Chapter 15
What is the basic structure of the Federal Reserve Bank?
There are 12 district banks, a Board of Governors and a Federal Open Market Committee.
Which of the following does not describe some of the functions of the Federal Reserve Bank?
Acts as a medium of exchange, a unit of accounting, a store of value and a standard of deferred payment.
An example of a fiduciary monetary system is
American one-dollar bills.
Which of the following events caused Congress to begin seriously looking at setting up the Federal Reserve system?
Some severe banking crises at the end of the 19th century and early 20th century.
___________ deposits are any deposits in financial institutions from which the deposit owner can transfer funds using a debit card or checks.
TRANSACTIONS
Individuals purchasing new bonds issued by a corporation is an example of direct finance for the corporation.
TRUE
Suppose all banks have zero excess reserves. The Fed buys bonds for $1 million and a bond dealer deposits the check in his or her bank. The required reserve ratio is 10 percent. The bank loans out the maximum it is allowed to a local business. The business writes a check for the full amount for supplies, which is then deposited in another bank. The largest loan the second bank can make is:
The largest loan the second bank can make is $810,000 =1mx(1-.10) =900000x(1-.10)
Which of the following statements is incorrect?
There are a total of 25 Federal Reserve district banks.
Which of the following statements is true when considering national banking structures around the world?
U.S. businesses only obtain approximately 30% of their funds from bank loans compared to 65% for European firms.
Money may serve as a "standard of value" that allows for comparison of the relative worth of various goods and services. What function of money does this describe?
Unit of accounting.
When a temporarily illiquid bank which is otherwise in good financial condition borrows money from the Fed in an attempt to prevent a loss of confidence in the bank or in other banks, this is an example of the Fed
acting as the lender of last resort.
A loan applicant does not mention that a legal judgment in his divorce case will require him to make alimony payments to his ex-wife. This situation poses
adverse selection problem
Required reserves
are the minimum amount of legal reserves that a depository institution must have to back up its checkable deposits.
Open market operations
are the purchase and sale of existing U.S. government securities by the Federal Reserve.
During the 1945-1946 Hungarian hyperinflation, when the rate of inflation reached 41.9 quadrillion percent per month, the Hungarian government discovered that the real value of its tax receipts was falling dramatically. To keep real tax revenues more stable, it created a good called a "tax pengö", in which all bank deposits were denominated for purposes of taxation. Nevertheless, payments for goods and services were made only in terms of the regular Hungarian currency, whose value tended to fall rapidly even though the value of a tax pengö remained stable. Prices were also quoted only in terms of the regular currency. Lenders, however, began denominating loan payments in terms of tax pengös. The tax pengö functioned as money in Hungary in 1945 and 1946
as a store value
An auto loan to an individual is an __________ to a commercial bank.
asset
The bank's required reserve is an ________ to a commercial bank.
asset
The functions of the Federal Reserve System are to supply fiduciary ________, provide payment-clearing services, hold depository institution __________, act as the government's fiscal agent, supervise depository institutions, regulate the supply of money, intervene in foreign currency markets, and act as the ___________.
currency/ reserves/lender of last resort
Obviously financial intermediaries need to collect money from a variety of sources so they can redirect it where it can be used efficiently. The primary source of funds for a financial intermediary are known as its
liabilities.
Funds borrowed from a credit union in the federal funds market is a ________ to a commercial bank.
liability
Money is a highly _______ asset because it can be disposed of with low transaction costs and with relative certainty as to its value.
liquid
When sellers accept money as payment in market transactions, money is serving as a
medium of exchange.
Until 1946, residents of the island of Yap used large doughnut-shaped stones as financial assets. Although prices of goods and services were not quoted in terms of the stones, the stones were often used in exchange for particularly large purchases, such as payments for livestock. To make the transaction, several individuals would place a large stick through a stone's center and carry it to its new owner. A stone was difficult for any one person to steal, so an owner typically would lean it against the side of his or her home as a sign to others of accumulated purchasing power that would hold value for later use in exchange. Loans would often be repaid using the stones. These stones performed the following functions of money :
medium of exchange, store of value, and standard of deferred payment functions of money.
Scott is seeking a loan from his bank for a home improvement project. He receives the loan and then decides to take a special vacation opportunity to Las Vegas and enter a gambling tournament. The bank, as a financial intermediary, is facing a problem of
moral hazard
A manager of a savings and loan association responds to reports of a likely increase in federal deposit insurance coverage. She directs loan officers to extend mortgage loans to less creditworthy borrowers. This situation poses
moral hazard problem
An individual who was recently approved for a loan to start a new business decides to use some of the funds to take a Hawaiian vacation. This situation poses
moral hazard problem
The possibility that a borrower might engage in riskier behavior after a loan has been obtained is known as
moral hazard.
A currency will cease to function as money if
people think that they will not be able to use it to exchange for goods and services later.
Money is accepted in exchange for goods and services because people have confidence that it can later be exchanged for other goods and services. In addition, money has _____ value.
predictable
On a bank's balance sheet, ________ are assets and ________ are liabilities.
reserves and loans; transactions deposits
The Fed acts like a government agency when it
supplies the economy with fiduciary currency/ supervises depository institutions
When the Fed acts as the lender of the "last resort" it means that
the Fed lends to depository institutions it deems should not fail.
Due to the Gramm-Leach-Bliley Act of 1999
the US government allowed commercial banks to own stock and sell insurance policies.
The opportunity cost of money holdings is
the alternative interest income foregone from not holding some other asset.
The value of the U.S. dollar is based on
the public's faith that the dollar can be exchanged for goods and services.
When money is used as a standard of value that allows people to compare the relative worth of various goods and services, it is serving as a
unit of accounting.
The required reserve ratio is 0.20. If the Federal Reserve buys $1,000,000 worth of bonds from a bond dealer who has her account at Bank XYZ above and she deposits the entire $1,000,000 into a checking account at Bank XYZ, what will be the new required and excess reserves for this bank (assume no new loans are made)? (Remember that required reserves are found by applying the required reserve ratio to the amount of total checkable deposits.) Total checkable deposits at Bank XYZ grow by _________ because of this deposit from the broker.
$1000000
If the Fed engages in an open market sale with a bond dealer, the bond dealer's bank's transactions deposits liabilities will ________ and the money supply will ________.
decrease; decrease
The fraction of transactions deposit liabilities that depository institutions hold as reserves is the
reserve ratio
The Federal Deposit Insurance Corporation (FDIC)
-creates moral hazard problems in that big banks take on more risk knowing the FDIC will consider them "too big to fail." -was created in 1933 to prevent bank runs that had been plaguing the economy during the Great Depression.. -assures depositors that their deposits will be fully recoverable (up to a maximum of $250,000 per depositor per institution) regardless of how serious a bank's financial situation may be. -All of the above.
Assume that the required reserve ratio is 8 percent. What is the total possible expansion of the money supply after a $1 million bond purchase by the Fed?
12500000
Bank XYZ is now required to hold an additional $_________ as required reserves due to this $1,000,000 deposit into a checking account.
200000/ 800000
A bank's only liabilities are $14 million in transactions deposits. The bank currently meets its reserve requirement, and it holds no excess reserves. The required reserve ratio is 0.08. Assuming that its only assets are legal reserves, loans, and securities, calculate the value of loans and securities held by the bank.
= (1-.08) *14
potential money multiplier
= 1/ RESERVE RATIO
M1
= Currency + Transactions/CHECKABLE deposits + Traveler's checks.
EXCESS RESERVES = LOANS TO ITS CUSTOMERS
= TOTAL RESERVES - REQUIRED RESERVES
U.S. Treasury bills are
ASSETS
Which of the following assets is the most liquid?
A traveler's check.
A $1,000 balance in a transactions deposit at a mutual savings bank. This item is counted in
BOTH
A $20 Federal Reserve note is counted in
BOTH
A $50 traveler's check. This item is counted in
BOTH
What are the features of federal deposit insurance?
Depository institutions' premiums are based on the value of their deposits with the funds being held for use in the case of a failed bank so that depositors can be reimbursed.
In the United States, the dollar volume of payments using checks exceeds the volume using debit cards.
FALSE
To limit the fallout from systemwide failures and bank runs, Congress created the ______________ in 1933. Since the advent, there have been no true bank runs at federally insured banks.
Federal Deposit Insurance Corporation
Which of the following is a situation of moral hazard created by the existence of the FDIC?
Financial institutions, with FDIC protection, use depositors' funds in riskier investment projects.
Borrowings from a Federal Reserve district bank are
LIABILITIES
Transactions deposits are
LIABILITIES
Liabilities refer to amounts owed, and assets refer to amounts owned.
TRUE
Which of the following is a true statement?
The FDIC has reduced the number of depositors who have lost savings, but in doing so, has inadvertently encouraged banks to make riskier loans.
If you live in Atlanta, Georgia, and you purchase a computer in Los Angeles, California, while there on vacation, which of the following paths would your check take before it finally clears?
The check goes from the computer store's bank to the Federal Reserve bank in San Francisco, then to the Federal Reserve bank in Atlanta, and then to your bank.
Which of the following is a major reason why financial intermediaries, such as banks, exist?
The existence of asymmetric information makes financial intermediaries more efficient in channelling money to its most efficient use.
Which of the following statements is true when considering liquidity?
The most liquid assets typically earn no or little interest.
The Fed sells $10,000,000 in bonds to Jim, a bond dealer who pays for the bonds with a check drawn on his bank. Assume a 55% required reserve ratio. Which of the following statements correctly records this transaction at Jim's bank with respect to the bank's reserves?
The bank's reserves will go down by $10,000,000.
The Fed sells $30 comma 000 comma 30,000,000 in bonds to Jim, a bond dealer who pays for the bonds with a check drawn on his bank. Assume a 1010% required reserve ratio. Which of the following statements correctly records this transaction at Jim's bank with respect to the bank's reserves?
The bank's reserves will go down by $30,000,000.
All deposits in U.S. banks are insured by the Federal Deposit Insurance Corporation.
True
Federal deposit insurance currently covers up to $250,000 per depositor per institution.
True
Since 2010, the FDIC has been able to assess premium rates on banks' total liabilities.
True
The FDIC possesses regulatory powers to offset risk-taking temptations to depository institution managers.
True
An individual with several children who has just learned that she has lung cancer applies for life insurance but fails to report this recent medical diagnosis. This situation poses
an adverse selection problem
A state-chartered financial institution exempt from laws requiring it to have federal deposit insurance decides to apply for deposit insurance after experiencing severe financial problems that may bankrupt the institution. This situation poses
an adverse selection problem
The M2 measurement of the money supply includes all of M1 plus several other highly liquid assets. Which of the following is not one of those assets which is included in M2?
credit card balances
Money market mutual funds combine the savings of many individuals, in order to
lower management costs
__________ of depository institutions consist of their vault cash and deposits that they hold with ________ district banks.
reserves/ federal reserve
Money is the least liquid asset.
false
Modern nations have ______ monetary systemslong dash—national currencies are not convertible into a fixed quantity of gold or silver.
fiduciary
The _______________is equal to 1 divided by the reserve ratio.
potential money multiplier
Federal insurance of bank deposits insulates depositors from risks, so depositors are ___________ concerned about riskier investment strategies by depository institutions. Thus, bank managers have an incentive to invest in _________ assets to make _________ rates of return.
less/ riskier/ higher
When money is used as a means of settling debts maturing in the future, it is serving as a
standard of deferred payment.
When money is set aside to be used for future purchases, it is serving as a
store of value.
Financial intermediaries
transfer funds from savers to investors.
change in total deposits
= potential money multiplier x federal reserve purchases
required reserved
= required reserved ratio x deposit amount
total assets
= required reserves + loans + securities
total assets
= total reserves + loans + securities + other assets
Financial intermediaries specialize in tackling problems of ______________ information. They address the ________________ problem by carefully reviewing the credit-worthiness of loan applicants, and they deal with the ____________ problem by monitoring borrowers after they receive loans. Many financial intermediaries also take advantage of cost reductions arising from the centralized management of funds pooled from the savings of many individuals.
ASYMMETRIC/ADVERSE SELECTION/ MORAL HAZARD
____________ intermediaries, including depository institutions such as commercial banks and savings institutions, insurance companies, mutual funds, and pension funds, transfer funds from ultimate lenders (savers) to ultimate borrowers.
FINANCIAL
Because of the FDIC, the federal government is not exposed to asymmetric information problems.
False
Paul needs to decide between buying a new home gym for $1,800 or being able to go on a Canadian vacation for $1,000 and still having enough left over to buy a new set of free weights for $800. Paul opts for the new set of free weights and the Canadian vacation. Paul has used money in what ways in making his decision?
Medium of exchange and a standard unit of account.
A $100,000 certificate of deposit issued by a New York bank. This item is counted in
NEITHER
Which of the following statements is true when considering central banks?
The number of central banks in the world grew enormously after the Great Depression.
Which of the following statements is true concerning the potential money multiplier?
The required reserve ratio and the potential money multiplier are inversely related.
A corporation that recently obtained a loan from several banks to finance installation of a new computer network instead directs some of the funds to executive bonuses. This situation poses
a moral hazard problem
Commercial banks screen their borrowers before a loan can be approved, in order to
limit adverse selection
Stockbrokers monitor the companies after investing funds in them, in order to
limit moral hazard
Money is defined by its functions, which are as a __________ of __________, __________ of __________, __________ of __________, and __________ of __________ __________.
medium of exchange; unit of accounting; store of value; and standard of deferred payment.
On the one hand, the Federal Deposit Insurance Reform Act of 2005 expanded the __________ risks associated with deposit insurance by increasing limits for insured retirement deposits and indexing limits for other deposits to inflation. On the other hand, the law granted the FDIC greater discretion to assess risk-based deposit insurance ______ intended to restrain ______ risks.
moral hazard/ premiums/ moral hazard
Excess reserves
-are zero if required reserves equal legal reserves. -are negative if legal reserves are not sufficient to cover required reserves. -are minimized by profit-maximizing banks since they generate no income. -All of the above.
Ancient goldsmiths are credited with
-creating paper notes that could purchase goods and services. -the creation of the fraction reserve banking system. -developing deposit slips for gold and silver. -All of the above.
A credit card is not considered money because
-it is not a unit of accounting. -it simply defers rather than completes transactions that ultimately involve the use of money. -it is not a store of value.. -All of the above.
The potential money multiplier is equal to
1 divided by the reserve ratio.
M2
= M1 + Savings deposits + Small-denominations time deposits + Money market deposit accounts + Noninstitution money market mutual funds.
Which of the following assets is the least liquid?
A house.
Deposits with a Federal Reserve district bank are
ASSETS
Loans to a private company are
ASSETS
Loans to other banks in the federal funds market are
ASSETS
Vault cash is
ASSETS
Which of the following statements is true concerning a fractional reserve banking system?
Banks maintain a fraction of deposits on hand to meet the daily needs of their customers.
The central bank in the United States is the ____________, which was established on December 13, 1913.
Federal Reserve System
Which of the following is not a duty of the a central bank?
Guarantee the savings of its citizens.
Which of the functions of the Federal Reserve is appropriately matched with its correct institution?
Holds reserve balances for depository institutions; The Federal Reserve Bank.
The money supply can be defined in a variety of ways, depending on whether we use the transactions approach or the liquidity approach. Using the transactions approach, the money supply consists of currency, transactions deposits, and traveler's checks. This is called
M1
There are two major ways of measuring money, M1 and M2. Which statement is true about the measuring of M1 and M2?
M1 is measured by the transactions approach which stresses the role of money as a medium of exchange while M2 is measured by the liquidity approach which stresses the role of money as a temporary store of value.
When we add savings deposits, small-denomination time deposits, and retail money market mutual fund balances to ______ we obtain the measure known as _____________.
M1/M2
A $10,000 time deposit an elderly widow holds at her credit union. This item is counted in
M2
A $50,000 money market deposit account balance. This item is counted in
M2
The M1 measurement of the money supply includes all of the following components except
SAVINGS DEPOSITS
Suppose that there is a checkable deposit intoYourBank. Which of the following statements is an accurate description of the changes that occur at YourBank?
The required reserves decrease by the amount of the withdrawal times the required reserve ratio.
here are 12 Federal Reserve district banks, with 25 branches. The Federal Reserve System is managed by the ______________ in Washington, D.C. The Fed interacts with almost all depository institutions in the United States, most of which must keep a certain percentage of their transactions deposits on reserve with the Fed. The Fed serves as the chief regulatory agency for all depository institutions that have Federal Reserve System membership.
board of governers
The financial intermediary with liabilities of shares and checkable deposits and assets that include consumer debt and long term mortgage loans is a
credit union.
The Fed acts like a private banking institution when it
holds Depository institution's reserves/provides payment−clearing services to depository institutions/ acts as the government's fiscal agent.
A customer's savings deposit is a ___________ to a commercial bank.
liability
