Exam 2 Review
Who are the members of the Federal Open Market Committee? - All regional Federal Reserve bank presidents. - All members Federal Reserve Board of Governors only. - All members of the Federal Reserve Board of Governors and all regional Federal Reserve bank presidents. - All members of the Federal Reserve Board of Governors and a set of rotating regional Federal Reserve bank presidents.
All members of the Federal Reserve Board of Governors and a set of rotating regional Federal Reserve bank presidents.
Which of the following is a consequence of deposit insurance? - All of these answers are correct. - Bank managers have more incentive to engage in risky activities. - Depositors have incentive to withdraw funds if a bank is at risk of failing. - Bank runs are contagious. - Financial crises have become more frequent and more severe.
Bank managers have more incentive to engage in risky activities.
Which of the following is not an asset on a bank's balance sheet? - Reserves. - Loans. - Government securities. - Checkable deposits.
Checkable deposits.
Which of the following is an advantage of discretionary policy? - All of these answers are correct - Discretionary policy results in a more credible central bank. - Discretionary policy allows policy makers the most flexibility to respond to adverse events. - Discretionary policy solves the time inconsistency problem.
Discretionary policy allows policy makers the most flexibility to respond to adverse events.
If a bank needs liquidity, it can borrow from another bank overnight in the _______ market. - Discount lending - Federal Funds - Securities - none of these
Federal Funds
Suppose depositors make large, surprise withdrawals of funds from First Federal Bank, depleting its reserves. Which of the following is true? - First Federal has a liquidity problem. - First Federal will likely need to find new investors. - First Federal has no problem since deposits are insured. - First Federal is at risk of becoming insolvent.
First Federal has a liquidity problem. If a bank does not hold enough liquid assets, they are not able to convert assets to cash in situations like this.
Which of the following might motivate owners of a bank to reduce their leverage ratio (capital relative to assets)? - A lower leverage ratio reduces the risk of insolvency. - Holding ROA constant, a lower leverage ratio means higher return on equity - both of these - none of these
Holding ROA constant, a lower leverage ratio means higher return on equity
When was the Federal Deposit Insurance Corporation (FDIC) created? - In the 1940s, during World War II. - In the 1970s, during the Great Inflation. - In the 1930s, during the Great Depression.
In the 1930s, during the Great Depression.
Approximately when did the number of banks in the United States begin to steadily decline? - In the 1990s, after the passage of the Riegle-Neal Interstate Banking Act. - About 1913, after the creation of the Federal Reserve system. - In the early 1940s, shortly after the end of the Great Depression. - In the early 1800s after the National banking act.
In the 1990s, after the passage of the Riegle-Neal Interstate Banking Act.
Which of the following is a disadvantage of inflation targeting? - Inflation is difficult to control in the short-run. - All of these answers are correct - An inflation target makes a central bank less credible. - Inflation targeting does not solve the time inconsistency problem.
Inflation is difficult to control in the short-run.
Which of the following is an advantage of inflation targeting? - Inflation targeting solves the time inconsistency problem. - All of these answers are correct - Inflation is quickly and easily observed. - Inflation targeting allows the central bank a high level of flexibility.
Inflation targeting solves the time inconsistency problem.
Which of the following is correct about the Federal Reserve system? - Regional bank presidents are not selected by elected government officials. - The decisions of the FOMC can be overruled by the U.S. president. - The chair of the Board of Governors must also be a regional bank president. - All members of the FOMC are appointed by the U.S. president and confirmed by the senate.
Regional bank presidents are not selected by elected government officials.
Bank regulation specifies that the leverage ratio (capital/assets) cannot fall below 5%. However, some assets are riskier than others, and the bank may engage in risky off-balance sheet activities. What kinds of bank regulation would you recommend to account for assets with different levels of risk and off-balance sheet activities? - Require all banks hold the same, high level of capital. - Allow banks with riskier assets and higher returns to hold less capital. - Require banks that hold riskier assets hold more capital. - Require banks hold a fraction of deposits in reserve.
Require banks that hold riskier assets hold more capital.
Banks would probably take fewer risks if depositors, lenders, potential shareholders, and borrowers were aware of their activities. However, deposit insurance and the costly acquisition of information reduce the incentive for research. How would you regulate banks to solve this problem? - Require banks to make loans in areas where they take deposits. - Require banks to deposit insurance on all consumer deposits. - Require banks to hold a minimum quantity of deposits in reserve. - Require banks to provide information regarding lending activities to the public.
Require banks to provide information regarding lending activities to the public.
Which of the following is true? - Congress has mandated the Fed set a 2% inflation target. - The Federal Reserve is mandated in the type of instruments to use but can choose how to interpret its mandate. - The Fed can choose the policy instruments to implement policy and how to interpret its mandate. - The Fed can choose the policy instruments to use to implement policy but does not have goal independence.
The Fed can choose the policy instruments to implement policy and how to interpret its mandate.
Suppose the Fed wanted to decrease the money supply by decreasing the money multiplier. Which tool could be used to accomplish this? - The Fed could decrease the interest rate it pays on excess reserves. - The Fed could conduct an open market sale of securities. - The Fed could reduce lending to banks. - The Fed could increase the reserve requirement
The Fed could increase the reserve requirement.
Which of the following contributes to the independence of the Federal Reserve? - The chair of the Federal Reserve must testify to congress regarding activities. - The president appoints the chair of the Board of Governors. - The Federal Reserve does not rely on the government for funds for operation. - Congress can amend the Federal Reserve Act.
The Federal Reserve does not rely on the government for funds for operation.
Which of the following Federal Reserve actions would lead to a decrease in the money multiplier? - The Federal Reserve decreases the reserve requirement. - The Federal Reserve increases the interest rate paid on bank reserves. - The Federal Reserve reduces the quantity of discount loans. - The Federal Reserve conducts open market sales of securities.
The Federal Reserve increases the interest rate paid on bank reserves.
Which of the following regulations was imposed to reduce competitive pressure on banks and resulted in thousands of small banks scattered over the country? - The Glass-Steagall Act of 1933 - The Federal Reserve Act of 1913 - The Dodd-Frank act of 2010 - The McFadden act of 1927
The McFadden act of 1927
Money market mutual funds sell shares to investors for $1 each. Savers view money market deposits as a substitute for savings accounts. What is done with the funds from savers? - The funds are invested in a portfolio of capital market instruments. - The funds are used to make long-term loans to corporations. - The funds are invested in medium-term Treasury securities. - The funds are used to purchase short-term securities, like Treasury securities and commercial paper.
The funds are used to purchase short-term securities, like Treasury securities and commercial paper.
The Federal Funds rate is - All of these answers are correct - A benchmark interest rate that banks use to determine the interest rate on various consumer loans. - The interest rate the Fed charges banks for short-term loans. - The interest rate that the Fed pays banks on reserves held at the Fed. - The interest rate banks pay/collect to borrow/lend overnight in the inter-bank market.
The interest rate banks pay/collect to borrow/lend overnight in the inter-bank market.
Which of the following statements best describes what has happened to the number of commercial banks in the United States since 1950? - The number of commercial banks has been constant since 1950. - The number of commercial banks has been gradually declining since 1950. - The number of commercial banks remained roughly constant and then began a fairly steep decline in the early 1990s. - The number of commercial banks remained roughly constant and then began to increase in the 1990s.
The number of commercial banks remained roughly constant and then began a fairly steep decline in the early 1990s.
Which of the following is true about banking in the United States? - There was a period time in the 1800s when only states chartered and regulated banks. - State-chartered banks did not exist until after the McFadden Act was repealed in 1994. - The United States never had a national or central bank until the Federal Reserve was created in 1913.
There was a period time in the 1800s when only states chartered and regulated banks.
Which of the following is a way for firms to earn profits through off-balance sheet activities? - overdraft fees - proprietary trading - loan sales - ATM fees - all of these
all of these
Which of the following would increase the Federal Funds rate? - an open market sale of securities - a reduction in the discount rate - a decrease in the reserve requirement
an open market sale of securities
What entities hold the capital in the Federal Reserve system? - the U.S. Treasury - the states of the U.S. - commercial bank members of the system.
commercial bank members of the system.
In the early years of central banking, central banks did not - lend to commercial banks. - conduct monetary policy. - sell government debt (bonds). - hold reserves.
conduct monetary policy.
Prior to the financial crisis of 2008, households and firms borrowed significant amounts of funds to purchase assets. This caused asset prices to rise and formed a _______ -driven bubble. - both credit and irrational exuberance - credit - irrational exuberance
credit
When the Federal Reserve purchases securities from banks, it pays for these securities using - income from interest on reserves. - electronic funds created that did not exist previously. - the proceeds of sales of other types of assets. - taxpayer funds.
electronic funds created that did not exist previously.
Incumbent politicians (those up for re-election) generally prefer - either type of policy as long as inflation is stable. - expansionary monetary policy. - contractionary monetary policy.
expansionary monetary policy.
If interest rates on all types of assets increase, the present value of a portfolio of loans __________. At the same time, the profitability of future loans __________. - rises; falls - falls; rises - falls; falls - rises; rises
falls; rises
Banks generate profits by earning higher returns on their ____________ than they pay in interest on _____________. - liabilities; deposits - deposits; loans - loans; deposits - deposits; securities
loans; deposits
The Federal Reserve has not yet implemented _______ during times of crisis. - quantitative easing - negative interest rates - forward guidance
negative interest rates
The free banking era in the United States, the period between 1832 and 1864, refers to the period of time when - banks were allowed to operate without a charter. - only the federal government chartered banks. - only the Federal Reserve Chartered banks. - only states chartered banks.
only states chartered banks.
What is the most commonly used Fed tool (during non-crisis times)? - loans to financial institutions - open market operations - the interest rate paid of reserves - the reserve requirement
open market operations
If the Federal Reserve would like to decrease the monetary base it should - reduce the interest rate paid on reserves. - make discount loans to banks. - increase the reserve requirement. - perform an an open market sale of securities
perform an an open market sale of securities.
In an attempt to keep funds flowing in financial markets and prevent the financial crises from resulting in failure of financial firms, the Federal Reserve - lent funds to the government to finance TARP. - insured all liabilities of shadow banking entities. - provided emergency loans and other sources of funds to commercial and shadow banking entities. - purchased shares of failing banks. - All of these answers are correct
provided emergency loans and other sources of funds to commercial and shadow banking entities.
The most costly way for banks to increase reserves is to - borrowing from other banks. - selling securities. - reduce loan balance by calling in loans.
reduce loan balance by calling in loans.
The portion of checkable deposits that banks are required to hold is called: - vault cash. - excess reserves. - required reserves. - currency outstanding.
required reserves.
A bank can increase its level of capital by - retaining earnings (reducing dividends) - buying back shares of stock. - borrowing from another bank.
retaining earnings (reducing dividends)
If prevailing interest rates decrease the present value of a bank's current portfolio of loans __________. At the same time, the profitability of future loans __________. - falls; rises - rises; falls - falls; falls - rises; rises
rises; falls
Which of the following is an example of a bank liability? - bank reserves - savings deposits - government securities
savings deposits
Which of the following would decrease the risk of a bank becoming insolvent? - buying back outstanding shares of stocks - borrowing funds and making more loans - selling new shares of stock - distributing dividends
selling new shares of stock
The Graham-Leach-Bliley Financial Services Modernization Act of 1999 repealed the part of the Glass-Steagall Act that separated commercial banking, investment banking and insurance. As a result, - most financial institutions have become so large it is unlikely they will fail. - most financial institutions have become smaller and more nimble. financial firms have not been able to take advantage of economies of scale and scope. - some financial institutions have become large, complex and systematically significant.
some financial institutions have become large, complex and systematically significant.
The Federal Reserve is mandated to care about - stable inflation and stable output equally. - stable inflation first, then stable output. - stable inflation only. - stable output only.
stable inflation and stable output equally.
Which entity charters and supervises national banks? - the U.S. Treasury - the Federal Reserve - the FDIC - the Comptroller of the Currency
the Comptroller of the Currency
The dual banking system in the United States refers to - the existence of banks that are chartered at the state level or national level. - the existence of regulations that prevent banks from branching across state lines. - the fact that every bank must have at least two regulators.
the existence of banks that are chartered at the state level or national level.
The Federal Funds Rate is -the interest rate banks pay/charge to - borrow/lend in the overnight market. - All of these answers are correct - the interest rate the Federal Reserve charges on overnight loans. - the interest rate paid by the Federal Reserve bank reserves.
the interest rate banks pay/charge to borrow/lend in the overnight market.
In the market for reserves, the floor on the Federal Funds rate is determined by - the discount rate (the interest rate the Fed charges on loans to banks.) - the interest rate that the Federal Reserve pays on reserves. - the interest rate banks charge consumers for loans. - the reserve requirement.
the interest rate that the Federal Reserve pays on reserves.
When the Federal Reserve conducts an open market purchase of securities, - the monetary base decreases. - the money multiplier decreases. - the monetary base increases. - the money multiplier increases.
the monetary base increases.
The gradual decline in the number of commercial banks in the United States in recent years is a result of - the repeal of the prohibition on branching across state lines. - bank failure that occurred after the financial crisis. - the creation of bank holding companies. - the repeal of restrictions on commercial banks engaging in investment banking and insurance activities.
the repeal of the prohibition on branching across state lines.
Ideally banks would like to make loans at relatively high rates of interest. Which of the following best describes why this might be a challenge for bankers? - they are only available during times of high inflation. - banks are restricted on the quantity they can make. - they attract high-risk borrowers denied by other lenders. - they are less likely to default.
they attract high-risk borrowers denied by other lenders.
Which of the following is an asset of the Federal Reserve? - loans to banks - currency in circulation - bank reserves
loans to banks
Which of the following is an example of a bank asset? - checking deposits - loans to businesses - certificates of deposits (time deposits)
loans to businesses
Jonny deposits $500 in his checking account at First Federal bank. As a result, assets at First Federal ___________, liabilities ___________ and capital ___________. - increase; decrease; increases. - remains constant; decreases; increases. - decrease; decrease; remains constant. - increases; increases; remains constant.
increases; increases; remains constant.
The FDIC - insures consumer deposits up to a certain limit. - conducts monetary policy. - makes loans to banks. - was created in 1913, prior to the Great Depression. - All of these answers are correct.
insures consumer deposits up to a certain limit.
The cost to banks of raising funds from checkable deposits include all of the following EXCEPT - bill pay services - teller service - interest payments - maintaining bank branches - debit card services
interest payments
The Federal Reserve Act has been amended such that the Fed is mandated to enact policy to support - price stability first and then full employment. - only price stability. - only full employment. - price stability and full employment with equal importance.
price stability and full employment with equal importance.
State banks are chartered and supervised by states. In addition, which national entity(ies) supervise(s) state-chartered banks? - none, state banks are not supervised at the federal level - the Comptroller of the Currency - only the FDIC - the FDIC or the Federal Reserve
the FDIC or the Federal Reserve
A bank has $25,000 of checkable deposits and a required reserve ratio of 20 percent. The bank currently holds $20,000 in reserves. How much of these reserves are excess reserves?
$15,000
Joe deposits his $2,000 paycheck into his checking account at Local Bank. The bank's assets will then increase by $ __________ .
$2,000
The Taylor rule provides a suggestion for - a Federal Funds rate target. - an inflation target. - a money growth rate target.
- a Federal Funds rate target.
Which members of the Federal Open Market Committee (FOMC) are selected by the President of the United States? - the presidents of the regional banks - None of these answers are correct - the Board of Governors
- the Board of Governors
Who at the Federal Reserve makes the decisions regarding the direction of monetary policy? - Representatives from banks all over the country - A committee made up of the Federal Reserve Board of Governors and a (rotating) subset of Federal Reserve District Bank presidents as well as representatives from the U.S. Treasury. - the chair of the Federal Reserve Board of Governors with input from bank presidents. - The council of economic advisors to the president. - A committee made up of the Federal Reserve Board of Governors and a (rotating) subset of Federal Reserve District Bank presidents.
A committee made up of the Federal Reserve Board of Governors and a (rotating) subset of Federal Reserve District Bank presidents.
Among other things, what do the Basel Accords require of banks? - Banks make loans in areas where they take deposits. - Banks hold a minimum quantity of deposits in reserve. - Banks carry deposit insurance on all consumer deposits. - Banks maintain a minimum risk-weighted leverage ratio.
Banks maintain a minimum risk-weighted leverage ratio.
Consumers supply banks with funds to make loans by keeping their money on deposit. Banks earn revenue from loans. How do banks compensate depositors? - Banks do not compensate consumers. - Banks provide depositors first access to loan opportunities. - Banks pay consumers interest on their deposits. - Banks provide depositors with liquidity services.
Banks provide depositors with liquidity services.
Which of the following reduces the independence of the Federal Reserve? - Each member of the Board of Governors serves a 14-year term. - The board of directors of reserve banks select a president. - Congress can amend the Federal Reserve Act. - The Federal Reserve does not rely on the government for funds for operation.
Congress can amend the Federal Reserve Act.
Which of the following could cause a bank to become insolvent? - The bank calls in loans made to households and firms. - The value of assets minus liabilities rises. - Interest rates fall and the value of fixed-income assets fall. - Consumers default on their loans and market value of loans falls. - Creditors call in loans made to the bank.
Consumers default on their loans and market value of loans falls.
Which bank balance sheet item is responsible for generating the majority of bank revenues? - Loans to households and firms. - Deposits from households - Treasury securities - Collateralized debt obligations (CDOs).
Loans to households and firms.
The business of banking may attract speculators and other shady characters looking to make risky investments with depositors funds (adverse selection). What type of banking regulation would help solve this problem? - Require banks to hold a minimum amount of depositors funds in reserve. - Require banks to hold a minimum leverage ratio. - Require banks to carry deposit insurance. - Require individuals to receive permission (charter) from the state or Federal Government to start a bank.
Require individuals to receive permission (charter) from the state or Federal Government to start a bank.
The safety net provided by the government in the form of deposit insurance and implicit bailout guarantee encourages banker managers and owners to take on excessive risk. What kinds of regulations would you recommend to curb excessive risk-taking? - All of these answers are correct. - Require a low leverage ratio. - Require banks disclose lending activities to depositors. - Restrict banks on the types of assets they hold.
Restrict banks on the types of assets they hold.
Sunny bank has leverage ratio of 8% and Cloudy bank has leverage ratio of 15%. Assuming ROA is the same for both banks, ROE is greater at __________ bank and risk of insolvency is greater at __________. - Cloudy; Sunny - Cloudy; cannot be determined - Sunny; Cloudy - Cloudy; Cloudy - Sunny; Sunny
Sunny; Sunny
What would cause return on equity (ROE) to increase? - The ratio of capital/assets increases. - Return on assets (ROA) decreases. - The ratio of capital/assets decreases.
The ratio of capital/assets decreases. Inverse of the Equity Multiplier.
Which of the following would normally lead to an increase in both the M1 and M2 money multipliers. - Banks increase holdings of excess reserves relative to deposits. - The reserve requirement decreases. - Households hold a higher fraction of deposits in currency. - Banks are regulated more heavily.
The reserve requirement decreases.
Which of the following is true in the United States over the period 1832-1913? - There was no central bank. - The Federal Reserve existed, but did not make loans to banks. - Only federal or national agencies charted banks.
There was no central bank.
Jonny takes $1000 in currency and deposits it in a savings account at Fifth Third Bank. The value of the deposit is - an asset for Fifth Third Bank and a liability for Jonny. - a liability for Fifth Third Bank and a liability for Jonny. - a liability for Fifth Third Bank and an asset for Jonny. - an asset for Fifth Third Bank and an asset for Jonny.
a liability for Fifth Third Bank and an asset for Jonny.
Which of the following might decrease the Federal Funds rate? - a reduction in the interest rate paid on reserves - an increase in the reserve requirement - an increase in the discount rate
a reduction in the interest rate paid on reserves
The Federal Reserve was created in 1913 with the initial mandate to - All of these answers are correct - act as the lender to banks. - purchase and sell government securities. - replace the gold standard. -conduct monetary policy to keep both unemployment and inflation low.
act as the lender to banks.
Suppose owners of a bank would like to reduce the amount of capital relative to assets. This could be accomplished by - distributing dividends to shareholders - buying back shares from existing owners - borrowing funds and making more loans - all of these
all of these
Banks make profits by selling liabilities with one set of characteristics and using the proceeds to buy assets with a different set of characteristics. This process is known as __________ .
asset transformation
A Discount loan from the Federal Reserve is an example of a - none of these - bank capital - bank asset - bank liability
bank liability
Which of the following is a liability of the Federal Reserve? - bank reserves - federal funds - loans to banks - Treasury securities held
bank reserves
The least costly way for banks to increase reserves is to - reduce loan balance by calling in loans. - borrowing from other banks. - selling securities.
borrowing from other banks.
The Federal Reserve can increase the monetary base by - making loans to banks. - purchasing securities. - both making loans to banks and purchasing securities.
both making loans to banks and purchasing securities.
Assume the duration of assets exceeds the duration of liabilities. If the interest rate increases, then - capital decreases. - capital increases. - profits decrease.
capital decreases.
First Federal has leverage ratio of 15%. ROA is 1%. If First Federal increases the leverage ratio to 20%. ROE __________ and risk of insolvency __________ . - remains the same; increases - decreases; increases - increases; decreases - decreases; decreases - increases; increases
decreases; decreases
Commercial banks primarily acquire funds from ______ and finance companies acquire funds from ______. - deposits; sale of long-term securities - deposits; the Federal Reserve - deposits; sale of short-term securities - Federal Funds; Federal Funds - the Federal Reserve; sale of long-term assets
deposits; sale of short-term securities
If interest rates decrease, bank managers would prefer to be holding - short-term and variable rate loans. - a diverse portfolio of long-term loans from different types of businesses. - high risk, high yield loans. - long-term, fixed-rate securities and loans.
long-term, fixed-rate securities and loans.
Loans that are more easily securitized likely have _____ interest rates compared to loans that are not securitized, all else constant. - the same - higher - lower
lower
Generally, securitization of loans results in - increased risk for investors. - a less liquid market for loans. - increased scrutiny of borrowers ability to repay. - lower interest rates on securitized loans.
lower interest rates on securitized loans.
Under the requirements of the Basel Accords, a bank that holds a higher share of its total assets as risky loans relative to safer government securities will be required to hold ______ capital compared to a bank that holds a lower share of risky loans relative to safer securities. - the same - more - less
more
Of the following unconventional tools, which of the following was NOT implemented by the Federal Reserve during and after the financial crisis of 2008? - emergency liquidity provision - forward guidance - quantitative easing - negative interest rates
negative interest rates
Suppose interest rates increase and profit at Cactus bank also increases. This means that - duration of assets is less than the duration of liabilities. - rate sensitive liabilities exceed rate sensitive assets. - duration of assets is greater than the duration of liabilities. - rate sensitive assets exceed rate sensitive liabilities.
rate sensitive assets exceed rate sensitive liabilities. If interest rates increase, rate sensitive assets will drive more revenue.
State banks are chartered and supervised by states. In addition, which national entity(ies) supervise(s) state-chartered banks? - the Comptroller of the Currency - only the FDIC - none, state banks are not supervised at the - federal level - the FDIC or the Federal Reserve
the FDIC or the Federal Reserve
In the market for reserves, the ceiling on the Federal Funds rate is determined by - the discount rate (the interest rate the Fed charges on loans to banks.) - the interest rate banks charge consumers for loans. - the interest rate that the Federal Reserve pays on on reserves.
the discount rate (the interest rate the Fed charges on loans to banks.)
The interest rate the Fed charges on loans to banks is called - the Federal Funds rate. - the discount rate. - the LIBOR rate.
the discount rate.
The FDIC will take steps to close a bank if Group of answer choices - the leverage ratio gets too low. - the bank refuses to take deposits from zip - codes where it makes loans. - reserves fall below required.
the leverage ratio gets too low.
Suppose the central bank announces a contractionary monetary policy to fight inflation. This leads to unemployment and the central bank reverses the policy after political pressure. This is an example of the ____ problem. - inflationary - Taylor - contractionary - time inconsistency
time inconsistency
Holding ROA constant, a bank could increase ROE by - selling shares of stock. - reducing the value of liabilities relative to assets. - increasing retained earnings. - using borrowed funds to make more loans. - none of the above, ROE depends entirely on the profitability of assets.
using borrowed funds to make more loans.
Bank reserves consist of - vault cash only - deposits at the Fed only - vault cash and deposits at the Fed - vault cash, deposits at the Fed, and Treasury securities
vault cash and deposits at the Fed
