ECON 321 FINAL
Monetary policy aims to
advance the economic well-being of the country's citizens.
Money
is anything that people are willing to accept in payment for goods and services or to pay off debts.
What is underwriting?
is an activity in which an investment bank guarantees to the issuing corporation the price of a new security and then resells the security for a profit.
Economic well-being is typically determined by the
quantity and quality of goods and services that individuals can enjoy.
Which of the Fed's traditional monetary policy tools was the most important?
Open market operations
What does a fund's "dumping its positions" mean?
Selling before capital runs out. Selling before a margin call.
What does the financial planner mean by a diversified portfolio?
A diversified portfolio includes
Why did Congress decided to establish the Federal Reserve System in 1913?
A panic and economic recession in 1907.
What is specialization?
A system in which individuals produce the goods or services for which they are relatively best at.
Is an investment bank that buys securities with its own capital acting as a financial intermediary?
An investment bank that buys securities with its own capital is not acting as a financial intermediary.
Why would a fund's trade moving against it cause it to burn through its capital?
Hedge funds are highly leveraged, and a margin is generally required for their trades. Capital serves as margin, so capital is used as a cushion between losses.
Why is the demand for money curve downward sloping?
As interest rates decrease, the quantity demanded of money decreases.
How does deposit insurance encourage banks to take on too much risk?
Banks can make riskier investments without worrying about deposit withdrawals because the government has insured depositors against losses.
Why might a fund's dumping its positions cause prices to be destabilized? Prices of what?
Because such large positions are being sold, it Decreases the prices of assets the fund holds.
Why do fluctuations in interest rates make investment decisions by households and firms more difficult?
Because the cost of borrowing becomes more uncertain.
Why does the supply curve have a horizontal segment?
Because the discount rate sets a ceiling on the federal funds rate.
What does "breaking the buck" mean?
Breaking the buck' means that the net asset value of the money market fund had fallen below $1
What are "capital requirements"? What purpose do they serve?
Capital requirements describe the ________ amount of capital a bank can hold. They are put in place to ________, resulting in a more ________ banking industry. - minimum; limit moral hazard in banking; stable
Would deflation create some of the same problems as inflation in terms of the information communicated by price changes and the arbitrary redistribution of income?
Deflation, just like inflation, complicates the ability to distinguish overall price changes from relative price changes, which determine resource allocation. Unanticipated deflation redistributes income just as unanticipated inflation does, but from borrowers to lenders rather than from lenders to borrowers.
Suppose financial intermediaries did not exist and only direct finance was possible. How would this affect the process of an individual buying a car or a house?
Direct financing would increase the price the lender charges and reduce the number of loans.
Before the financial crisis of 2007-2009, what were the monetary policy tools that the Fed relied on?
Discount policy, Reserve requirements, Open market operations
Describe key services that the financial system provides to savers.
Economies of scale of information, Liquidity, and Risk sharing.
With respect to the Federal Reserve, which interest rate would be likely to hit zero?
Federal funds rate
Why the financial system is one of the most highly regulated sectors of the economy?
Governments worldwide put rules in place for financial markets to make them more organized. This is because financial markets are complex, and there's often uneven access to information. The rules are meant to bring some order to this complicated system.
Who the buyer is
In the bond market, the buyer is the lender and in the loanable funds market, the buyer is the borrower.
What the good is
In the bond market, the good is the bond and in the loanable funds market, the good is the use of funds.
What the price is
In the bond market, the price is the bond price and in the loanable funds market, the price is the interest rate.
Who the seller is
In the bond market, the seller is the borrower and in the loanable funds market, the seller is the lender.
What is the simple deposit multiplier?
It is the ratio of the amount of deposits created by banks to the amount of new reserves.
When economists speak of the "zero lower bound problem" that the Fed sometimes faces, what are they referring to?
It is when short-term interest rates are close to zero, meaning the Fed can no longer use changes in interest rates to stimulate the economy.
What is the connection between a fund's being highly leveraged and its having a "thin cushion of capital"?
Leverage Magnifies a trading position,Reducing the ratio of capital to assets. This magnifies
Given that inflation erodes the value of money, should the Federal Reserve pursue a goal of deflation?
No, deflation encourages consumers to delay consumption, which can cause the economy to contract.
During the recession caused by the 2020 Covid-19 pandemic, was the Fed powerless to act when this rate hit zero? If not, which monetary policy tools did the Fed rely on?
No, the Fed used quantitative easing and purchased 10-year Treasury notes and 30-year mortgages. It also provided forward guidance to the market.
What is the difference between the nominal exchange rate and the real exchange rate?
Nominal exchange rates tell you how many, say, euros you will receive in exchange for a U.S. dollar, but they do not tell you how much of another country's goods and services you can buy with that U.S. dollar.
How does specialization improve an economy's standard of living?
Specialization increases productivity.
In what sense is the Federal Reserve System both accountable to the government and independent of it?
The Board of Governors is a federal government agency, while the Federal Reserve Banks are legally the equivalent of private corporations.
Which body is more important within the Federal Reserve System, the Board of Governors or the Federal Open Market Committee?
The Board of Governors since they control reserve requirements, the discount rate, and hold a majority of the seats on the Federal Open Market Committee.
Why did the United States have no central bank between 1836 and 1913?
The authorization for a central bank expired.
In what sense do investors face a trade-off between risk and return?
The higher the risk that an asset has, the lower the demand for the asset. This raises the yield or return if the asset performs well. Low-risk assets have a high demand, which lowers their yield or return.
What do open market operations imply?
The purchase or sale of securities, typically U.S. Treasury securities, in financial markets.
What are the costs and sources of inefficiency in a barter system?
There is a lack of standardization | There is difficulty in accumulating wealth. | Transaction costs are almost always high. | There is increased time and effort spent looking for trading partners.
An increase in the discount rate:
This would raise the interest rate at which the supply for reserves becomes horizontal.
In what sense is an investment bank that engages in underwriting acting as a financial intermediary?
Underwriting is financial intermediation because the bank brings together savers and the issuers of securities.
What are the key differences between using a deerskin as money and using a dollar bill as money?
Using a deerskin as money may not be as widely accepted as using paper money. Using a deerskin as money incurs a much larger transactions cost because it is bigger and heavier than paper money.
When are economists most likely to use the bond market approach to analyze changes in interest rates?
When are economists most likely to use the loanable funds approach? - The bond market model is a medium-term model that focuses on movements in the bond market. The loanable funds model is generally a long-term model when discussing global savings and long-term global interest rates.
In what sense is the Federal Reserve System a "public-private partnership"?
While authorized by the government, it is owned by private banks.
When a newspaper article uses the term "the exchange rate," it is typically referring to the
nominal
The majority of wealth held by households is in
pension and retirement accounts
One reason for this might be that such accounts offer
tax advantages
To suffer from a "systemic problem" means that
the problem is of the system itself rather than specific firms or institutions
debt instrument a mortgage loan belongs.
Fixed-payment loan
