FIN 330 Exam 2

$1,000

A bank has excess reserves of $6,000 and demand deposit liabilities of $100,000 when the required reserve ratio is 20 percent. If the reserve ratio is raised to 25 percent, the bank's excess reserves will be

a

A bundle of home mortgages sold to an investor is known as a A)mortgage-backed security B)subprime mortgage C)moral hazard D)credit default swap

Repurchase Agreement

A financing transaction in which one firm lends assets to another firm in exchange for cash with a simultaneous agreement to purchase the assets back.

Financial Accelerator

A negative shock to the economy may be intensified by worsening financial market conditions

B

A potential problem of a more politically controlled central bank is that: A)conducting both monetary policy and fiscal policy as part of the political process may produce inconsistent results. B) politicians may want to pursue monetary policies that are good in the short run but bad in the long run. C)politicians may take too long to decide on the direction of monetary policy. D) politicians may want to pursue monetary policies that are bad in the short run but good in the long run.

D

A primary lesson learned from the Panic of 1907 was the A)need for deregulation of financial markets in the United States. B)value of a private banking system in the United States. C)downside of government intervention in the economy. D) need in the United States for a central bank.

Stigma Effect

A situation in which commercial banks fear that borrowing from the central bank will be considered as a sign of financial weakness

FOMC

Consists of 12 voting members: 7 governors + 5 of the 12 Fed Reserve bank presidents

Fannie Mae would then pool mortgages and sell them to institutional investors

Consumers would pay less for a down payment now.

Funding the War Effort - Government increased spending 6-fold

Covered by increase in taxes as well as a massive increase in government debt. Debt came from the government selling a ton of bonds

Secondary Credit

Credit given to a limited number of banks that experience unusually high swings in their levels of reserves during different seasons of the year

Largest liability of the Fed

Currency outstanding and reserve repos

A

In the United States, monetary policy is formed by: A)committee B)the Fed Chair C)the President and approved by Congress. D)an individual advised by a close group of people.

D

In the early stages of the pandemic crisis: A)the fed agreed to provide a backdrop to the stock market B)the Fed (FOMC) took the target rate of overnight funds to a negative number. C)the bickering and discord between Congress and the Fed led to a painful delay in Fed reaction. D) the social distancing lockdown had an immediate impact because household outlays represent about 2/3 of the U.S. economy.

How the nonbank public affects the monetary base

Increased cash holdings increases currency in circulation and decreases bank reserves

A major concern of US policymakers for the dramatic increase in wartime spending was

Inflation

Government Rationing

Limitations, implemented by a government, on the amount of goods a person can purchase; in the past, put in place because of wartime shortages of many goods. Kept inflation low.

True

T/F: The Fed does not completely control the level of bank deposits and loans because banks can hold excess reserves and the public can change its currency holdings.

False

T/F: The financial crisis of 2007-2009 was largely limited to the United States.

Treaty

The Europe central bank model is not likely to be modified because it was created by ________________.

D

If the Federal Reserve is to be independent, then the quantity of securities it purchases is determined by: A)Congress. B)the Treasury. C)the amount the public does not want to purchase at the going price. D)the Federal Reserve itself.

D

In its role as the bankers' bank, a central bank performs each of the following, except: A)providing loans during times of financial distress. B)overseeing commercial banks and the financial system. C)managing the payments system. D) providing deposit insurance.

lends, spends

The Fed ______ and congress _______

A

_____________________ is a process of bundling together smaller loans (like mortgages) into standard debt securities. A)Securitization B)Bubble Swaps C)Compression D)Origination

C

______________________________ are subject to reserve requirements. A)Only the member institutions of the Federal Reserve B)Only commercial banks C) All depository institutions D)Only nationally chartered depository institutions

Stagflation

a period of slow economic growth and high unemployment (stagnation) while prices rise (inflation)

Credit Crunch

a reduction in the general availability of credit in financial markets most often seen as an irrational increase in risk aversion. Interest rates will rise due to increasing competition for funds.

Beige Book

a report that summarizes current economic conditions in each Federal Reserve district and each sector of the economy

Lend-Lease Act

allowed the presidential administration to provide military and economic assistance to any country the president viewed as "vital to the defense of the United States"

Matched Sale-Purchases

arrangement where the federal reserve sells gov securities to a primary dealer or the central bank of another country with the agreement to purchase the security back within a short period of time

Target Asset Purchases

asset purchases that shift the composition of the Fed's balance sheet.

If fed increases required reserve ratio

banks would be required to hold more reserves and thus decrease the size of the money multiplier

Primary Credit

healthy banks are allowed to borrow from the Federal Reserve for short periods of time (historically overnight)

The Fed's largest asset

holdings of securities, which includes government securities such as U.S. T-bills, notes and bonds; fed agency debt; and privately issued mortgage-backed securities: uses its holding of securities for open-market operations

Expansionary OMO

increase the monetary base (level of bank reserves) , the central bank buys assets in financial markets, and pays with new monetary base

Discount Rate

interest rate the Fed Reserve charges on loans it makes to member banks (made at the Fed's discount window).

Fannie/Freddie

provide liquidity, stability, and affordability to mortgage market

Primary Dealer Credit Facility

provides overnight loans to primary dealers who are willing to post loan-backed securities as collateral

DIDMCA and GSGA were both meant to

regulate to allow depository institutions to take more risks due to funds being insured

bank reserves

reserves of the banking system consist of bank deposits at the fed plus the currency they hold in bank vaults

Main street lending program

support lending to small and medium-sized for profit businesses and nonprofit organizations that were in sound financial condition before the onset of the COVID-19 pandemic.

Primary Dealers

supports credits needed by households and businesses.

Quantitative easing

the introduction of new money into the money supply by a central bank. Large scale asset purchases

Reserve Requirement

the minimum level of deposits that banking institutions must hold in reserve

Term Auction Facility

the monetary policy procedure used by the Federal Reserve, in which commercial banks anonymously bid to obtain loans being made available by the Fed as a way to expand reserves in the banking system

Repurchase Agreements

the selling of a security with an agreement to buy it back in the future

The majority of members of the FOMC are

the seven members of the board of governors.

Discount window lending takes place at the

twelve Federal Reserve Banks

Frictional or short term unemployment

unemployment that lasts only a few weeks or a few months as unemployed workers are searching for jobs

Cyclical Unemployment

unemployment that occurs as a result of a downturn in the business cycle

Structural Unemployment

unemployment that occurs as some industries or sectors of the economy are contracting while others are expanding

One of the tools the US government used to control inflation in WWII was

wage and price controls. Others may include war bonds and government rationing.

Foreign Exchange Intervention

when fed buys foreign currency from commercial bank, it deposits dollars into commercial bank and increases bank reserves

Quantitative tightening

when the Fed sells longer-term government bonds or other securities

Inflation Targeting

a monetary policy where the central bank uses its tools to achieve a stated rate of inflation over time

Federal Reserve

(1913): created in response to the Panic of 1907

Changes to the structure of the Fed during the Great Depression included

- The creation of the FOMC - The consolidation of power in the Board of Governors - Increasing the political independence of the Fed

Power Pyramid of Fed Reserve

1. The Chair 2. Board of Governors (2 + the chair) 3. 12 Federal Reserve Banks

Term Securities Lending Facility

Allowed securities dealers to exchange their otherwise difficult to finance secured debt for easier to finance treasury securities

Wage and Price Control

Also called the incomes policy, an economic policy where governments place legal limits on the amount of wage and price increases.

D

Although the subprime mortgage market problem began in the United States, the first indication of the seriousness of the crisis began in A)China B)Saudi Arabia C)South America D)Europe E)Australia

Garn-St. Germain Act of 1982 (GSGA)

An act designed to reduce the amount of regulation over the Saving & Loan or thrift industry

C

Both ________ and ________ are Federal Reserve assets. A)currency in circulation; reserves B)securities; reserves C) securities; loans to financial institutions D)currency in circulation; securities

A

Both ________ and ________ are monetary liabilities of the Fed. A) currency in circulation; reserves B)securities; loans to financial institutions C)securities; reserves D)currency in circulation; loans to financial institutions

12

How many regional Federal Reserve Banks are there?

A

I argued that the primary mission of Fannie and Freddie in the market is to provide: A)liquidity B)exchange C)confidence D)capital

C

Central banks often find: A)they can efficiently pursue all of their goals simultaneously. B)they must keep their goals secret or else they cannot be attained. C) there are tradeoffs that make pursuing all of their goals simultaneously impossible. D)the goal(s) they pursue will be determined by their profitability.

Excess Reserves Ratio

excess reserves / deposits

A

Identify the true statement A) Fannie and Freddie are the two largest guarantors of residential mortgage loans B)Fannie guarantees loans for banks and Freddie guarantees loans for non-banks C)Freddie is larger than Fannie D)Both Freddie and Fannie lack a federal regulator 5)Both Fannie and Freddie are designated "lenders of last resort"

One of the things that made Savings & Loans eager to lend money for home mortgages was the existence of the

Federal Housing Administration

D

Federal Reserve notes are considered to be A)assets of the US Treasury. B)assets of the Federal Reserve. C)liabilities of the US Treasury. D) liabilities of the Federal Reserve.

B

Government response to the 2007-2009 crisis included all of the following except: A)"Quantitative Easing" or security purchases by the Fed B) Stimulus spending by state and local governments C)Bailouts for key financial institutions D)Stimulus spending by the federal government

A

One of the most important functions of the US Federal Reserve is to serve as A) a lender of last resort B)the printer of currency for the US economy C)the chief monitor of economic activity in the US economy D)the repository of all gold deposits in the US financial system

Dynamic Transactions

Open market operations designed to change the level of reserves.

Defensive Transactions

Open market operations designed to maintain the level of reserves

Fed tools

Open market operations, reserve requirements, discount rate, interest on excess reserves, reverse repurchase agreements

D

Price paid by banks in the financial crisis: as a result of financial crisis A)more liquidity required B)more capital required C)more oversight D)all of these answers were a price paid by banks

D

Private-label issuers of bundled mortgages gained market share prior to the crisis. Much of the content was substandard due to A)over-reliance on credit scoring b)lack of documentation c)poor underwriting d)all of these potential answers contributed

Reserves

Required Reserves + Excess Reserves

D

Reserves are equal to the sum of A)vault cash reserves and total reserves. B)excess reserves and vault cash reserves. C)required reserves and vault cash reserves. D) required reserves and excess reserves.

At the conclusion of WWII, an explosion in the home mortgage market was led by depository institutions known as

Savings & Loans

Fed's Balance Sheet - Assets

Securities (OMO), Loans, Repos, Foreign Exchange Reserves

B

Subprime Loans A)refers to ARMs and HELOCs B) carry higher levels of perceived risk C)are at a rate below the Prime lending rate D)are exclusive to credit card debt and payday lending

False

T/F: Among the issues addressed by Dodd-Frank legislation was privately-owned, government-sponsored enterprises (GSEs) such as Fannie Mae and Freddie Mac.

True

T/F: Bernanke indicated the U.S. Government made a profit on its QE asset purchases.

True

T/F: Fannie and Freddie support affordable rental housing by facilitating multi-family residential loans. Correct! True

False

T/F: Fed funds are overnight funds that banks borrow from a Federal Reserve Bank.

True

T/F: Most of the community banks were hurt more by commercial real estate loan losses than residential real estate loan losses in the aftermath of the financial crisis.

False

T/F: One thing that is true about economic policy in the U.S. is fiscal and monetary policy never conflict.

False

T/F: The Fed agreed to purchase municipal bonds as long as they were not used to refinance to a lower rate as a pandemic response

C

The Fed started picking up more mortgage-backed securities in its inventory during TAP. What was the intended goal? A)diversification (credit risk) B)there was a lack of Treasuries to buy C)increase price of securities (lower yield) and therefore support lower mortgage rates. D)corner the market to support Fannie and Freddie

B

The Fed usually keeps the discount rate above the target fed funds rate and prefers that _________________ so that __________________. A)banks borrow reserves from the Fed; banks can monitor each other for credit risk B) banks borrow reserves from each other; banks can monitor each other for credit risk C)banks borrow reserves from each other; the Fed can monitor banks for credit risk D)banks borrow reserves from the Fed; the Fed can monitor banks for credit risk

A

The Fed's open market operations normally involve only the purchase of government securities, particularly those that are short-term. However, during the crisis, the Fed started new programs to purchase A)mortgage-backed securities and long-term Treasuries. B)Treasury bills and Treasury notes. C)commercial papers and short-term Treasuries. D)mortgage-backed securities and Treasury bills.

D

The Federal Reserve was created largely in response to the A)response to the establishment of the Bank of England. B)need for a national currency. C)start of World War I. D)frequency of bank panics.

A

The Panic of 1907 was triggered by A)excessive speculation in the stock market, excessively loose lending by banks and trusts, and a lack of effective oversight of financial markets. B)excessively loose lending by banks and trusts, a need to divert cash to San Francisco following the 1906 earthquake, and excessively restrictive regulation of financial markets. C)excessive speculation in the stock market, excessively tight lending by banks and trusts, and excessively restrictive regulation of financial markets. D)a need to divert cash to San Francisco following the 1906 earthquake, government intervention that broke up many of the major trusts, and a lack of effective oversight of financial markets.

E

The Reserve Banks of the Federal Reserve System are owned by: A)the Board of Governors. B)the U.S. Treasury. C)the taxpayers in their districts. D)a blind trust. E) the commercial banks in their districts.

DIDMCA The Depository Institutions Deregulation Monetary Control Act

The act sought to increase the amount of competition in financial markets while also granting the Federal Reserve additional regulatory oversight

A

The most important advantage of discount policy is that the Fed can use it to: A) perform its role as lender of last resort. B)punish banks that have deficient reserves. C)control the money supply. D)precisely control the monetary base.

A

The quantity of securities held by the Federal Reserve is A) open market operations B)the Fed's annual budget C)the purchases made by the regional Reserve banks. D)the U.S. Treasury

QE2

The second round of quantitative easing, or extraordinary expansionary monetary policy, undertaken by the Federal Reserve from November 2010 to June 2011

C

The term "quantitative easing" refers to the Fed's A)sales of only short-term Treasury securities. B)purchases of only short-term Treasury securities. C)purchases of various types of debt securities, including risky debt securities. D)purchases of only commodities such as gold.

QE3

The third round of quantitative easing, or extraordinary expansionary monetary policy, undertaken by the Federal Reserve from late 2013 to late 2014

D

The three largest Federal Reserve banks (New York, Chicago, and San Francisco) combined hold more than ________ percent of the assets of the Federal Reserve System. A)25 B)67 C)33 D)50

Contractionary OMO

To shrink the monetary base (level of bank reserve), the central bank sells assets in financial markets,

Fed's Balance Sheet - Liabilities

US currency in circulation; bank reserve deposits

A

What did I say contributed to the larger than expected time that Fannie and Freddie were/are wards of the U.S. Government? A) rebound in housing B)regulator scandal C)IRS challenges D)Dodd-Frank legislation

A

What does Fannie and Freddie do with most of these loans purchased from banks? A) bundles, sells, guarantees B)sells them to non-banks C)services the loan payments D)keeps in inventory and contracts with a third-party to service payments.

Operation Twist

When the Fed buys long-term government securities and sells short-term government securities

Monetary Base, Monetary Base, Money Multiplier

Which does each tool affect (monetary base or money multiplier)? 1. Open Market Operations 2.Discount Policy 3. Reserve requirements

C

Which of the books used at the FOMC meetings is/are treated as secret documents and not released to the public until after a number of years have passed? A)Beigebook B)Bluebook C) Tealbook D)Greenbook

A

Which of the following is NOT a major component of the Federal Reserve System? A)Securities and Exchange Commission B)Federal Open Market Committee C)Board of Governers D)member banks

B

Who shared the credit risk with the Fed on its Main Street Lending Program? A)Chamber of Commerce B) banks C)U.S. Treasury D)affected cities

Saving & Loans

a depository institution that focuses on taking deposits of households and individuals. Most loans are consumer loans including home mortgages. Established to lend money to households so the households could purchase houses.

Deflation

can be more destructive than inflation because it increases the real burden of debt. Can lead to businesses and households cutting back their spending and borrowing, thereby pushing the economy into recession.

Real Bills Doctrine

central banks should lend money to commercial banks if and only if the commercial banks use those funds to support "real" economic activity

Federal Open Market Committee (FOMC)

committee within the Fed Reserve responsible for setting monetary policy.

Money Supply

currency + deposits

Currency Ratio

currency / deposits

Monetary Base

currency in circulation + bank reserves + US Treasury currency in circulation

War Bonds

debt issued by the federal government to fund the spending on wars. Done in the US most recently during WWI and WWII

TALF (Term Asset-Backed Securities Loan Facility)

designed to increase the availability of consumer credit during pandemic

Discount Loans

loans the federal reserve makes to banks

Discount loans

loans the federal reserve makes to banks

US Treasury Currency

mainly includes coins produced by US mint and other Treasury monetary liabilities

Price Level Targeting

monetary policy where the central bank uses its tools to achieve a stated price index over time

Open Market Operations

most flexible and most often used tool Fed uses for monetary policy Fed is buying/selling government securities from/or to a private entity

Term Auction Credit

new tool the Fed developed in an attempt to stabilize financial markets during 2008-09 through Term Auction Facility. Increase the amount of liquidity in the market.