1. The decision-making arm of the Federal Reserve System is the
a. Congressional Budget Office.
b. Bureau of Economic Analysis.
c. Federal Open Market Committee.
d. Office of Management and Budget.
2. The actions of the Federal Reserve are often guided by the
a. economic conditions of the country.
b. Senate Banking Committee.
c. the Budget Director in the office of the Presidency.
d. the political party in power.
3. The Federal Reserve directly controls the
a. unemployment rate.
b. AAA Corporate bond rate.
c. Government Bond Rate.
d. Federal Funds Rate.
4. The Federal Reserve is responsible for the conduct of
a.
b.
c.
d.
fiscal policy.
monetary policy.
tax policy.
supply-side policy.
5. To increase spending in the economy, the Federal Open Market Committee is most likely to
a. buy securities from the public through open market operations.
b. sell securities to the public through open market operations.
c. cut the tax rate.
d. increase the federal funds rate.
6. To slow down the economy, the Federal Open Market Committee is most likely to
a. buy securities from the public through open market operations.
b. sell securities to the public through open market operations.
c. cut the tax rate.
d. reduce the federal funds rate.
7. If you expect the Federal Reserve to raise the interest rate, what type of contract would you
be most likely to buy from the IEM FedPolicy Market?
a. FRupMMYY
b. FRdownMMYY
c. FRsameMMYY
d. A market “bundle”
8. If you expect the Federal Reserve to reduce the interest rate, what type of contract would you
be most likely to buy from the IEM FedPolicy Market?
a. FRupMMYY
b. FRdownMMYY
c. FRsameMMYY
d. A market “bundle”
9. How many times does the Federal Open Market Committee meet each year?
a. once a year
b. twice a year
c. four times
d. about eight times