Money and Banking Exam 3
Suppose the macroeconomy is in equilibrium and Congress decides to increase the amount of government spending. What is the most likely short-term result?
An increase in aggregate demand, an increase in inflation, and an increase in output.
Which of the following will lead to a decrease in the monetary base?
An open market sale.
Scrip prices for the First Bank of the United States rapidly increase in value and then decline shortly thereafte
Asset price boom-bust
The Fed announces a plan to target a 2% inflation rate over a period of several years rather than per year.
Average Inflation Targeting
Since August 2020, the Federal Reserve System has used which of the following nominal anchors?
Average Inflation targeting
Lenders to the investment bank Bear Stearns refuse to rollover repos and, as a result, Bear Stearns risks becoming insolvent.
Banking crisis
Mortgage lenders start relaxing lending standards in order to make more loans and, eventually, many borrowers are unable to repay their debt.
Credit-boom bust
Economic activity slows down, leading to a decline in the velocity of money and the price level. This decline in the price level causes real interest rates to rise and increases personal and business bankruptcies.
Debt deflation
Which federal agency was created in response to the bank panics that occurred between 1930 and 1933?
Federal Deposit Insurance Corporation
Several members of the Board of Governors believe the economy is overheating, but other members argue that their position is based on an incorrect estimate of the natural rate of unemployment.
Forecast uncertainty
Which of the following is a nonconventional monetary policy tool?
Forward guidance.
Data from the bond market shows that investors are expecting inflation to increase above 2% but the FOMC will not meet for another month.
Inside lag
Oil prices suddenly spike, but the Board of Governors does not meet to discuss the issue for several days
Inside lags
The Treasury Secretary who navigated the United States government through the Panic of 1972 was
John Snow
Federal Reserve Chair Jay Powell announces an interest rate increase but cautions that the change will take time to work through the economy.
Outside Lag
The Board of Governors announces a new lending facility for commercial banks, but the program cannot start immediately and when it does banks will not start lending immediately.
Outside lag
The Federal Reserve wants to maintain 2% inflation over the long-run but they're worried that war in Eastern Europe might cause inflation to increase by 5% over the next 12 months.
Time-Inconsistency Problem
Some members of the FOMC want to keep the federal funds rate low, even though it might lead to an inflation rate above the target in the future.
Time-inconsistency problem
Monetary and fiscal policy are mostly unable to help correct
a negative supply shock.
A nominal variable that central bankers use to keep the price level low and stable is known as
a nominal anchor
The Taylor principles states that the nominal federal funds rate should be set
above the inflation rate.
Technological progress can lead to
an increase in aggregate supply, higher growth, and lower inflation.
Commercial bank reserves
are used to settle transactions and withdrawals.
Which of the following financial regulatory tools is best use for screening against adverse selection?
bank chartering
The FDIC was created primarily to prevent
bank panics
At the zero lower bound
conventional monetary policy tools are ineffective.
The Fed selling government bonds on the open market _________ the monetary base while the Fed buying government bonds on the open market ________ the monetary base.
decreases; increases
The Federal Reserve System operates under a
dual mandate
Economists at the Federal Reserve estimate that the inflation rate will fall by 0.5% over the next month but their estimates show that the real number could by higher or lower by 1%.
forecast uncertainty
The Federal Reserve states that 2% annual inflation is consistent with its mandate to achieve "stable prices." The fact that the Fed can establish this target indicates that it has
goal independence.
When a central bank is required to focus on price stability above all other objectives it is operating under a
hierarchical mandate.
If the Federal Reserve began buying Treasury bonds directly from the federal government in order to fund government spending a likely result would be
hyperinflation.
In a financial crisis, credit spreads tend to __________ which
increase; indicates heightened uncertainty in financial markets
A policy in which a central bank publicly commits to maintaining a numerical inflation goal is known as
inflation targeting.
Which of the following is an economic variable that the Federal Reserve can directly control?
interest paid on reserves
The monetary base
is composed of currency in circulation and bank reserves.
The downward slope of the aggregate demand curve
is due to a factor known as the interest rate effect.
Debt deflation
is the phenomenon in which a falling price level increases the real value of indebtedness.
In the aggregate demand-aggregate supply model, higher interest rates shift aggregate demand to the ________ because
left; a higher rate will raise the cost of business investment
Time-varying capital requirements, whereby capital ratios increase during good times and decrease during bad times, are an example of
macroprudential regulation.
Currency in circulation and bank reserves are considered to be the
monetary base.
"Following an asset price bust, we might see individuals make riskier investments in an attempt to make up their losses." This statement is an example of
moral hazard.
When the economy is at full employment
only frictional and structural unemployment exist.
The principle-agent problem which a lender's business model is to attract as many borrowers as possible and quickly sell the loans is know as
originate-to-distribute
Suppose the economy experiences a negative aggregate demand shock. Without a monetary policy response, over the long-run
output will return to its long-run potential and the price level will fall.
Overnight bank borrowing from the Federal Reserve is known as
primary credit.
Using the __________ method, the FDIC finds another bank that is willing to take possession of the failed bank's assets and liabilities.
purchase and assumption
When interest rates are at the zero lower bound, a decrease in the inflation rate can
raise the real interest rate.
In the too big to fail policy, there is an inherent tension between __________ and __________.
reducing systemic risk; increasing moral hazard
A reduction in the monetary base can be accomplished by an open market ________ while an increase in the monetary base can be accomplished by an open market ________.
sale; purchase
In the aggregate demand-aggregate supply model, an autonomous increase in interest rates by the Federal Reserve would
shift the aggregate demand curve to the left.
In the aggregate demand-aggregate supply model, an autonomous decrease in interest rates by the Federal Reserve would
shift the aggregate demand curve to the right
A phenomenon in which inflation increases and the level of real output in the economy falls is known as
stagflation
The U.S. government responded to the Financial Crisis of 2007 - 2009 with
the Dodd-Frank Wall Street Reform and Consumer Protection Act.
Changes to the discount rate will not affect the equilibrium federal funds rate as long as
the discount rate is higher than the federal funds rate.
Under a corridor system
the discount rate serves as the upper bound for the federal funds rate and interest on reserves serves as the lower bound
When the nonbank public converts deposits into currency
the monetary base does not change because the increase in currency is offset by the decrease in reserves.
If deflation occurs following a financial crisis, the real interest rate
will increase leading to higher real values of debt.