Econ 330 Test 3

List Four factors that affect exchange rates in the long-run

1. Relative Price levels/ inflation rate 2. Trade Barriers 3. Relative productivity levels 4. Preference for domestic vs foreign goods

list 2 theory of purchasing power parity assumptions

1. all goods are identical 2. trade barrier and transportation costs are low 3. many goods are not traded across the border

what three parties play a role in determining the money multiplier and thus the money supply?

1. central banks 2. commercial banks 3. depositors

order the dynamics of the financial crisis

1. credit asset boom 2. banking crisis 3. debt deflation 4. price deflation

what are the three major parts of the federal reserve system?

1. federal open market committee (fomc) 2. Board of governors 3. District Banks

how did competitive forces lead to the repeal of the glass-stegall act's separation of the banking and securities industries?

1. the act's restrictions put americans at a competitive disadvantage relative to foreign banks 2. the fed allowed holding companies to enter the underwriting business 3. financial innovation motivated bank and other financial institutions to bypass the intent of the Glass- Steagall Act

the U.S. got its first national currency around the

1860s

If you expect the inflation rate to be 4 percent next year and a one year bond has a yield to maturity of 7 percent, then the real interest rate on this bond is?

3% real rate= nominal- inflation

example of indirect finance

An individual borrows from a bank; you buy shares in a mutual fund

Bond market after consumers have a decrease in the the desire to consume.

Borrowing and lending go up interest rate go down (I save more you lend more)

c=

C/D

An increase in wealth affects Demand or Supply and shifts to the right or left?

Demand; right

e=

ER/D

Bond market after an increase in technology makes i possible to buy and sell bonds with more ease.

Liquidity increases, lending & borrowing increase interest rates decrease

what happens if the Japanese economy's productivity grows faster than the US

Yen appreciates $ depreciates demand (quantity) increases supply ($) decreases

income effect

a higher level of income causes the demand for money at each interest rate to increase and the demand curve to shift to the right

unit of account

a means for comparing the values of goods and services (price per sqft.)

response to an increase in the foreign interest rate:

a rise in the domestic interest rate shifts the demand curve to the right the exchange rate increases

Price-Level Effect

a rise in the price level causes the demand for money at each interest rate to increase and the demand curve to shift to the right

the interest rate parity

a situation in which the rates of return on assets in different currencies are equal

Currency includes A) paper money and coins. B) paper money, coins, and checks. C) paper money and checks. D) paper money, coins, checks, and savings deposits.

a. paper money and coins

who was the first treasury secretary of the U.S. ?

alexander hamilton

what is the global pool of money

all the money the world is saving now

store of value (function of money)

an item people can use to transfer purchasing power from the present to the future (store away money for childs college)

the fed. usually conduct open market operations using

any government security: - municipal bonds - any thing with the word treasury

transaction costs

as ATM fees go up you take out more money on each visit- internet lowered transaction costs so you don't keep a lot of wealth in your checking account.

Why do bank runs occur?

asymmetric information

why is financial regulation probably necessary?

asymmetric information systemic risk

the federal reserve was created after the crisis surrounding?

banking panics of the early 1900s

Foreign Bonds

bonds sold in a foreign country and denominated in that country's currency

bond suppliers

borrowers

why isn't china appreciating like it does for Japan?

china is buying our debt

The 1980s is known for banking

consolidation, deregulation, and innovation

Money supply=

currency + deposits

if money market price goes up from decrease in demand the fed will, in response:

decrease money supply (shift left); sell bonds

commercial bank liabilities

deposits from customers discount loans

a higher domestic money supply causes the domestic currency to:

depreciate

a (blank) is bought at a price below its face value, & the (blank) value is repaid at the maturity date.

discount; face

describe the process of securitization/ mortgage backed securities

each security is backed by thousands of mortgages from pooling together mortgages and creating securities out of them

financial intermediaries lower transaction cost by providing what two things?

economies of scale liquidity

what happens if Europe becomes a more attractive vacation destination.

euro appreciates supply shifts right $ depreciates

bonds that are sold in a foreign country and denominated in a currency other than that of the country in which it is sold are known as

eurobonds

Eurocurrencies

foreign currencies deposited in banks outside the home country

the most comprehensive measure of aggregate output is:

gross domestic product

what role did the global pool of money play in the housing bubble

growth of pool went looking for a place to save money and got attracted to mortgage back securities, which required more mortgages, which led to the relaxing of mortgage standards

what happens if real interest rates on Mexican bonds rise relative to American bonds?

if rates rise demand increases (you want to invest in) pesos appreciate dollar depreciates demand shift right supply shifts left

Which bonds have the highest default risk?

junk bonds

bond demanders

lenders

liquidity services

make it easier for customers to conduct transactions

As a result of strict banking​ regulations, the United States​ has:

many more smaller banks when compared to other industrialized countries

the greatest period of financial regulation in the U.S occurred in the

mid 1900s

the greatest period of financial regulation in the U.S. occurred in the

mid 1900s

what happens to money demand if inflation rises?

money demand decreases

what happens to money demand if real interest rates rise?

money demand decreases

what happens to money demand if Real GDP rises

money demand increase

what happens to money demand if transaction costs rise?

money demand increases

what happens to money demand is price levels rise?

money demand increases

the federal reserve did not rescue the investment bank lehman brothers because of

moral hazard

the yield to maturity for a discount bond is () related to the current price

negatively

what is the key disadvantage of commodity money?

no control of supply

there is (blank) for any bond that whose time to maturity matches the holding period

non interest- rate- risk

what gives the federal reserve the ability to be so independent

own budget and board of govenors have a 14 year non renewable term

In order to reduce risk and increase the safety of financial institutions, commercial banks and other depository institutions are prohibited from A) owning municipal bonds. B) making real estate loans. C) making personal loans. D) owning common stock.

owning common stock

examples of contractual savings institution:

pension fund a life insurance company a fire and casualty insurance company

law of one price

price of identical goods should be identical throughout the world.

if monetary base is lower then previous and wants money supply to stay the same they should:

purchase bonds

the troubled asset relief program (tarp) authorized the treasury to:

purchase subprime mortgage assets from troubled financial institutions

open market operations refer to the fed doing what?

purchasing bonds to increase money supply and selling bonds to decrease money supply

TR= R+ ER R=

r*d

what affects exchange rates in the short run? why? example?

real risk adjusted interest rate because dramatic changes can happen in short period of time ex: Global pool of money: German bonds pay a higher interest rate than american bonds that are of the same relative risk. with the global pool of money people can sell all their dollar denominated bonds in dollars to buy euros so they can buy the European higher German interest rate bonds.

if banks want to decrease money supply they should buy or sell bonds

sell bonds

if money demand goes down and price goes up fed will need to:

sell bonds, supply shifts right

bond market: An increase in risk

shifts demand (lending) to the left

an increase in liquidity

shifts demand to the right

an increase in expected probability of investment opportunities

shifts supply to the right

increase in government deficits

shifts supply to the right

what happens when the Fed uses open market operations to raise the federal funds rate to 1.75%

supply shift left; they would have to sell bonds to increase the rate

the federal reserve rescued the investment bank bear sterns because of

systemic risk

what is the key disadvantage of fiat money? solution?

temptations to print away to pay bills; independent central banks

which entity in the federal reserve system controls the discount rate

the board of govenors

which entity of the federal reserve sets reserve requirements

the board of govenors

why does trump want the fed to lower interest rates? 2 reasons

the demand for the dollar by Europeans would decrease lowering interest rates will cause the dollar to depreciate. Thus, american products will become cheaper, and increase international sales of american goods

Which entity of The Federal Reserve System is responsible for establishing open market operations?

the federal open market committee (FOMC)

when the federal reserve conducts an expansionary monetary policy, what happens to the money supply?

the money supply increases, but the supply of dollar assets does not change since dollar currency is a small part of total U.S. dollar denominated assets

theory of purchasing power parity

the theory that exchange rates between two countries is equal to the ratio of currencies' respective purchase power

Monetary base=

total reserves+ currency

3 functions money must fulfill

unit of account, store of value, medium of exchange

what is the key advantage of commodity money

universally accepted