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Explanation:
B is correct. The Federal Reserve generates three supervisor-derived macroeconomic scenarios, which are:
A is incorrect. One of the three scenarios reflects the consensus forecast among major bank economists. But none of the three is designed to mimic the Fed's specific forecast for the economy.
C is incorrect. This is not a scenario among the three Fed-designed scenarios.
D is incorrect. This is not a scenario among the three Fed-designed scenarios.
Learning Objective: Explain the use of scenario analysis in stress testing programs and capital planning.
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Q-18. A risk consultant is advising a US-based bank on the Dodd-Frank Act stress tests (DFAST), an annual stress test exercise conducted by the US Federal Reserve (the Fed) for mid-size US banks. The consultant points out that the Fed requires the banks to utilize three supervisor-derived macroeconomic scenarios during the DFAST stress test. Which of the following describes the conditions that one of the supervisor-derived scenarios is designed to simulate?
A
A set of economic variables reflecting the forecast by the Fed’s chief economist
B
Economic conditions that correspond to the average projections from a survey of economic forecasters
C
The worst market conditions experienced in a 10-day period during the previous year
D
An economic expansion with an associated rapid increase in demand for real estate investments and fixed-income instruments