ECON 202 EXAM 2

¡Supera tus tareas y exámenes ahora con Quizwiz!

With a required reserve ratio of 20​ percent, an increase in reserves of​ $10,000 could lead to a maximum increase in checking account deposits in the entire banking system of

50,000

The Federal Reserve​ Bank's Board of Governors consists of ____ members appointed by the president of the U.S. to​ 14-year, ​ non-renewable terms.

7

shadow banking system

Investment banks, money market mutual funds, hedge funds and other financial firms engaged in similar activities.

Which of the following is included in M2 but not​ M1?

Money market deposit accounts in banks

To increase the money​ supply, the Federal Reserve could

conduct an open market purchase of Treasury securities.

To decrease the money​ supply, the Federal Reserve could

conduct an open market sale of Treasury securities

Why do we accept dollar bills as a medium of exchange?

confidence that the dollar bill will be accepted by others

discount rate

interest rate the fed charges on loans (called discount loans) to banks

How do banks make a profit?

interest rates

congress in 1934 established the federal deposit insurance corporation

-to insure deposits in most banks up to a limit, which is currently 250,000 per deposit

fed purchase of treasury securities increases bank reserves

-when the fed buys treasury securities the sellers of the securities deposit the fed payment into their checking account deposits, increasing bank reserves

How banks create money examples

-with a required reserve ratio of 10%, Bank of america's required reserves = 100 and excess reserves = 900 -bank loans $900 of excess reserves and increases the borrower's checking account deposit by 900 -by making the 900 loan from excess reserves, the bank has increased the money supply by 900

Suppose that Deja owns a​ McDonald's franchise. She decides to move her​ restaurant's checking account to Wells​ Fargo, which causes the changes shown on the following​ T-account. If the required reserve ratio is 0.15, or 15 ​percent, and Wells Fargo currently has no excess​ reserves, the maximum loan Wells Fargo can make as result of this transaction is

100,000-15,000= 85,000

the United States is divided into _______Federal Reserve Districts.

12

One of the board members is appointed to a ___ ​year, renewable term as the chairman

4

Lender of last resort

function when banks face liquidity problems

Very high rates of inflation are called

hyperinflation

nominal GDP

income in the country

how do banks create money

print

loans

(commercial and consumer) largest asset

federal reserve system board of governors

-7 members appointed by the president to 14 yr nonrenewable terms -chair appointed to 4 yr renewable term

Monetary policy

-actions the fed takes to manage the money supply and interest rates to pursue macroeconomic policy objectives

Central Bank Monetary Authority

-an institution designed to oversee the banking system and regulate the quantity of money in the economy -a monopolized and often nationalized institution given privileged control over the production and distribution of money and credit

federal reserve system three parts

-board of governors -federal reserve district banks -federal open market committee

the federal reserve's first test as lender of last resort

-in the early years of the great depression, many banks were hit with bank runs. the fed declined to make loans to many of them because they worried that banks experiencing runs has made bad loans and other investments -the fed believed that making loans to banks that were in financial trouble because of bad investments might reduce the incentive bank mangers had to be careful in their investment decisions= moral hazard problem -more than 5000 banks failed during the early 1930s

Runs on Investment Banks

-investment banks funded long term investments with short term loans by maturity mismatch -no problems occurred as long as lenders renewed their short term loans -the run on investment banks occurred when lenders did not renew their short term loans

the firms in the shadow banking system were more vulnerable to runs

-shadow banking system had no federal deposit insurance -these firms were also more highly leveraged than commercial banks, and held a significant amount of mortgage-backed securities

Real-World Deposit (Money) Multiplier

-the real world deposit (money) multiplier is considerably smaller (about 1.6 during normal periods) than the simple deposit multiplier -banks may not lend out as much as we predict, either because they want to keep excess reserves or they cannot find credit-worthy borrowers -consumer keep some currency out of the bank; that currency cannot be used as required reserves

What is price​ deflation?

A fall in the price level.

What is meant by Professor​ Spencer's statement​ "This printing of money​ 'will keep the​ [deflation] wolf from the​ door'"?

An increase in the money supply that exceeds the rate of growth of GDP will increase the price level.

money

Assets that people are generally willing to accept in exchange for goods and services or for payment of debts.

"China now has one of the highest​ [required reserve] ratios in the​ world, economists​ say, even though many businesses are starved of​ credit..."

Being starved for credit means Chinese businesses cannot get loans.

Why would deflation cause​ "shoppers to hold​ back," and what does​ Evans-Pritchard mean when he​ says, "Once this psychology gains a​ grip, it can gradually set off a​ self-feeding spiral that is hard to​ stop"?

Consumers delay​ purchases, expecting prices to fall​ more, and the lack of demand causes prices to fall further.

largest liability

Deposits (checking, saving)

excess reserves formula

Excess reserves are equal to total reserves minus required reserves

What is the​ "shadow banking​ system"?

Financial firms that raise money from investors and provide it to borrowers

What is the​ "shadow banking​ system"?

Financial firms that raise money from investors and provide it to borrowers.

If Irving Fisher was correct in his prediction about the value of​ velocity, then the quantity equation can be written to solve for the inflation rate as​ follows:

Inflation rate​ = Growth rate of the money supply- Growth rate of real output.

The Federal Reserve uses two definitions of the money​ supply, M1 and​ M2, because

M1 is a narrow definition focusing more on​ liquidity, whereas M2 is a broader definition of the money supply.

Monetary Aggergates : M1

M1= currency in circulation + checking account deposits (paper money and coins)

Suppose you withdraw​ $1,000 from a money market mutual fund and deposit the funds in your bank checking account. How will this action affect M1 and​ M2?

M2 will not be​ affected, but M1 will increase.

Monetary Aggergates : M2

M2= M1 + saving type account deposits (saving accounts, small time deposits, money market mutual funds)

bank panic

Many banks experience bank runs at the same time. Banking system could be in trouble

What is a​ "classic type of​ run"?

Many depositors simultaneously decide to withdraw their money from a bank.

Why might investors in a money market mutual​ fund, for​ example, be more likely to​ "rush to the​ exits" if they heard bad news about the​ fund's investments, than would bank depositors if they received bad news about their​ bank's investments?

Money market mutual funds are not protected by deposit​ insurance, as commercial​ banks' deposits are through the Federal Deposit Insurance Corporation​ (FDIC).

What did Geithner mean by the​ "non-bank financial​ system"?

Money market mutual​ funds, hedge​ funds, and other financial firms that raise money from investors and provide it to firms and households.

Which one of the following is not one of the policy tools the Fed uses to control the money​ supply?

Moral suasion

required reserves formula

Required reserves are equal to the required reserve ratio multiplied by the amount of deposits.

Why would deposit insurance provide the banking system with protection against​ runs?

Since most depositors are​ insured, it is less likely that panicked buyers will simultaneously withdraw funds.

Which tool is the most​ important?

The Fed conducts monetary policy principally through open market operations.

Federal Open Market Committee (FOMC)

The Federal Reserve committee responsible for open market operations and managing the money supply in the United States. -meets every 6 weeks -12 voting members: 7 board of governors, president of NY fed, and 4 presidents from other 11 fed banks

open market operations

The buying and selling of Treasury Securities by the Federal Reserve in order to control the money supply

required reserve ratio

The minimum fraction of deposits that banks are required by law to keep as reserves

Based on the quantity theory of​ money, if velocity is​ constant, inflation is likely to occur​ when:

The money supply grows at a faster rate than real GDP.

Open market operations refer to the purchase or sale of​ ________ to control the money supply.

U.S. Treasury securities by the Federal Reserve

Systemic Risk in the Banking System

With fractional reserve banking, the maturity mismatch between deposits and loans, contagion and asset deflation, the banking system faces an inherent system-wide risk.

Is there a connection between the Chinese central bank imposing a higher required reserve ratio on banks and Chinese businesses being starved for​ credit? Briefly explain.

Yes, higher required reserve ratios require banks to keep more capital as reserves instead of making loans.

Hyperinflation is caused by

a high rate of growth in the money supply

If the economy adjusts through the automatic​ mechanism, then a decline in aggregate demand causes

a recession in the short run and a decline in the price level in the long run.

In the United​ States, each bank panic in the late nineteenth and early twentieth centuries was accompanied by

a recession.

A supply shock is

a sudden increase in the price of an important natural resource, resulting in a leftward shift of the SRAS curve

Which of the following is usually the cause of​ stagflation?

a supply shock as a result of an unexpected increase in the price of a natural resource

Stagflation occurs when

a supply shock shifts the SRAS to the left, increasing the price level and decreasing actual GDP

If the economy is initially at​ full-employment equilibrium, then an increase in aggregate demand causes​ _____________ in real GDP in the short run and​ ___________ in the price level in the long run.

an​ increase; an increase

Multiple banks selling assets to meet liquidity needs can cause ________ _________ and cause healthy banks to become insolvent.

asset deflation--> price of assets go down

fractional reserve banking

bank keep < 100% of deposits as reserves

During a bank run or panic, why can't the bank(s) call in their loans to pay the depositors?

because the loans are long term -maturity mismatch between deposits and loans cause banks during a bank panic to have liquidity problems

interest rate on bank reserve deposits at the fed

by increasing the interest rate on bank reserves deposited at the fed, the fed can increase the level of excess reserves banks are willing to hold thereby decreasing bank lending and decreasing money supply

domain of commercial banks

by raising money from investors and lending it directly or indirectly to firms and households, these firms were carrying out a function

Stagflation is a

combination of inflation and recession

If households in the economy decide to take money out of checking account deposits and put this money into savings accounts, this will initially

decrease M1 and not change M2

An increase in the amount of excess reserves that banks keep​ _________ the value of the​ real-world deposit multiplier.

decreases

Which of the following is the largest liability of a typical​ bank?

deposits

reserves

deposits that a bank keeps as cash in its vault or on deposit with the Federal Reserve

income

earnings over a period of time

Whenever banks gain reserves and make new​ loans, the money supply​ ___________; and whenever banks lose​ reserves, and reduce their​ loans, the money supply​ __________.

expands; contracts

during financial crisis

fed provided discount loans to investment banks during the financial crisis

federal reserve does what to banks experiencing liquidity problems during a banking panic that cannot borrow funds elsewhere?

federal reserve established to make loans to banks

bank run

many depositors simultaneously decide to withdraw their money from a bank. one bank can . handle by borrowing from other banks

central bank controls what

money- quantity of money in a country (affects interest rates, spending in short run) (doesn't affect income and wealth in long run)

The financial firms of the shadow banking system were

more vulnerable than commercial banks to bank runs because they were more highly leveraged than commercial banks

The financial firms of the shadow banking system were

more vulnerable than commercial banks to bank runs because they were more highly leveraged than commercial banks.

wealth

net worth= assets- liabilities

when the federal reserve acts as a lender of last resort, does that represent a bail out of the banks?

no- if a bail out then got to let them fail

According to the quantity theory of​ money, if velocity does not​ change, when the money supply of a country​ increases, what will​ occur?

nominal GDP will increase

To decrease the money​ supply, the Federal Reserve could

raise the required reserve ratio.

three tools of monetary policy

reserve requirement, discount policy, open market operations -the fed conducts monetary policy primarily thru open market operations

required reserves

reserves that a bank is legally required to hold, based on its checking account deposits

excess reserves

reserves that banks hold over and above the legal requirement excess reserves = actual reserves - required reserves

three key assets

reserves, loans, securities

To offset (balance) the effect of households and firms deciding to hold more of their money in checking account deposits and less in​ currency, the Federal Reserve could

sell Treasury securities.

​If, during a deposit​ expansion, not all money gets redeposited into the banking system and some leaks out as​ currency, then the real world multiplier is

smaller than ​1/RR

When the Federal Reserve sells Treasury securities in the open​ market,

the buyers of these securities pay for them with checks and bank reserves fall.

Which of the following refers to the minimum fraction of deposits banks that are required by law to keep as​ reserves?

the required reserve ratio

When the Federal Reserve purchases Treasury securities in the open​ market,

the sellers of such securities deposit the funds in their banks and bank reserves increase.

The quantity theory of money is better able

to explain the inflation rate in the long run.

securities

treasury bills

Governments sometimes allow hyperinflation to occur because

when governments want to spend more than they collect in​ taxes, central banks increase the money supply at a rate higher than GDP​ growth, often resulting in hyperinflation

fed sale of treasury securities decreases bank reserves

when the fed sells treasury securities the buyers of the securities pay with checks written on their checking account deposits, decreasing bank reserves -fed sell treasury securities in order to reduce money supply

The​ ________ the reserve​ ratio, the​ ________ the money multiplier.

​smaller; larger


Conjuntos de estudio relacionados

Humidity, Relative Humidity, and Dew Point

View Set

Vocabulary: From Narrative of the Life of Frederick Douglass

View Set

Strategic - Chapter 1, Chapter 2 Multiple Choice, MGMT 495 - Chapter 12, Chapt 2 martinov, MGMT425 CH4, GBA 490 Test 1 - Chapter 4, UCSC ECON 136 MIDTERM MC

View Set

Advanced Topics: Social Psychology FINAL

View Set

Chapter 12: Muscular Analysis of Selected Exercises and Related Concepts

View Set

Physics Unit 3 Test: Forces (True/False)

View Set

Anatomy and Physiology 1 Chapter 8 and 9

View Set