finc 381 final (chapter 5 pt 2, 9-13, 16-18)

Because most open market operations are typically repurchase​ agreements, it is likely that the volume of defensive open market operations is ______ the volume of dynamic open market operations.

greater than

Agreements to provide a standardized commodity to a buyer at a specific price on a specific date​ are: Part 2 A. ​mortgage-backed securities. B. put options. C. call options. D. futures contracts.

futures contracts

The money multiplier when people hold currency and when banks hold excess reserves is ______ the simple multiplier ​(the multiplier found when currency held and excess reserves are both​ zero).

smaller than

The European system of central banks uses similar monetary policy tools to that of the Federal reserve. These tools​ involve: A. open market operations B. lending to banks C. reserve requirements D. Both A and C are correct E. All of the above are correct

E. All of the above are correct

Why might the procyclical behavior of interest rates​ (rising during business cycle expansions and falling during​ recessions) lead to procyclical movements in the money​ supply? ​ (Assume the Fed does not change the discount​ rate.) A. The excess reserves ratio e falls with rising interest rates and the money supply rises when e falls. B. The excess reserves ratio e rises with rising interest rates and the money supply rises when e rises. C. Discount loan borrowing is positively related to interest rates and the money supply is positively related to the level of discount loans from the Fed. D. Discount loan borrowing is negatively related to interest rates and the money supply is negatively related to the level of discount loans from the Fed. E. Both A​ & C are correct. F. Both B​ & D are correct.

E. Both A​ & C are correct.

It is ________ for the taxpayer if the FDIC resolves an insolvent institution by the ​"purchase and assumption method​".

typically more costly

Using the figure of the money market shown to the​ right, show why a rise in the price level ​(but not in expected inflation​) will cause interest rates to rise when the nominal money supply is fixed.

demand curve shifts up and to the right (interest rate y axis, quantity of money is x axis)

Using the​ T-accounts of the First National Bank and the Second National​ Bank, describe what happens when Jane Brown writes a check for ​$75 on her account at the First National Bank to pay her friend Joe​ Green, who in turn deposits the check in his account at the Second National Bank. ​T-account for the First National​ Bank: ​T-account for the Second National​ Bank:

​T-account for the First National​ Bank: Assets i. Reserves: -75 Liabilities i. Checkable Deposits: -75 ​T-account for the Second National​ Bank: assets i. Reserves: 75 Liabilities i. Checkable Deposits: 75

The players in the money supply process include all of the following except​: A. the Treasury. B. depositors. C. banks. D. the central bank.

A. the Treasury.

Paul's car slid off the icy​ road, causing $3,000 in damage to his car. He was also treated for minor​ injuries, costing ​$1,000. His car insurance has a $500 ​deductible, after which the full loss is paid. His health insurance has a ​$100 deductible and covers 75​% of medical cost. What were​ Paul's out-of-pocket costs from the​ incident? ​Paul's out-of-pocket costs are _____

$825

Suppose that you are the manager of a bank that has​ $15 million of​ fixed-rate assets,​ $30 million of​ rate-sensitive assets,​ $25 million of​ fixed-rate liabilities, and​ $20 million of​ rate-sensitive liabilities. Conduct a gap analysis for the​ bank, and show what will happen to bank profits if interest rates rise by 5 percentage points. The change in bank profits is ​$____ million

0.5 million

Angus Bank holds no excess reserves but complies with the reserve requirement. The required reserves ratio is 10​%, and reserves are currently $30 million. 1. The amount of deposits is: ___ 2. The reserve shortage created by a deposit outflow of $6 million is _____ 3. The cost of the reserve shortage if the Angus Bank borrows in the federal funds market (assume the federal funds rate is 0.20%) is ____

1. 300 million 2. -5.4 million 3. $10800

Suppose that you are the manager of a bank whose​ $100 billion of assets have an average duration of four years and whose​ $90 billion of liabilities have an average duration of six years. Conduct a duration analysis for the​ bank, and show what will happen to the net worth of the bank if interest rates rise by 2 percentage points. 1. Assets fall in value by ___ billion 2. Liabilities fall in value by ____ billion 3. Networth ____ by ___ billion

1. 8 billion 2. 10.80 billion 3. increases by 2.8 billion

1. What special problem do​ off-balance-sheet activities present to bank​ regulators? A. These activities do not appear on bank balance sheets and thus limit a​ bank's ability to pursue​ high-risk investments. B. Since data for​ off-balance-sheet activities are not always​ available, asymmetric information problems may arise. C. These activities do not appear on bank balance sheets and thus cannot be handled with bank capital requirements. D. All of the above are possible problems that bank regulators may encounter. What have bank regulators done about this​ problem, if​ anything? A. Bank regulators have lowered the level of​ off-balance-sheet activities permitted for banks. B. Bank regulators have imposed an additional​ risk-based bank capital requirement. C. Bank regulators have decided to ignore some of the​ off-balance-sheet activities by banks. D. At the present​ time, there is no way to solve the problem of​ off-balance-sheet activities.

1. C. These activities do not appear on bank balance sheets and thus cannot be handled with bank capital requirements. B. Bank regulators have imposed an additional​ risk-based bank capital requirement.

Which regulatory agency has the primary responsibility for supervising the following categories of commercial​ banks? 1.National​ banks: 2.Bank holding​ companies: 3.​Non-Federal Reserve member state​ banks: 4.Federal Reserve member state​ banks: 5.Federally chartered savings and loan​ associations: 6. Federally chartered credit​ unions:

1. comptroller of the currency 2. federal reserve system 3. state banking authorities 4. federal reserve system 5. office of thrift supervision 6. National Credit Union Administration

1.Consider a failing bank. If the FDIC uses the payoff method​, a deposit of $350,000 is worth a minimum oF _____ 2.If the FDIC uses the purchase and assumption methodLOADING...​, a deposit of ​$350,000 is worth a minimum of ​_____ 3. Which method is more costly to​ taxpayers? A. The purchase and assumption method. B. The payoff method. C. Both methods are equally costly to taxpayers.

1.250,000 2. 350,000 3. A. The purchase and assumption method.

If the required reserve ratio on checkable deposits increases to​ 20%, how much multiple deposit creation will take place when reserves are increased by​ $100? Assume that banks do not hold any excess reserves and the​ public's holdings of currency do not change. A. ​$50. B. ​$500. C. ​$1,000. D. ​$2,000.

500

Suppose First National Bank holds ​$100 million in assets with an average duration of 5 ​years, and it holds ​$85 million in liabilities with an average duration of 3 years. Further suppose there is a 3​-percentage-point increase in interest rates. Calculate the percentage decrease in First National​ Bank's net worth relative to the total original asset value. A 3​-percentage-point increase in interest rates decreases First National​ Bank's net worth by ____ % of the total original asset value

7.35%

With lack of solid information about financial​ conditions, the failure of one bank can lead to runs on other banks. This is known​ as: A. the contagion effect B. adverse selection C. too big to fail D. moral hazard

A. the contagion effect

Which of the following are true of the monetary policy tools of the European System of Central Banks​ (ECB) and the​ Fed? ​(Select all that​ apply.) A. Both the ECB and the Fed supply funds to member banks at the marginal lending rate. B. The ECB does not have a discount lending​ facility, whereas the Fed has a discount lending facility. C. Both the ECB and the Fed bank members receive interest on their deposits.. D. The ECB creates an interest floor for the overnight​ rate, whereas the Fed does not create a floor for the overnight market rate.

A. Both the ECB and the Fed supply funds to member banks at the marginal lending rate. C. Both the ECB and the Fed bank members receive interest on their deposits..

The graph shows an equilibrium in the market for reserves. An open market purchase would shift the supply curve to the​ __________ and cause the federal funds rate to​ ________. A. right, fall B. right, rise C. left, rise D.

A. right, fall

Your rich uncle​ dies, leaving you a life insurance policy worth $100,000. The insurance company also offers you an option to receive $8,550 per year for 20 ​years, with the first payment due today. You should choose the immediate payout if the interest rate is greater than A. 5.76​%. B. 7.75​%. C. 5.27​%. D. 4.66​%.

A. 5.76​%.

How do sweep accounts and money market mutual funds allow banks to avoid reserve​ requirements? A. Although they function as​ interest-earning deposits, these accounts are not legally deposits and so are not subject to reserve requirements. B. Because banks are able to​ "sweep" funds from these accounts into other transaction​ accounts, they are able to avoid reserve requirements. C. Because these accounts pay a return that is slightly below the Regulation Q​ ceiling, they are not subject to reserve requirements. D. Reserve requirements on any interest bearing account cannot be avoided because they are mandated by the Federal Reserve System.

A. Although they function as​ interest-earning deposits, these accounts are not legally deposits and so are not subject to reserve requirements.

At the height of the global financial crisis in October​ 2008, the U.S. Treasury forced nine of the largest U.S. banks to accept capital​ injections, in exchange for nonvoting ownership​ stock, even though some of the banks did not need the capital and did not want to participate. What could be the rationale for doing​ this? A. By forcing all banks to accept capital​ injections, it would help prevent bank runs on the weakest banks. B. These actions were mandated by the Basel Accord to help end the financial crisis. C. With capital​ injections, institutions would have less​ "skin in the​ game" and would thus pursue​ less-risky investments. D. Government control of banks and other financial institutions would guarantee an end to the fin

A. By forcing all banks to accept capital​ injections, it would help prevent bank runs on the weakest banks.

Why do credit spreads rise during financial​ crises? A. Credit spreads rise because asymmetric information problems​ increase, making it more difficult to judge the risk of potential borrowers. B. Credit spreads rise because the government becomes the only institution that is able to lend money to borrowers. C. Credit spreads rise because depositors with productive investment opportunities withdraw their funds from​ banks, which creates an incentive to lend to borrowers with riskier investment opportunities. D. None of the above are correct.

A. Credit spreads rise because asymmetric information problems​ increase, making it more difficult to judge the risk of potential borrowers.

Unlike commercial​ banks, savings and​ loans, and mutual savings​ banks, credit unions did not have restrictions on locating branches in other states.​ Why, then, are credit unions typically smaller than the other depository​ institutions? Part 2 A. Credit unions are small because members usually share a common employer or have ties to a particular organization. B. To maintain their​ tax-exempt status, credit unions must remain smaller than other depository institutions. C. Credit unions are small because they operate under diseconomies of scale. D. The National Credit Union Association​ (NCUA) regulates the size of credit unions.

A. Credit unions are small because members usually share a common employer or have ties to a particular organization.

'The commercial banking industry in Canada is less competitive than the commercial banking industry in the United States because in Canada only a few large banks dominate the​ industry, while in the United States there are around​ 6,500 commercial​ banks.' Is this statement true or​ false? Explain your answer. Part 2 A. False. The reason for the large number of US banks is anticompetitive regulations such as branching restrictions B. True. The banking industry is less competitive in Canada than in the United States because Canada has a national banking​ system, i.e., owned and operated by the government C. True. The reason for the large number of US banks is regulations that promote competition such as branching restrictions D. False. It is not true that the industry is dominated by a few large​ firms; thus, based on the​ Herfindahl-Hirschman Index, the banking industry in Canada is just as competitive as in the United States

A. False. The reason for the large number of US banks is anticompetitive regulations such as branching restrictions

Which of the following is responsible for the supervision of savings and loan​ associations? Part 2 A. Federal Home Loan Bank System. B. FSLIC. C. Federal Reserve System. D. Comptroller of the Currency.

A. Federal Home Loan Bank System.

The bank panic of 1907 led to the passage of​ the: Part 2 A. Federal Reserve Act of 1913. B. National Bank Act of 1863. C. ​Garn-St. Germain Act of 1982. D. National Bank Charter Amendments of 1918.

A. Federal Reserve Act of 1913.

Unlike defined benefit pension​ plans, defined contribution pension plans​ are: A. Fully funded B. Covered by the Employee Retirement Income Security Act C. Guaranteed by the Pension Benefit Guarantee Corporation D. Vested immediately

A. Fully funded

Give one example each of moral hazard and adverse selection in private insurance arrangements. Part 2 A. Leaving your car unlocked with the keys in it is an example of moral​ hazard, while a person with poor health seeking health insurance is an example of adverse selection B. Leaving your car unlocked with the keys in it is an example of adverse​ selection, while a person with poor health seeking health insurance is an example of moral hazard C. An insurance company that sells a policy with inflated premiums is an example of adverse​ selection, while an insurance company that intentionally selects​ high-risk clients is an example of moral hazard D. An insurance company that sells a policy with inflated premiums is an example of moral​ hazard, while an insurance company that intentionally selects​ high-risk clients is an example of adverse selection

A. Leaving your car unlocked with the keys in it is an example of moral​ hazard, while a person with poor health seeking health insurance is an example of adverse selection

The collapse of the Bank of Credit and Commerce​ International, BCCI, showed the difficulty of international banking regulation. BCCI operated in more than 70 countries and was supervised by the small country​ of: A. Luxembourg B. Monaco C. Brunei D. Singapore

A. Luxembourg

Which of the following may not be used as a backup line of​ credit? A. Mortgages B. Loan commitments C. Standby letters of credit D. Overdraft privileges

A. Mortgages

Small investors might prefer to invest in a mutual fund rather than with an individual broker because​ of:: A. Mutual funds lower transaction costs to individuals. B. Mutual funds are important to household saving. C. Mutual funds have a large market share. D. Mutual funds are run by experts.

A. Mutual funds lower transaction costs to individuals.

small investors might prefer to invest in a mutual fund rather than with an individual broker because​ of: A. Mutual funds lower transaction costs to individuals. B. Mutual funds have a large market share. C. Mutual funds are important to household saving. D. Mutual funds are run by experts.

A. Mutual funds lower transaction costs to individuals.

The​ _______________ established the Office of the Comptroller of the Currency. A. National Bank Act of 1863 B. National Bank Charter Amendments of 1918 C. ​Garn-St. Germain Act of 1982 D. Federal Reserve Act of 1913

A. National Bank Act of 1863

Federally chartered banks are supervised​ by: A. the Office of the Comptroller of the Currency. B. state banking authorities. C. the Office of Thrift Supervision. D. the Federal Deposit Insurance Corporation​ (FDIC).

A. the Office of the Comptroller of the Currency.

If a bank depositor withdraws​ $1,000 of currency from an​ account, what happens to​ reserves, checkable​ deposits, and the monetary​ base? Assume that the required reserve ratio on checkable deposits is​ 10% and banks do not hold any excess reserves. A. Reserves fall by​ $1,000, checkable deposits fall by​ $10,000, and the monetary base remains unchanged. B. Reserves do not​ change, checkable deposits fall by​ $10,000, and the monetary base falls by​ $1,000. C. Reserves do not​ change, checkable deposits fall by​ $1,000, and the monetary base falls by​ $10,000. D. Reserves fall by​ $10,000, checkable deposits fall by​ $1,000, and the monetary base remains unchanged.

A. Reserves fall by​ $1,000, checkable deposits fall by​ $10,000, and the monetary base remains unchanged.

Which of the following functions is not performed by any of the 12 regional Federal Reserve​ banks? A. Setting interest rates payable on time deposits B. Issuing new currency and withdrawing damaged currency C. Cheque clearing D. Conducting economic research related to monetary policy

A. Setting interest rates payable on time deposits

How did competitive forces lead to the repeal of the​ Glass-Steagall Act's separation of the banking and securities​ industries? ​(Check all that​ apply.) A. The Fed allowed bank holding companies to enter the underwriting business. B. Banks were allowed to hold substantial equity stakes in commercial firms in order to keep them competitive. C. The​ Act's restrictions put American banks at a competitive disadvantage relative to foreign banks. D. Financial innovation motivated banks and other financial institutions to bypass the intent of the​ Glass-Steagall Act.

A. The Fed allowed bank holding companies to enter the underwriting business. C. The​ Act's restrictions put American banks at a competitive disadvantage relative to foreign banks. D. Financial innovation motivated banks and other financial institutions to bypass the intent of the​ Glass-Steagall Act.

What is a credit​ spread? A. The difference between interest rates on loans to households and businesses and interest rates on completely safe assets such as U.S. Treasury bonds. B. The difference between the interest rate on corporate bonds with different maturities. C. The difference between the net worth of a borrower and the amount of the loan the borrower would like to secure. D. The difference between a​ borrower's credit score and the score of the most​ credit-worthy borrower.

A. The difference between interest rates on loans to households and businesses and interest rates on completely safe assets such as U.S. Treasury bonds.

Which of the following statements is true of the role of a loan originator in the securitization process of a mortgage​ loan? A. The loan originator is only concerned with households accepting the terms of the mortgage loan. B. The loan originator is concerned with the financial background of households accepting the loan since the loan originator has to repay the loan if the households default. C. The loan originator is only concerned with the risk associated with the mortgage given to households.

A. The loan originator is only concerned with households accepting the terms of the mortgage loan.

Predict what will happen to the money supply if there is a sharp rise in the currency ratio. A. The money supply falls B. The money supply increases C. The money supply stays the same D. The effect on the money supply is ambiguous

A. The money supply falls

An employee contributes $200 a year​ (at the end of the​ year) to her pension plan. What would be the total contributions and value of the account after five ​years? Assume that the plan earns 15​% per year over the period. A. Total contributions equal $1,000 and the value of the account is $1,348.40. Your answer is correct. B. Total contributions equal $800 and the value of the account is $943.88. C. Total contributions equal $1,000 and the value of the account is $1,213.56. D. Total contributions equal $800 and the value of the account is $1,078.72.

A. Total contributions equal $1,000 and the value of the account is $1,348.40. Your answer is correct.

​"If inflation had not risen in the 1960s and​ 1970s, the banking industry might be healthier​ today." Is this statement​ true, false, or​ uncertain? Explain your answer. Part 2 A. True. Higher inflation helped raise interest​ rates, which caused the disintermediation process to occur and helped create money market mutual funds. B. False. Higher inflation helped raise interest​ rates, which helped the banking industry. Problems in the U.S. banking system are primarily due to financial innovation. C. True. Higher inflation helped raise interest​ rates, which caused the disintermediation process to occur and prompted the reinstatement of Regulation Q and NOW accounts. D. False. Higher inflation helped raise interest​ rates, which helped the banking industry. Problems in the U.S. banking system are primarily due to the abolishment of Regulation Q.

A. True. Higher inflation helped raise interest​ rates, which caused the disintermediation process to occur and helped create money market mutual funds.

Since the passage of the International Banking Act of​ 1978, the competitive advantage enjoyed by foreign banks has​ been: Part 2 A. eroded. B. greatly expanded. C. mildly expanded. D. completely eliminated.

A. eroded.

The monetary base rises when there is an increase​ in: A. float. B. Treasury currency outstanding. C. Treasury deposits at the Fed. D. Only A and C are correct. E. All of the above are correct.

A. float.

The ability of a central bank to set monetary policy instruments is​ ___________, while the ability of a central bank to set goals of monetary policy is​ _______. A. instrument​ independence; goal independence B. target​ independence; policy independence C. goal​ independence; target independence D. policy​ independence; target independence

A. instrument​ independence; goal independence

An open market sale would shift the supply curve to the​ __________ and cause the federal funds rate to​ ________. A. left, rise B. right, rise C. left, fall D. right, fall

A. left, rise

In Canada​, the Bank of Canada and the government jointly set the goal of monetary​ policy, a target for inflation.​ Thus, when compared to the​ Fed, the Bank of Canada ​has: A. less goal independence B. more instrument independence C. less instrument independence D. more goal independence

A. less goal independence

The European system of central​ banks' primary tool for conducting monetary policy is open market operations. It uses this tool to set the interest rate for very​ short-term interbank​ loans, which is known as​ the: A. overnight cash rate B. marginal lending rate C. discount rate D. target financing rate

A. overnight cash rate

Why is a financial crisis likely to lead to a contraction in economic​ activity? A. Disruptions in the financial system decreases asymmetric​ information, thereby decreasing the associated problems of adverse selection and moral hazard. B. A disruption in the financial system diminishes the flow of funds from savers to borrowers. C. Those that borrow funds to finance productive investment opportunities will have a greater opportunity to obtain financing. D. None of the above are correct.

B. A disruption in the financial system diminishes the flow of funds from savers to borrowers.

Which of the following is likely a result of increased​ interest-rate volatility? Part 2 A. A decrease in costs for financial products and services B. An increase in demand for financial services and products C. A decrease in demand for financial services and products D. An increase in costs for financial products and services

B. An increase in demand for financial services and products

If a bank experiences a deposit outflow of​ $50 million with a required reserve ratio on deposits of​ 10%, which balance sheet would the bank rather have​ initially: Balance Sheet A or Balance Sheet B​? ​Why? Balance Sheet A Assets Reserves ​$ 75 million Loans ​$525 million Liabilities Deposits ​$500 million Bank capital ​$100 million Balance Sheet B Assets Reserves ​$100 million Loans ​$500 million Liabilities Deposits ​$500 million Bank capital ​$100 million A. Since acquiring reserves is nearly​ costless, Balance Sheet A is more desirable because it can take advantage of holding more​ income-producing assets until the deposit outflow. B. Balance Sheet B because the excess reserves are adequate to cover the deposit outflow without the bank needing to alter its balance sheet. C. Since acquiring reserves is nearly​ costless, Balance Sheet B is more desirable because it can take advantage of holding more​ income-producing assets until the deposit outflow. D. Balance Sheet A because the excess reserves are adequate to cover the deposit outflow without the bank needing to alter its balance sheet.​ Moreover, this balance sheet has more​ income-producing assets.

B. Balance Sheet B because the excess reserves are adequate to cover the deposit outflow without the bank needing to alter its balance sheet.

A bank almost always insists that the firms it lends to keep compensating balances at the bank.​ Why? ​(Check all that​ apply.) Part 2 A. Compensating balances earn higher returns than other​ income-producing assets, which raises bank profitability B. Compensating balances help establish​ long-term customer​ relationships, which make it easier for the bank to collect information about prospective​ borrowers, thus reducing the adverse selection problem C. Compensating balances help the bank monitor the activities of a borrowing​ firm, which reduces the moral hazard problem D. Compensating balances can act as collateral E. Compensating balances can be used as a substitute for a revolving line of credit

B. Compensating balances help establish​ long-term customer​ relationships, which make it easier for the bank to collect information about prospective​ borrowers, thus reducing the adverse selection problem C. Compensating balances help the bank monitor the activities of a borrowing​ firm, which reduces the moral hazard problem D. Compensating balances can act as collateral

What are the five areas included in the​ Dodd-Frank Act of​ 2010? A. Consumer​ protection, capital​ requirements, GSEs,​ credit-rating agencies, and derivatives. B. Consumer​ protection, resolution​ authority, systemic risk​ regulation, Volcker​ rule, and derivatives. C. Capital​ requirements, resolution​ authority, compensation,​ credit-rating agencies, and GSEs. D. Capital​ requirements, resolution​ authority, compensation,​ credit-rating agencies, and systemic risk regulation.

B. Consumer​ protection, resolution​ authority, systemic risk​ regulation, Volcker​ rule, and derivatives.

Identify the similarities between the United​ States' experiences during the Great Depression and the financial crisis of​ 2007-2009. ​(Check all that​ apply.) A. The source of the asset−price increase was the same for both episodes. B. Credit spreads widened and the availability of credit declined during both episodes. C. Both episodes resulted in significant declines in GDP and a significant increase in unemployment of 25%. D. Both episodes were preceded by sharp increases in asset prices. E. A bank panic occurred during both episodes.

B. Credit spreads widened and the availability of credit declined during both episodes. D. Both episodes were preceded by sharp increases in asset prices.

If casualty insurance companies provided fire insurance without any​ restrictions, what kind of moral hazard problem might​ result? Part 2 A. Insurance premiums would likely be lower with no need for deductibles B. Customers would take less preventive care in avoiding fire risk with this type of insurance C. ​High-risk customers​ (for example, fireworks​ manufacturers) would seek this type of insurance D. With no​ restrictions, individuals would likely engage in less​ risk-taking behaviour with this type of insurance

B. Customers would take less preventive care in avoiding fire risk with this type of insurance

_______ is the process of researching and developing new instruments to address the needs of investors and institutions in a rapidly changing financial climate. Part 2 A. Customer manipulation B. Financial engineering C. Financial manipulation D. Customer engineering

B. Financial engineering

Which of the following statements is true of financial​ frictions? A. Financial frictions are a set of conditions that prevents financial markets from undertaking​ high-risk investment. B. Financial frictions are a set of conditions that prevents financial markets from effectively assigning funds to the best investment opportunities. C. Financial frictions help avoid the problem of moral hazard in financial markets. D. Financial frictions help avoid the problem of adverse selection in financial transactions.

B. Financial frictions are a set of conditions that prevents financial markets from effectively assigning funds to the best investment opportunities.

Why does the existence of deposit insurance increase the likelihood that depositors will need deposit​ protection? Part 2 A. Insured banks tend to be too​ conservative, reducing the profitability of the bank B. Insured banks tend to pursue greater risks than they otherwise would C. Insured banks tend to regard deposits as an unattractive source of funds due to depositor demands for safety D. With increased deposit​ protection, depositors are likely to withdraw large amounts of funds from their accounts

B. Insured banks tend to pursue greater risks than they otherwise would

Why might American businesses want to hold Eurodollars? Part 2 A. Eurodollar deposits are insured by the FDIC B. Many commercial transactions and international contracts are denominated in dollars C. Eurodollar deposits are heavily regulated D. Minimum transaction sizes are very​ low, making Eurodollars an attractive savings instrument for consumers

B. Many commercial transactions and international contracts are denominated in dollars

Choose the components of the shadow banking system. ​(Check all that​ apply.) A. Savings and loan associations. B. Money market funds. C. Hedge funds. D. Commercial banks. E. Investment banks.

B. Money market funds. C. Hedge funds. E. Investment banks.

If the bank you own has no excess reserves and a sound customer comes in asking for a​ loan, should you automatically turn the customer​ down, explaining that you​ don't have any excess reservesLOADING... to lend​ out? Why or why​ not? What options are available for you to provide the funds your customer​ needs? Part 2 A. Yes. Although excess reserve are not the only source of new​ lending, the cost of acquiring the excess reserves for lending are higher than the expected return on the loan. B. No. There are several ways that reserves can be acquired. For​ example, the bank can borrow at the discount window or in the federal funds​ market, or it can acquire funds by issuing negotiable CDs. C. No. There are only two sources of funds that can used to acquire reserves. The bank can borrow at the discount window or in the federal funds market. D. Yes. In response to the subprime mortgage​ meltdown, the Federal Lending Act of 2008 stipulates that excess reserves are the only source of new lending.

B. No. There are several ways that reserves can be acquired. For​ example, the bank can borrow at the discount window or in the federal funds​ market, or it can acquire funds by issuing negotiable CDs.

A bank finds that its ROE is too low because it has too much bank capital. Which of the following will not raise its​ ROE? Part 2 A. The bank can increase the amount of its assets by acquiring new funds B. The bank can sell part of its holdings of securities and hold more excess reserves C. The bank can pay out more dividends D. The bank can buy back some of its shares

B. The bank can sell part of its holdings of securities and hold more excess reserves

Suppose after a few mergers and​ acquisitions, a single bank holds​ 70% of all the deposits in the United States. Part 2 Which of the following statements is likely to be true in the event of the failure of the​ bank? A. The failure of the bank will likely cause the bond prices to increase​ significantly, prompting the FDIC to recommend further acquisitions to maintain the​ country's balance of trade. B. The failure of the bank will likely cause a financial​ catastrophe, prompting the FDIC to do everything to prevent the institution from going bankrupt. C. The failure of the bank will likely cause a negative economic growth of the​ country, prompting the FDIC to adopt a system of deposits to lower the chances of this failure.

B. The failure of the bank will likely cause a financial​ catastrophe, prompting the FDIC to do everything to prevent the institution from going bankrupt

Use the figure and supply and demand analysis of the market for reserves to answer the following question. What would happen to the federal funds rate if it were initially at i1ff and there was a switch from deposits into currency​ (holding everything else​ constant)? The federal funds rate would stay at i1ff . B. The federal funds rate would increase to i2ff . C. The federal funds rate would fall to i3ff . D. The federal funds rate would increase to i4ff .

B. The federal funds rate would increase to i2ff .

The figure is drawn such that the discount rate id is above the federal funds rate i1ff . What would happen to the federal funds rate if there was a switch from deposits into currency​ (holding everything else​ constant) and the federal funds rate was initially at the discount rate ​(i1ff = id​)? A. The federal funds rate would rise. B. The federal funds rate would stay at i1ff . C. The federal funds rate would fall. D. The outcome cannot be determined.

B. The federal funds rate would stay at i1ff .

Predict what will happen to the money supply if there is a sharp rise in the currency ratio. Part 2 A. The money supply increases B. The money supply falls C. The money supply stays the same D. The effect on the money supply is ambiguous

B. The money supply falls

If the economy starts to boom and loan demand picks​ up, what do you predict will happen to the money​ supply? Part 2 A. The money supply will decrease B. The money supply will increase C. The money supply will not change D. The effect on the money supply is ambiguous

B. The money supply will increase

What do you predict would happen to the money supply if expected inflation suddenly​ increased? Part 2 A. The money supply will decrease B. The money supply will increase C. The money supply will not change D. The effect on the money supply is ambiguous

B. The money supply will increase

Suppose that you have​ $300,000 in deposits at a bank. After careful​ consideration, the FDIC decides that this bank is now insolvent. Part 2 Which method would you like to see the FDIC​ apply? A. The payoff method. B. The purchase and assumption method. PART 3 What if your deposit were​ $200,000? A. The payoff method. B. The purchase and assumption method. C. Indifferent as to which method the FDIC would use to handle this failed bank.

B. The purchase and assumption method. PART 2 C. Indifferent as to which method the FDIC would use to handle this failed bank.

M1 money growth in the U.S. was about​ 16% in​ 2008, 7% in​ 2009, and​ 9% in 2010. Over the same time​ period, the yield on​ 3-month Treasury bills fell from almost​ 3% to close to​ 0%. Given these high rates of money​ growth, why did interest rates​ fall, rather than​ increase? A. The liquidity effect was working in the same direction as the​ income, price-level, and expected inflation effects. B. The​ income, price-level, and​ expected-inflation effects were small relative to the liquidity effect. C. The liquidity effect did not dominate the other effects as the liquidity preference framework would suggest. D. The​ income, price-level, and​ expected-inflation effects were large relative to the liquidity effect.

B. The​ income, price-level, and​ expected-inflation effects were small relative to the liquidity effect.

When the risk that some banks might fail​ increases, depositors may not have enough information to determine whether their bank is a good one or one of the banks at greater risk to fail. Depositors have an incentive to withdraw their deposits before the bank runs out of funds. If this becomes a widespread​ occurrence, it is known​ as: A. moral hazard. B. a bank panic. C. adverse selection. D. debt deflation.

B. a bank panic.

Using the liquidity preference​ framework, an increase in the riskiness of bonds will​ cause: A. a decrease in the demand for​ money, no change in the quantity of​ money, and a higher interest rate. B. an increase in the demand for​ money, no change in the quantity of​ money, and a higher interest rate. C. a decrease in the demand for​ money, no change in the quantity of​ money, and a lower interest rate. D. an increase in the demand for​ money, no change in the quantity of​ money, and a lower interest rate

B. an increase in the demand for​ money, no change in the quantity of​ money, and a higher interest rate.

Not requiring Fannie Mae and Freddie Mac to have the same​ _____________ as banks has led to concerns about the financial safety of the agencies. A. cost of raising funds B. capital to asset ratio C. levels of debt D. federal regulation

B. capital to asset ratio

The ability to use one common resource to provide different products and services​ is: A. economies of scale B. economies of scope C. diversification D. vertical integration

B. economies of scope

Open market sales shrink the​ ________, thereby decreasing the​ _________. A. money​ multiplier; money supply B. monetary base and​ reserves; money supply C. money​ multiplier; monetary base and reserves D. money​ base; money multiplier

B. monetary base and​ reserves; money supply

Thrift institutions​ include: Part 2 A. insurance companies B. mutual savings banks C. commercial banks D. brokerage firms

B. mutual savings banks

The McFadden Act of​ 1927: Part 2 A. separated commercial banks and investment banks. B. prohibited banks from branching across state lines. C. required that banks maintain bank capital equal to at least 6 percent of their assets. D. required that all banks seek deposit insurance.

B. prohibited banks from branching across state lines.

When the​ zero-lower-bound problem​ occurs, central banks can rely​ on: A. qualitative easing. B. the liquidity provision. C. asset sales. D. systemic adjustment.

B. the liquidity provision.

When the charter of the Second Bank of the United States expired in​ 1836: A. it created a central bank to help prevent future bank panics. B. there was no lender of last resort to provide reserves to the banking system. C. the Treasury assumed the role as lender of last resort. D. bank panics and losses to depositors declined.

B. there was no lender of last resort to provide reserves to the banking system.

Which of the following repealed the​ Glass-Steagall Act? Part 2 A. McFadden Act. B. ​Gramm-Leach-Bliley Act. C. ​Garn-St. Germain Act. D. ​Riegle-Neal Act.

B. ​Gramm-Leach-Bliley Act.

How could higher deposit insurance premiums for banks with riskier assets benefit the​ economy? Part 2 A. ​Risk-based premiums would help mitigate the adverse selection​ problem; however, it is difficult to monitor the degree of risk in bank assets because often only the bank making the loans knows how risky they are B. ​Risk-based premiums would help mitigate the moral hazard​ problem; however, it is difficult to monitor the degree of risk in bank assets because often only the bank making the loans knows how risky they are C. ​Risk-based premiums would eliminate the moral hazard problem.​ Furthermore, since the technology exists to accurately estimate the riskiness of bank​ assets, implementing this policy could significantly benefit the economy D. ​Risk-based premiums would eliminate the adverse selection problem.​ Furthermore, since the technology exists to accurately estimate the riskiness of bank​ assets, implementing this policy could significantly benefit the economy

B. ​Risk-based premiums would help mitigate the moral hazard​ problem; however, it is difficult to monitor the degree of risk in bank assets because often only the bank making the loans knows how risky they are

How have GSEs exposed the taxpayer to large​ losses? A. The​ GSE's have failed to fulfill their mandates to support agriculture and housing​ market, forcing taxpayers to find other methods. B. The Federal Reserve has failed to control the money supply​ tightly, exposing taxpayers to the risks of inflation. C. The GSEs have incentives to take on excessive risk because their debt is implicitly​ guaranteed, and thus they have made bad​ loans, leaving the taxpayer exposed to large losses. D. The FDIC has had to carry the costs of reorganizing failing​ banks, which is costly to taxpayers

C. The GSEs have incentives to take on excessive risk because their debt is implicitly​ guaranteed, and thus they have made bad​ loans, leaving the taxpayer exposed to large losses.

Why is the shadow banking system an important part of the​ 2007-2009 financial​ crisis? A. The shadow banking system was able to take on significantly less risk than other financial​ firms, preventing the economy from losses. B. A large amount of funds flowed through the shadow banking​ system, which increased interest rates and fueled some of the housing bubble. C. A decrease of funding from the shadow banking system caused a restriction of lending and a decline in economic activity. D. An increase of funding from the shadow banking system resulted in a decrease in the issuance of​ CDOs, increasing the severity of adverse selection and moral hazard problems.

C. A decrease of funding from the shadow banking system caused a restriction of lending and a decline in economic activity.

If the Treasury has just paid a large bill to defense contractors and as a result its deposits with the Fed​ fall, what defensive open market operations will the manager of the open market desk​ undertake? Part 2 A. A defensive open market purchase. B. A repurchase agreement. C. A defensive open market sale. D. None of the above are correct.

C. A defensive open market sale.

Why is a financial crisis likely to lead to a contraction in economic​ activity? A. Those that borrow funds to finance productive investment opportunities will have a greater opportunity to obtain financing. B. Disruptions in the financial system decreases asymmetric​ information, thereby decreasing the associated problems of adverse selection and moral hazard. C. A disruption in the financial system diminishes the flow of funds from savers to borrowers. D. None of the above are correct.

C. A disruption in the financial system diminishes the flow of funds from savers to borrowers.

What is the major difference between banking systems in the United States and​ Japan? Part 2 A. Japanese banks are usually organized as bank holding companies. B. Bank holding companies are illegal in the United States. C. American banks are not allowed to hold substantial equity stakes in commercial​ firms, whereas Japanese banks can. D. Japanese banks are not allowed to hold substantial equity stakes in commercial​ firms, whereas American banks can.

C. American banks are not allowed to hold substantial equity stakes in commercial​ firms, whereas Japanese banks can.

​____________ are intended to offset movements in other factors that affect reserves and the monetary base. A. Open market sales B. Open market purchases C. Defensive open market operations D. Dynamic open market operations

C. Defensive open market operations

​____________ are intended to change the level of reserves and the monetary base. A. Open market purchases B. Defensive open market operations C. Dynamic open market operations D. Open market sales

C. Dynamic open market operations

"Because diversification is a desirable strategy for avoiding​ risk, it never makes sense for a bank to specialize in making specific types of​ loans." Is this statement true or​ false? Explain your answer. Part 2 A. True. A bank can reduce its risk by using​ diversification, just like individuals can. B. False. A bank does not gain anything by​ diversifying; the bank only raises its costs when it diversifies. C. False. A bank may have developed expertise in screening and monitoring a particular type of​ loan, thus improving its ability to handle problems of adverse selection and moral hazard. D. True. Diversification is a desirable strategy for a​ bank, so it does not make sense for a bank to specialize in certain types of lending.

C. False. A bank may have developed expertise in screening and monitoring a particular type of​ loan, thus improving its ability to handle problems of adverse selection and moral hazard.

Hedge funds are similar to the Mutual funds. They allow small investors to diversify their portfolios and thus provides a hedge against risk.​ However, unlike a mutual​ fund, investors do not have to commit their money for long periods of time. Evaluate the statement above. Part 2 A. True. Hedge funds have a minimum investment requirement between​ $1000 and​ $5000, with the typical minimum investment being​ $1500. Furthermore, there is typically no penalty for withdrawing money from the fund. B. False. Although hedge funds typically have minimum investment requirement between​ $500 and​ $1000, they require that investors commit their money for long periods of​ time, often several years. C. False. Hedge funds have a minimum investment requirement between​ $100,000 and​ $20 million, with the typical minimum investment being​ $1 million.​ Furthermore, they usually require that investors commit their money for long periods of​ time, often several years. D. True. Hedge funds have a minimum investment requirement between​ $500 and​ $1000, with the typical minimum investment being​ $500. Furthermore, shares in of a hedge fund can sold at anytime for any reason.

C. False. Hedge funds have a minimum investment requirement between​ $100,000 and​ $20 million, with the typical minimum investment being​ $1 million.​ Furthermore, they usually require that investors commit their money for long periods of​ time, often several years.

​"The only way that the Fed can affect the level of borrowed reserves is by adjusting the discount​ rate." Is this statement​ true, false, or​ uncertain? Explain your answer. Part 2 A. True. The Fed uses only the discount rate to adjust the amount of discount loans made. B. False. The Fed can also engage in open market operations. C. False. The Fed can also limit the amount of discount loans that an individual bank can have. D. Uncertain. It depends on whether the discount rate is set lower than the federal funds rate target.

C. False. The Fed can also limit the amount of discount loans that an individual bank can have.

Which of the following is not a difficulty in the regulation and supervision of​ banks? A. Unintended consequences may happen if details in the regulations are not precise B. There can be political pressure to ease the rules C. Financial institutions are not required to follow the rules D. Financial institutions may have strong incentive to avoid existing regulations

C. Financial institutions are not required to follow the rules

If a bank doubles the amount of its capital and ROA stays​ constant, what will happen to​ ROE? A. Even if the bank doubles its amount of​ capital, if ROA is​ constant, then ROE will remain unchanged. B. Given the​ ROA, if bank capital​ doubles, then ROE will also double. C. Given the​ ROA, if bank capital​ doubles, then ROE will fall by half. D. The effect on ROE cannot be determined based on the information provided.

C. Given the​ ROA, if bank capital​ doubles, then ROE will fall by half.

Do you think that eliminating or limiting the amount of deposit insurance would be a good​ idea? Explain your answer. Part 2 A. It is a good idea. Eliminating or limiting the amount of deposit insurance would help increase the moral hazard of excessive risk taking on the part of banks.​ Moreover, it would make bank failures and panics less likely. B. It is a good idea. Eliminating or limiting the amount of deposit insurance would help reduce the moral hazard of excessive risk taking on the part of banks.​ Moreover, it would make bank failures and panics less likely. C. It is not a good idea. Eliminating or limiting the amount of deposit insurance would help reduce the moral hazard of excessive risk taking on the part of banks. It​ would, however, make bank failures and panics more likely. D. It is not a good idea. Eliminating or limiting the amount of deposit insurance would help increase the moral hazard of excessive risk taking on the part of banks. It​ would, however, make bank failures and panics more likely.

C. It is not a good idea. Eliminating or limiting the amount of deposit insurance would help reduce the moral hazard of excessive risk taking on the part of banks. It​ would, however, make bank failures and panics more likely.

Which of the following statements are true of the firewall created by the​ Glass-Steagall Act of​ 1933? ​(Select all that​ apply.) A. It was able to examine and enforce regulations related to housing mortgages. B. It put the U.S. banks at a disadvantage against their foreign competitors in terms of differentiating between risky mortgages and safe ones. C. It was able to separate a risky industry from traditional commercial banking. D. It put the U.S. banks at a disadvantage against their foreign competitors in terms of lost opportunities to make profits.

C. It was able to separate a risky industry from traditional commercial banking. D. It put the U.S. banks at a disadvantage against their foreign competitors in terms of lost opportunities to make profits.

Given new medical​ technology, life insurance companies are finding it increasingly difficult to predict death rates. As a​ result, they are changing their asset mix to​ have: A. Less long​ term, liquid assets B. Less short​ term, liquid assets C. More short​ term, liquid assets D. More long​ term, stable assets

C. More short​ term, liquid assets

The primary reason insurers include deductibles in their policies is​ to: A. Address the problem of​ pre-existing conditions B. Eliminate the adverse selection problem C. Reduce moral hazard D. Lower administrative costs

C. Reduce moral hazard

Why is it important for the U.S. government to have resolution​ authority? A. Resolution authority solves asymmetric information problems and thus prevents a contagion effect. B. Resolution authority gives the government the authority to increase the level of deposit insurance if necessary. C. Resolution authority allows the government to quickly takeover a failing firm. D. It provides that banks cannot engage in​ high-risk trading when receiving the benefits of federal deposit insurance.

C. Resolution authority allows the government to quickly takeover a failing firm.

Following the global financial crisis in​ 2008, assets on the Federal​ Reserve's balance sheet increased​ dramatically, from approximately​ $800 billion at the end of 2007 to​ $3 trillion in 2011. Many of the assets held are​ longer-term securities acquired through various loan programs instituted as a result of the crisis. In this​ situation, how could reverse repos​ (matched sale-purchase​ transactions) help the Fed reduce its assets held in an orderly​ fashion, while reducing potential inflationary problems in the​ future? A. Reverse repos serve as dynamic open market operations that are intended to permanently reduce the Federal​ Reserve's balance​ sheet, thus limiting fluctuations in the money supply. B. Reverse repos serve as a temporary open market sale in which the Federal Reserve temporarily sells assets to further increase its balance​ sheet, thus increasing the money supply and lowering​ short-term interest rates. C. Reverse repos serve as a temporary open market sale in which the Federal Reserve temporarily sells assets to reduce its balance​ sheet, thus decreasing the money supply and raising​ short-term interest rates. D. In this​ situation, the Fed should engage in repurchase agreements​ (a repo) rather than reverse​ repos, as this would further expand reserves and the monetary base.

C. Reverse repos serve as a temporary open market sale in which the Federal Reserve temporarily sells assets to reduce its balance​ sheet, thus decreasing the money supply and raising​ short-term interest rates.

If the next chair of the Federal Reserve Board has a reputation for advocating an even slower rate of money growth than the current​ chair, what will happen to interest​ rates? Part 2 A. Slower money growth will lead to a liquidity​ effect, which will raise interest rates.​ Moreover, the lower​ income, price​ level, and inflation will reinforce the increase in interest rates. B. Slower money growth will lead to a liquidity​ effect, which will lower interest rates.​ Moreover, the lower​ income, price​ level, and inflation will reinforce the decrease in interest rates. C. Slower money growth will lead to a liquidity​ effect, which will raise interest​ rates; however, the lower​ income, price​ level, and inflation will tend to lower interest rates. D. Slower money growth will lead to a liquidity​ effect, which will lower interest​ rates; however, the lower​ income, price​ level, and inflation will tend to raise interest rates.

C. Slower money growth will lead to a liquidity​ effect, which will raise interest​ rates; however, the lower​ income, price​ level, and inflation will tend to lower interest rates

​Traveler's checks have no reserve requirements and are included in the M1 measure of the money supply. When people travel during the summer and convert some of their checking account deposits into​ traveler's checks, what happens to the money​ supply? Why? Part 2 A. The money supply increases due to a shift from one component of the money supply​ (checkable deposits) with more multiple expansion to another​ (traveler's checks) with less. B. The money supply decreases due to a shift from one component of the money supply​ (checkable deposits) with less multiple expansion to another​ (traveler's checks) with more. C. The money supply increases due to a shift from one component of the money supply​ (checkable deposits) with less multiple expansion to another​ (traveler's checks) with more. D. The money supply decreases due to a shift from one component of the money supply​ (checkable deposits) with more multiple expansion to another​ (traveler's checks) with less.

C. The money supply increases due to a shift from one component of the money supply​ (checkable deposits) with less multiple expansion to another​ (traveler's checks) with more.

Investment banks that underwrite securities make money​ when: Part 2 A. The market price is greater than the price to the dealers. B. The price guaranteed to the bank is less than the market price of the security. C. The price guaranteed to the corporation is less than the market price of the security. D. The market price is less than the price to the dealers.

C. The price guaranteed to the corporation is less than the market price of the security.

If you are a banker and expect interest rates to rise in the​ future, would you want to make​ short-term or​ long-term loans? A. You would want to make​ long-term loans to secure the higher interest rate for an extended period of time. B. You would want to make​ short-term loans since there is no guarantee that the interest rate will rise as expected. C. You would want to make​ short-term loans so you can reinvest the funds at higher interest rates after their maturity. D. Both​ short-term and​ long-term loans will be profitable with an expected interest rate increase.

C. You would want to make​ short-term loans so you can reinvest the funds at higher interest rates after their maturity.

A financial crisis occurs​ when: A. there are predictable market disruptions. B. capital is allocated to its most productive uses. C. a particularly large disruption to information flows occurs in financial markets. D. financial frictions decrease sharply.

C. a particularly large disruption to information flows occurs in financial markets.

A hedge fund buys a​ security, such as a​ bond, that seems cheap and sells an equivalent amount of a similar security that appears to be overvalued. This hedge fund is engaging in what is referred to as A. a​ risk-balanced investment strategy. B. a leveraged investment strategy. C. a​ market-neutral investment strategy. D. a​ risk-mitigating investment strategy.

C. a​ market-neutral investment strategy.

he​ Glass-Steagall Act, which was repealed in​ 1999, prohibited commercial banks​ from: Part 2 A. selling new issues of government securities B. issuing equity to finance bank expansion C. engaging in underwriting and dealing in corporate securities D. purchasing any debt securities

C. engaging in underwriting and dealing in corporate securities

Financial instruments with returns tied to previously issued securities are​ called: A. reversible bonds B. hedge securities C. financial derivatives D. convertible bonds

C. financial derivatives

Two primary assets of the Federal Reserve System​ are: A. government securities and Treasury deposits. B. Federal Reserve notes outstanding and reserves of commercial banks. C. government securities and loans to commercial banks. D. government securities and Federal Reserve notes outstanding.

C. government securities and loans to commercial banks.

A​ government-sponsored agency is different from a government agency in​ that: A. it is a public corporation with a price ceiling on interest rates. B. it is a private corporation with a price ceiling on interest rates. C. it is a private corporation and the loans are not backed by the government. D. it is a public corporation with loans backed by the government.

C. it is a private corporation and the loans are not backed by the government

As a result of strict banking​ regulations, the United States​ has: A. too few banks when compared to other industrialised countries B. banks that are quite large relative to those in other industrialised countries C. many more smaller banks when compared to other industrialised countries D. a few dominant banks that hold most of the assets in the banking industry

C. many more smaller banks when compared to other industrialised countries

The European Central Bank​ (ECB) has complete control over monetary policy in eleven euro countries and has a charter that cannot be changed by legislation. In comparison to the Federal Reserve System, the ECB​ is: Part 2 A. less independent. B. equally independent. C. more independent.

C. more independent.

A​ well-functioning financial​ system: A. creates unpredictable market disruptions. B. causes financial frictions to increase in an economy. C. solves asymmetric information problems. D. acts as a barrier to efficient allocation of capital.

C. solves asymmetric information problems.

Agreements such as​ ________ are attempts to standardize international banking regulations. A. the Tokyo Round B. GATT C. the Basel Accord D. NAFTA

C. the Basel Accord

The public interest view of central bank behavior suggests that the objective of a bureaucracy is to​ maximize: A. efficiency. B. its own welfare. C. the​ public's welfare. D. profits.

C. the​ public's welfare.

Loans that the Fed makes to banks appear on the balance sheet as part of its​ __________, and deposits made by banks appear on the​ Fed's balance sheet as part of its​ ____________. A. ​securities; net worth B. net​ worth; reserves C. ​assets; liabilities D. ​liabilities; assets

C. ​assets; liabilities

Eliminating the​ Fed's independence might lead to a more pronounced political business cycle because a politically exposed Fed would be more concerned with​: Part 2 A. ​long-run objectives and thus be more likely to engage in expansionary policies designed to lower unemployment and interest rates before an election. B. ​short-run objectives and thus be a defender of a sound dollar and a stable price level. C. ​short-run objectives and thus be more likely to engage in expansionary policies designed to lower unemployment and interest rates before an election. D. ​long-run objectives and thus be a defender of a sound dollar and a stable price level.

C. ​short-run objectives and thus be more likely to engage in expansionary policies designed to lower unemployment and interest rates before an election.

Mutual​ funds' rapid growth in the last three decades can​ be, in​ part, attributed to the A. flight from the stock market and the specialization in debt instruments. B. relaxation of standards related to mutual funds. C. ​then-booming stock market and the specialization in debt instruments. D. increased wealth of investors.

C. ​then-booming stock market and the specialization in debt instruments.

How can a bursting of an​ asset-price bubble in the stock market trigger a financial crisis.​? Part 2 A. A reduction in asset prices causes lenders to become more cautious and reduce the amount of loans they make B. A reduction in asset prices causes a serious deterioration in borrowing​ firms' balance sheets C. A reduction in asset prices causes borrowing firms to have less to lose so they are willing to take on additional risk D. All of the above are correct

D. All of the above are correct

Why is the​ originate-to-distribute business model subject to the​ principal-agent problem? Part 2 A. The more volume the broker​ originates, the more he or she makes B. Once the mortgage broker earns his or her​ fee, the broker does not care if the borrower makes good on his payment C. The mortgage broker has little incentive to ensure the borrower is​ credit-worthy, since loans will be sold as​ mortgage-backed securities D. All of the above are correct

D. All of the above are correct

How did financial innovations in mortgage markets contribute to the​ 2007-2009 financial​ crisis? A. Advances in information technology and new statistical techniques lowered the cost of evaluating the risk of mortgages to subprime borrowers who did not meet the standards for traditional mortgage loans. B. Information technology lowered the cost of packaging numerous subprime mortgages into​ mortgage-backed securities that could be sold in financial​ markets, attracting more funds into mortgage finance. C. Borrowers could get mortgage loans with little or no money down and could borrow more money relative to the value of the house they were buying and relative to their incomes than allowed with traditional mortgages. D. All of the above are correct.

D. All of the above are correct.

How did financial innovations in mortgage markets contribute to the​ 2007-2009 financial​ crisis? A. Borrowers could get mortgage loans with little or no money down and could borrow more money relative to the value of the house they were buying and relative to their incomes than allowed with traditional mortgages. B. Advances in information technology and new statistical techniques lowered the cost of evaluating the risk of mortgages to subprime borrowers who did not meet the standards for traditional mortgage loans. C. Information technology lowered the cost of packaging numerous subprime mortgages into​ mortgage-backed securities that could be sold in financial​ markets, attracting more funds into mortgage finance. D. All of the above are correct.

D. All of the above are correct.

The Employee Retirement Income Security Act​ (ERISA) of 1974 is an attempt by the government to​ reduce: A. The number of retirees living in poverty B. Underfunding of pension plans C. The number of years until an employee vests in the plan D. Asymmetric information

D. Asymmetric information

Which of the following is not a reason why bank failures worsen financial​ crises? A. As bank panics​ occur, banks begin to sell so many assets that it can lower asset prices so much that even good banks become insolvent. B. A reduction in the number of banks operating reduces the amount of lending that can take​ place, which creates less economic activity and in turn makes borrowing more difficult. C. The closing of many banks worsen adverse selection and moral hazard problems. D. Bank panics reduce the amount of asymmetric​ information, which makes it more difficult to lend funds.

D. Bank panics reduce the amount of asymmetric​ information, which makes it more difficult to lend funds.

Why have banks been losing income advantages on their assets in recent​ years? Part 2 A. Securitization has enabled other financial institutions to originate​ loans, taking away some of the​ banks' loan business. B. The collapse of the subprime mortgage market has put banks at a comparative disadvantage because regulators are requiring them to refinance subprime mortgages with terms that are unfavorable to the banks. C. The growth of the commercial paper market and the development of the junk bond market have given corporations alternatives to borrowing funds from​ banks, thus eroding the competitive advantage of banks on the lending side. D. Both A and C are correct. E. All of the above are correct.

D. Both A and C are correct.

What happens to checkable deposits in the banking system when the Fed lends an additional​ $1 million to the First National​ Bank, assuming that the required reserve ratio on checkable deposits is​ 10%, banks do not hold any excess​ reserves, and the​ public's holdings of currency do not​ change? A. Checkable deposits rise by​ $900,000. B. Checkable deposits rise by​ $100,000. C. Checkable deposits rise by​ $1 million. D. Checkable deposits rise by​ $10 million.

D. Checkable deposits rise by​ $10 million.

​__________ occurs when a substantial unanticipated decline in the price level sets​ in, leading to a further deterioration in a​ firm's net worth because of the increased burden of indebtedness. A. Moral hazard B. Deleveraging C. Adverse selection D. Debt deflation

D. Debt deflation

Why are deposit insurance and other types of government safety nets important to the health of the​ economy? A. Government safety nets were designed to weaken the shadow banking system. B. Deposit insurance prevents depositors from withdrawing their funds and thus eliminates runs on banks. C. Deposit insurance and other types of government safety nets eliminate the adverse selection problem. D. Deposit insurance and other government safety nets help to eliminate a contagion effect.

D. Deposit insurance and other government safety nets help to eliminate a contagion effect.

Deposits in European banks denominated in dollars for the purpose of international transactions are known​ as: Part 2 A. international monetary units B. European monetary units C. European currency units D. Eurodollars

D. Eurodollars

Hedge funds are similar to the Mutual funds. They allow small investors to diversify their portfolios and thus provides a hedge against risk.​ However, unlike a mutual​ fund, investors do not have to commit their money for long periods of time. Evaluate the statement above. A. True. Hedge funds have a minimum investment requirement between​ $500 and​ $1000, with the typical minimum investment being​ $500. Furthermore, shares in of a hedge fund can sold at anytime for any reason. B. True. Hedge funds have a minimum investment requirement between​ $1000 and​ $5000, with the typical minimum investment being​ $1500. Furthermore, there is typically no penalty for withdrawing money from the fund. C. False. Although hedge funds typically have minimum investment requirement between​ $500 and​ $1000, they require that investors commit their money for long periods of​ time, often several years. D. False. Hedge funds have a minimum investment requirement between​ $100,000 and​ $20 million, with the typical minimum investment being​ $1 million.​ Furthermore, they usually require that investors commit their money for long periods of​ time, often several years.

D. False. Hedge funds have a minimum investment requirement between​ $100,000 and​ $20 million, with the typical minimum investment being​ $1 million.​ Furthermore, they usually require that investors commit their money for long periods of​ time, often several years.

Which agency has regulatory responsibility when a bank operates in many different​ countries? Part 2 A. The U.S. Federal Reserve System. B. The Bank of International Settlements. C. The International Monetary Fund. D. It is not always clear.

D. It is not always clear.

Why are repurchase agreements used to conduct most​ short-term monetary policy​ operations, rather than simply buying and selling securities​ outright? A. Repurchase agreements are temporary open market purchases that can be reversed. B. Repurchase agreements allow the Fed to easily adjust open market operations in response to daily conditions. C. They are effective in dealing with persistent shortages in​ reserves, and thus have a more permanent impact. D. Only A and B are correct. E. All of the above are correct.

D. Only A and B are correct.

What are the costs and benefits of a​ too-big-to-fail policy? Part 2 A. The benefit is shareholders of common stock in big banks are better protected against losing​ money; however, the cost is that it increases the incentive for adverse selection by big banks B. The benefit is that it makes bank panics less​ likely; however, the cost is that it increases the incentive for adverse selection by big banks C. The benefit is shareholders of common stock in big banks are better protected against losing​ money; however, the cost is that it increases the incentive for moral hazard by big banks D. The benefit is that it makes bank panics less​ likely; however, the cost is that it increases the incentive for moral hazard by big banks

D. The benefit is that it makes bank panics less​ likely; however, the cost is that it increases the incentive for moral hazard by big banks

The money multiplier declined significantly during the period​ 1930-1933 and also during the recent financial crisis of​ 2008-2010. Yet the M1 money supply decreased by​ 25% in the Depression period but increased by more than​ 20% during the recent financial crisis. What explains the difference in​ outcomes? A. There was a minimal increase in the currency ratio during the recent financial crisis. B. The excess reserves ratio increased rapidly during the recent financial crisis. C. The overall level of deposit expansion decreased during the recent financial crisis. D. There was a significant increase in the monetary base during the recent financial crisis.

D. There was a significant increase in the monetary base during the recent financial crisis.

Credit easing refers​ to: A. asset sales that can raise interest rates for sellers in particular credit markets. B. providing liquidity to foreign borrowers. C. the reserves that become excess reserves instead of being loaned out. D. altering the composition of the​ Fed's balance sheet in order to improve the functioning of particular segments of the credit markets.

D. altering the composition of the​ Fed's balance sheet in order to improve the functioning of particular segments of the credit markets.

Financial facilitators are like financial intermediaries in that​ they: Part 2 A. assist in the sale of securities in the primary markets. B. assist in channeling funds from investors to corporations. C. assist in the sale of securities in the secondary markets. D. assist in channeling funds from savers to borrowers.

D. assist in channeling funds from savers to borrowers.

The Federal Reserve System is the​ ___________ for the United​ States, which is defined as the government agency responsible for​ __________. Part 2 A. ​Treasury; carrying out open market exchanges of government securities B. national​ bank; ensuring money demand equals money supply C. financial​ comptroller; regulatory oversight of government reserves D. central​ bank; the conduct of monetary policy

D. central bank; the conduct of monetary policy

Currency in circulation that cannot be redeemed for gold is​ called: Part 2 A. state money B. junk bonds C. gold bills D. fiat money

D. fiat money

The difference between term life insurance and whole life insurance is that term life insurance A. allows policyholders to borrow against the cash value. B. has a constant premium throughout the life of the policy. C. has a savings aspect. D. has no cash value.

D. has no cash value.

The​ zero-lower-bound problem: A. implies that nominal interest rates can be zero. B. is responsible for the recession of​ 2007-2009. C. creates a negative shock to the economy. D. occurs because people can always earn more from holding bonds than holding cash.

D. occurs because people can always earn more from holding bonds than holding cash.

The​ Fed's most commonly used means of changing the money supply​ is: Part 2 A. changing reserve requirements B. changes in the Regulation Q ceiling C. changing the discount rate D. open market operations

D. open market operations

The presence of so many commercial banks in the United States is most likely the result​ of: Part 2 A. asymmetric information problems that give local banks a competitive advantage over larger banks B. ​consumers' desire to deal with local banks only C. consumer preferences for federally chartered banks D. previous restrictions on branch banking

D. previous restrictions on branch banking

Bank holding companies that rival money center banks in size but are not located in money center cities are known​ as: Part 2 A. multinational banks. B. international banks. C. district branch banks. D. superregional banks.

D. superregional banks.

Using the liquidity preference​ framework, when the economy​ expands: A. the demand for money will​ decrease, shifting the money demand curve to the left B. the demand for money will​ decrease, shifting the money demand curve to the right C. the demand for money will​ increase, shifting the money demand curve to the left D. the demand for money will​ increase, shifting the money demand curve to the right

D. the demand for money will​ increase, shifting the money demand curve to the right

The ratio of the money supply to the monetary base is​ called: A. the currency ratio B. the required reserve ratio C. ​high-powered money D. the money multiplier

D. the money multiplier

Finance Companies differ from banks in that they​ _________ large amounts and​ _________ small amounts​ A. ​Loan, borrow B. Receive interest payments​ on, pay interest on C. Are regulated by the FDIC​ for, are not regulated by the FDIC for D. ​Borrow, loan

D. ​Borrow, loan

Would fiscal policy makers ever have reason to worry about potentially inflationary​ conditions? A. ​No, fiscal policy makers have enough policy instruments available to them to stave off or contain inflation. B. ​Yes, if people expect higher potential​ inflation, it increases spending and causes M1 and M2 to increase too rapidly. C. ​No, policy makers view potential inflation as a positive for the​ economy, as it increases demand on the most liquid assets such as Treasury bonds. D. ​Yes, higher inflation leads to a higher debt service burden and increases the costs of financing deficit spending.

D. ​Yes, higher inflation leads to a higher debt service burden and increases the costs of financing deficit spending.

Uncertainty about future​ interest-rate volatility and returns is known​ as: Part 2 A. ​interest-rate parity B. ​interest-rate irregularities C. hedging D. ​interest-rate risk

D. ​interest-rate risk

If the Fed sells​ $2 million of bonds to the First National​ Bank, what happens to reserves and the monetary​ base? Complete the​ T-accounts below to explain your answer. First National Bank Assets Reserves = ______ Securities = _____ Liabilities Federal Reserve System Assets securities= _____ Liabilities Reserves = _____ reserves ___ by ___, and the monetary base ____ by ____

First National Bank Assets Reserves = -2 mill Securities = +2 mill Liabilities Federal Reserve System Assets securities= -2 million Liabilities Reserves = -2 million reserves fall by 2 million, and the monetary base falls by 2 million

If the Fed lends five banks an additional total of​ $100 million but depositors withdraw​ $50 million and hold it as​ currency, what happens to reserves and the monetary​ base? Use​ T-accounts to explain your answer. Five Banks Assets Reserves = ______ Liabilities Discount Loans =_____ Deposits = ____ Federal Reserve System Assets Discount Loans = _____ Liabilities Reserves = _____ Currency = _____ reserves ___ by ___, and the monetary base ____ by ____

Five Banks Assets Reserves = + 50 million Liabilities Discount Loans = +100 million Deposits = -50 miillion Federal Reserve System Assets Discount Loans = +100 million Liabilities Reserves = + 50 million Currency = + 50 million Reserves increase by 50 million, and the monetary base increases by $100 million

What effect might a financial panic have on the money multiplier and the money​ supply? Why? In a financial​ panic, you would expect the money multiplier to _____ and the money supply to _____, which would cause the excess reserves ratio to ______. Thus, depositors are likely to _____ their holdings of currency

In a financial​ panic, you would expect the money multiplier to decrease and the money supply to decrease​, which would cause the excess reserves ratio to increase. Thus depositors are likely to increase their holdings of currency.

Which of the following is not a factor that commonly initiates financial​ crises? A. Increases in government regulations that make it harder to manage the risks of financial assets. B. The mismanagement of financial liberalization and innovation. C. The increased uncertainty that occurs when a major financial institution fails. D. ​Asset-price booms and busts.

Increases in government regulations that make it harder to manage the risks of financial assets.

Victory Bank reports an EM​ (equity multiplier) of 30 while Batovi Bank reports an EM equal to 18. Part 1 The equity capital as a percentage of assets for Victory Bank is ____and for Batovi Bank is ____ ​(Round your response to two decimal​ places.) Part 2 Which bank is better prepared to respond against large losses on​ loans? A. Batovi Bank because it has a higher equity capital than Victory Bank. B. Victory Bank because it has a lower equity capital than Batovi Bank. C. Victory Bank because it has a higher equity capital than Batovi Bank. D. Batovi Bank because it has a lower equity capital than Victory Bank.

PART 1: 3.33%; 5.56% part 2: A. Batovi Bank because it has a higher equity capital than Victory Bank.

Suppose a country has weak​ institutions, prevalent​ corruption, and an ineffectively regulated financial sector. Part 2 Would you recommend the adoption of a system of deposit​ insurance, like the FDIC in the United​ States, for this​ country? PART 3 Based on the information given​ above, which of the following is likely to be a reason for not recommending the adoption of a system of deposit insurance for this​ country? A. It might increase the moral hazard incentives for banks to engage in risky lending. B. It might increase the problem of adverse selection of potential customers by banks. C. It might increase the​ economy's dependency on big financial institutions.

PART 2: NO PART 3 A. It might increase the moral hazard incentives for banks to engage in risky lending.

Suppose that the required reserve ratio is 10​%, currency in circulation is $580 billion, the amount of checkable deposits is $950 billion, and excess reserves are ​$16 billion. 1.The money supply is: 2.The currency deposit ratio is: 3.The excess reserves ratio is: 4.The money multiplier is: Part B Suppose the central bank conducts an unusually large open market purchase of bonds held by banks of ​$1,400 billion due to a sharp contraction in the economy. Assuming the ratios you calculated in the previous steps are the​ same, the money supply should _____ to ___ billion Part C Suppose the central bank conducts the same open market purchase as in the previous​ step, except that banks choose to hold all of these proceeds as excess reserves rather than loan them​ out, due to fear of a financial crisis. 1.Assuming that currency and deposits remain the​ same, the new amount of excess reserves is: 2.The new excess reserves ratio is: 3.The money supply is: 4. The money multiplier is: Part D Following the financial crisis in​ 2008, the Federal Reserve began injecting the banking system with massive amounts of​ liquidity, and at the same​ time, very little lending occurred. As a​ result, the M1 money multiplier was below 1 for most of the time from October 2008 through 2011. How does this relate to your answer to the previous​ step? A. If large amounts of reserves enter the banking system but are held as excess​ reserves, the money multiplier tends to rise above one. B. If large amounts of reserves enter the banking system but are held as excess​ reserves, it is possible for the money multiplier to fall below one. C. The amount of excess reserves held does not affect the value of the money multiplier. D. If the central bank injects the banking system with massive amounts of​ liquidity, the money multiplier always falls below one.

Part A 1. 1530 billion 2. 0.611 3. 0.017 4. 2.21 Part b increase to $4621 billion Part C 1. 1416 billion 2. 1.49 4. 1530 billion 5. 0.73 Part D B. If large amounts of reserves enter the banking system but are held as excess​ reserves, it is possible for the money multiplier to fall below one.

Suppose​ that: r​ = required reserve ratio​ = 0.10 c ​= ​{C/D}​ = currency ratio​ = 0.45 e​ = ​{ER/D}​ = excess reserve ratio​ = 0.03 MB​ = the monetary base​ = ​$5,000 billion Given that the formula for the money multiplier is​, find the value for M​, the money supply. Part A: The money supply is ____ Part B: Use the money multiplier to find the new value for the money supply if open market operations increase the monetary base by ​$300 billion. The money supply is now ​$

Part a: 12500 billion Part B 13250 billion

Assume that the required reserve ratio on checkable deposits is​ 10%, banks do not hold any excess​ reserves, and the​ public's holdings of currency do not change. If the Fed reduces reserves by selling​ $5 million worth of bonds to the​ banks, what will the​ T-account of the banking system look like when the banking system is in​ equilibrium? What will have happened to the level of checkable​ deposits? checkable deposits fall by _____ and the t account is:

checkable deposits fall by 50 million and the t account is: Banking System Assets Reserves: -5 mill Securities: +5 mill Loans: -50 mill Liabilities Checkable deposits: -50 mill

Part 1 Using the liquidity preference framework.​, show why interest rates are procyclical ​(rising when the economy is expanding and falling during recessions​). Part 2 Suppose GDP is rising.

demand curve shifts to the right as supply stays straight up and down (interest rates on y axis and quantity is on x axis)

When the federal reserves decreases the money supply by selling bonds to the public, bond prices ____ and interest rates (bond yields) _____

decrease; increase

Use the graph and the supply and demand for bonds to show what will happen to interest rates if there is a rise in the riskiness of bonds. ​(Remember that bond prices are inversely related to interest​ rates.)

demand curve shifts to the left and equilibrium lowers (price of bonds on y axis, quantity on x axis)

Part 1 Use the graph and the supply and demand for bonds to show what will happen to interest rates if the​ economy's GDP expands. ​(Remember that bond prices are inversely related to interest​ rates.)

demand curve shifts to the right and up, supply curve shifts to the right and down equilibrium moves down so price decreases (price of bonds on y axis, quanity of bonds on x acis)

A rise in the riskiness of bonds will cause the interest rates in the liquidity preference framework to _____ and cause the interest rate in the bond market to _____

increase; increase

Based on empirical evidence, because interest rates _____ when the economy is expanding, interest rates are said to be _____

increase; procyclical

chapter 5 pt 2

liquidity framework

Large-denomination CDs are​ ________, so that like a​ bond, they have a​ ________degree of liquidity and can be sold in secondary markets. A. ​non-negotiable; smaller B. ​negotiable; smaller C. ​negotiable; greater D. ​non-negotiable; greater

negotiable; greater

How can the​ S&L crisis be blamed on the principal-agent problem? Part 1 Politicians and​ regulators, who are known as the ____, have not had the same incentives to minimise costs of deposit insurance as do the​ taxpayers, who are known as the _____. Part 2 As a​ result, politicians and regulators​ __________________________, thereby increasing the cost of the​ S&L bailout. A. relaxed capital​ standards, removed restrictions on holdings of risky​ assets, and engaged in regulatory malfeasance B. relaxed capital​ standards, added restrictions on holdings of risky​ assets, and engaged in regulatory forbearance C. relaxed capital​ standards, removed restrictions on holdings of risky​ assets, and engaged in regulatory forbearance D. tightened capital​ standards, removed restrictions on holdings of risky​ assets, and engaged in regulatory forbearance

part 1: agents; principles part 2: C. relaxed capital​ standards, removed restrictions on holdings of risky​ assets, and engaged in regulatory forbearance

If a bank becomes insolvent and the FDIC reorganizes the bank by finding a willing merger​ partner, the FDIC resolved this insolvency problem through the _____

purchase and assumption method

An important way in which the Federal Reserve decreases the money supply is by selling bonds to the public. Using a supply and demand analysis for​ bonds, show what effect this action has on interest rates.

supply curve shifts to the right so the equilibrium moves down. demand does not move (price of bond on y axis, quantity on x axis)

Private equity funds are of two types. ________ funds make investments in new​ start-up businesses, often in the technology industry. _____ funds instead make investments in established​ businesses, and in many​ cases, buy publicly traded firms through a​ so-called leveraged buyout​ (LBO), in which the publicly traded firm is taken private by buying all of its​ shares, while financing the purchase by increasing the leverage​ (debt) of the firm.

venture capital; capital buyout