test 3
Which of the following men has NOT served as Chairman of the Board of Governors?
Milton Friedman
The only state to have two Federal Reserve District Banks is
Missouri
If C represents currency, D represents checkable deposits, N represents savings accounts, and MM represents money market mutual funds, which of the following equations is correct?
M2 = C + D + N + MM
During the financial crisis, the Fed introduced three new policy tools connected with bank reserve accounts. Which of the following is NOT one of those three new tools?
open market operations
In managing the monetary base, the Fed most often uses
open market operations
What is the most direct method the Fed uses to change the monetary base?
open market operations
Which of the following is NOT an activity carried out by Federal Reserve district banks?
open market operations
Expansionary monetary policy consists of all of the following EXCEPT
open market sales
How does the Open Market Trading Desk conduct its operations?
over-the-counter electronically with private securities dealers
How can the Fed reduce the implicit tax on banks resulting from reserve requirements?
paying interest on reserves
The largest institutional participants in capital markets are
pension funds
In a defined contribution pension plan
pension income varies depending on how well the plan's investments have done.
Primary dealers are those
permitted to trade directly with the Fed.
A benefit of hedge funds relative to mutual funds is
possible higher returns
The law of large numbers allows insurance companies to
predict the average number of occurrences of insurable events in a large population of policyholders.
Which of the following is considered to be a goal of monetary policy?
price stability
Which of the following is the mandate of the European Central Bank?
price stability
When economists and policymakers refer to the Fed's dual mandate, they are referring to
price stability and maximum employment
Discount loans available to healthy banks which can be used for any purpose are called
primary credit
Which of the following is when an investment bank purchases securities outright in case it misjudged the state of the market and it may have to sell the securities at a lower price than what was guaranteed?
principal risk
The regional Federal Reserve Banks are owned by
private banks which are part of the Federal Reserve System in each region.
The Employment Act of 1946 codified the federal government's commitment to
promote high employment consistent with price stability
The margin requirement set by the Federal Reserve is the
proportion of the purchase price of a security that an investor must pay in cash.
When investment banks buy or sell securities on their own account, it's called
proprietary trading.
What was the primary reason that Congress initiated deposit insurance in the 1930s?
protect the deposits of individual savers
Business finance companies
purchase accounts receivable of small firms at a discount.
During and after the financial crisis of 2007-2009, the Fed greatly increased the supply of reserves through three rounds of quantitative easing by
purchases of both long-term Treasury securities and mortgage-backed securities.
What regulatory change did Congress approve in 2010 to reduce counterparty risk in the shadow banking system?
push more trading of derivatives onto exchanges
Finance companies
raise funds in financial markets to lend to households and firms
If the Fed wished to decrease the money supply, it could
raise the interest rate it pays on reserves.
Depository institutions such as savings and loans have deposits with the Fed that ________, and financial institutions such as Fannie Mae have deposits with the fed that ________.
receive interest; do not receive interest
What are the two main objectives of policymakers in restoring the Glass-Steagall Act?
reduce risk in the financial system and reduce the size of banks
By the 1990s, most economists supported the repeal of the Glass-Steagall Act, arguing that the separation of commercial banking from investment banking ________ competition in the market for investment banking services and ________ opportunities for economies of scope in banking.
reduced; reduced
The Depository Institutions Deregulation and Monetary Control Act of 1980
required all banks to maintain reserve deposits with the Fed.
The percentage of deposits that banks must hold as reserves is called the
required reserve ratio.
In August 2016, the largest liability of the Fed was
reserves
Which of the following is a liability of the Fed?
reserves
When financial markets and institutions are NOT efficient in matching savers and borrowers
resources are lost
A matched sale-purchase transaction is also known as a
reverse repo
Which of the following equations is correct?
M = m(Bnon + BR)
In 1981, the first of the large investment banks to convert from a partnership to a corporation was
Salomon Brothers
All of the following are associated with rising inflation EXCEPT
a steady decrease in interest rates.
Which of the following are statisticians who compile statistics to predict the risk of an event occurring in the population?
actuaries
Blood tests administered to applicants for medical insurance are an example of an attempt by insurance companies to deal with the problem of
adverse selection
Charging drivers with good records lower premiums than drivers with bad records is an example of an attempt by insurance companies to deal with the problem of
adverse selection
The Fed was created
after financial panics in the late 1800s and early 1900s.
The monetary base is equal to
all currency in circulation plus reserves held by banks.
In addition to the Fed, which other central bank pursued unusual monetary policy following the financial crisis of 2007-2009?
all of the above
The Bank of the United States faced opposition from which of the following?
all of the above
How did the Fed peg interest rates during World War II?
by agreeing to purchase any bonds that were not purchased by private investors
How does the Fed reach its target for the federal funds rate?
by buying and selling Treasury securities
Which of the following is NOT considered to be a goal of monetary policy?
fair wages
All of the following were reasons that the Fed increased the required reserve ratio in 1936 EXCEPT
fears that the economy was overheating.
Which of the following interest rates tends to fluctuate the most?
federal funds rate
An insurance premium is a
fee paid by policyholders to insurance companies as payment for coverage.
Which of the following does NOT serve on the Governing Council of the European Central Bank?
finance ministers of each country
The bursting of the dot-com bubble contributed to the
financial crisis of 2007-2009
The development of new financial securities or investment strategies using sophisticated models is known as
financial engineering.
Intermediate targets are
financial variables, such as interest rates or monetary aggregates, the Fed believes will help it to achieve policy goals.
What is the length of a term for the Chairman of the Board of Governors?
four years
John Smith leaves his job in New York to go to California in hopes of finding a better one. If John Smith is unemployed while searching for a job in California, economists would consider him to be
frictionally unemployed
Individual investors who always want to hold gold are known as
gold bugs
All of the following are types of finance companies EXCEPT
government finance
Although open market operations and discount loans both change the monetary base, the Fed has
greater control over open market operations than over discount loans.
Underwriting involves
guaranteeing a price for new capital to the issuing firm.
The Fed's monetary policy tools
have allowed the Fed to achieve its monetary policy goals indirectly.
All of the following are differences between hedge funds and mutual funds EXCEPT
hedge funds use money collected from savers to make investments.
Traditionally, Fed policymakers have been ________ to use higher interest rates to head off potential asset bubbles ________.
hesitant; because it may cause a slowdown in the economy
Money market mutual funds
hold portfolios of short-term assets
Rates of inflation in the hundreds or thousands of percent per year are known as
hyperinflation
Under which circumstance is the Fed most likely to carry out a defensive open market operation?
if a snowstorm results in a delay in check clearing, resulting in an increase in the Federal Reserve float
The main argument against Fed independence is that
in a democracy, elected officials should make public policy.
The principal-agent view of Fed motivation predicts that the Fed acts
in order to increase its power, influence, and prestige.
Assuming a required reserve ratio of 10% and the Fed purchased $1 million worth of mortgage-backed securities, make use of the simple deposit multiplier to determine by how much checking deposits would change.
increase by $10 million
The Banking Acts of 1933 and 1935
increased central control of the Federal Reserve System.
Which of the following was the main reason for increased counterparty risk in the shadow banking system prior to the financial crisis of 2007-2009?
increased leverage
In the United States from 1981 to 1983, the money supply ________ and the inflation rate ________.
increased; decreased
An open market purchase
increases the monetary base
An open market purchase
increases the price of Treasury securities and decreases their yield.
Which of the following groups is an investment bank NOT likely to visit during a "road show"?
individual investors
A firm that holds an inventory of a security and serves as an intermediary between buyers and sellers of the security is known as a(n)
market maker
Which of the following is a term for the total value of a firm's outstanding shares?
market value
A defined benefits plan
may be either underfunded or overfunded
A consequence of the impact lag is that the Fed
might not be able to correct a mistaken policy soon enough.
The main argument in favor of Fed independence is that
monetary policy is too important and too technical to be determined in the political arena.
What do many economists see finance companies as having an advantage in?
monitoring the value of collateral
The use of deductibles and coinsurance are examples of attempts by insurance companies to deal with the problem of
moral hazard
Which of the following is likely to be more of a problem after the introduction of deposit insurance?
moral hazard
A rising dollar makes U.S. goods
more expensive abroad and decreases the volume of U.S. exports
The Fed can implement open market operations
more rapidly than either changes in the discount rate or changes in reserve requirements.
Since 1980, the M2 multiplier has been
more stable than the M1 multiplier.
The third round of quantitative easing, announced in September 2012, was focused on purchases of
mortgage-backed securities
Under the Federal Reserve Act, which banks must be members of the Federal Reserve System?
national banks
How many times has the Fed changed reserve requirements since 1993?
never
How did Operation Twist affect the monetary base?
no change
Because of the breakdown in the relationship between the growth of the money supply and inflation, since 1993, the Fed
no longer announces targets for M1 or M2.
Which of the following is an operating target?
non-borrowed reserves
The shadow banking system refers to
nonbank financial institutions such as investment banks and hedge funds.
Apart from the United States, in countries where central bank board members serve fixed terms of office
none have terms as long as fourteen years.
Congress established the FOMC because
of a lack of coordination among district banks in carrying out open market operations.
Which type of offering typically has the lowest fees?
offering of investment-grade bonds
High employment spurs economic growth because high employment
often leads to high rates of investment
The rapid increase in bank reserves that began in 2008 was a result of
the Fed purchasing assets.
The paper currency of the United States is issued by
the Fed.
"Nonbank" financial institutions include all of the following EXCEPT
the Federal Reserve
To conduct open market operations, the FOMC issues a directive to
the Open Market Desk at the Federal Reserve Bank of New York.
All of the following central banks took action to stimulate their economies following the 2007-2009 financial crisis and recession by implementing negative interest rates EXCEPT
the U.S. Federal Reserve.
The policy directive from the FOMC is carried out by
the account manager at the Federal Reserve Bank of New York.
All of the following help make the Fed independent of the political process EXCEPT
the chair of the Fed receives a lifetime appointment.
The Chairman of the Federal Open Market Committee is also
the chairman of the Board of Governors.
What was the goal of Operation Twist?
to reduce long-term interest rates and increase short-term interest rates
In 2016, state and local government pension plans were estimated to be
underfunded by a total of $1 trillion
When all workers who want jobs have them and the demand for and supply of labor are in equilibrium
unemployment is at its natural rate
Which of the following statements is correct?
Federal Reserve district banks pay dividends on their earnings to member banks.
Which of the following is an investment institution?
Fidelity Magellan Mutual Fund
What was the approximate peak amount of borrowing from the Fed during the Financial Crisis of 2007-2009?
$1 trillion
As of August 2016, the value of currency in circulation was about
$1.4 trillion
A $10 million open market purchase will increase the monetary base by
$10 million
A $10 million open market sale will decrease the monetary base by
$10 million
Suppose the required reserve ratio is 8% and the Fed purchases $100 million worth of Treasury bills from Wells Fargo. By how much is Wells Fargo able to increase its loans?
$100 million
Suppose that the banking system currently has no excess reserves and that a bank receives a deposit into a checking account of $10,000 in currency. If the required reserve ratio is 0.20, what is the maximum amount that the banking system can lend out?
$40,000
If banks hold no excess reserves, checkable deposits total $1.5 billion, currency totals $400 million, and the required reserve ratio is 10%, then the monetary base equals
$550 million
Suppose that a bank with no excess reserves receives a deposit into a checking account of $10,000 in currency. If the required reserve ratio is 0.20, what is the maximum amount that the bank can lend out?
$8,000
Suppose an investment bank is buying $50 million in long-term mortgage-backed securities, and finances the investment by borrowing 80% and paying for the other 20% out of equity. What is the bank's return on its equity investment if the value of the mortgage-backed securities decreases by 20% during the year after they are purchased?
-100%
For someone who invested in gold bars or coins in the late 1970s, when including storage and insurance fees the real return on investment in 2016 would have been
-30%
Assuming a required reserve ratio of 5%, interest rate on reserves of 1%, and interest rate on loans of 6%, what is the effective cost of the reserve requirement on a $10,000 deposit?
.25%
When the Fed raised its target for the federal funds rate in 2015, it set the interest rate it pays on overnight reverse repurchase agreements at
.25%
Assuming a required reserve ratio of 8%, interest rate on reserves of 0.5%, and interest rate on loans of 4%, what is the effective cost of the reserve requirement on a $1,000 deposit?
.28%
When the Fed raised its target for the federal funds rate in 2015, it set the interest rate it pays on excess reserves at
.50%
For how long must most hedge fund investors wait before withdrawing funds?
1 to 3 years
How many Federal Reserve districts are there?
12
The movement to set up a central bank in the United States was spurred by the financial panic that occurred in
1907
When did the Federal Reserve Act become law?
1913
In what year did the mutual fund industry in the United States begin?
1924
In what year did the United States go off the gold standard?
1933
If the required reserve ratio is 5%, what is the value of the simple deposit multiplier?
20
If currency outstanding equals $200 million, checkable deposits equal $1 billion, reserves equal $150 million, and the required reserve ratio is 0.10, the money multiplier equals
3.43
If currency outstanding equals $500 million, checkable deposits equal $2 billion, reserves equal $200 million, and the required reserve ratio is 0.10, the money multiplier equals
3.57
What percentage of all commercial banks in the United States belong to the Federal Reserve System?
34%
What is the name of the pension plan under which employees can make tax-deductible contributions through regular payroll deductions?
401(k) plan
Suppose an investment bank is buying $50 million in long-term mortgage-backed securities, and finances the investment by borrowing 80% and paying for the other 20% out of equity. What is the bank's leverage?
5
Suppose an investment bank is buying $50 million in long-term mortgage-backed securities, and finances the investment by borrowing 80% and paying for the other 20% out of equity. What is the bank's return on its equity investment if the value of the mortgage-backed securities increases by 10% during the year after they are purchased?
50%
Private banks in each region which are part of the Federal Reserve System elect
6 members of the regional Reserve Bank's board of directors.
In December 2008, the FOMC cut its target for the federal funds rate from 1% to a range from 0% to 0.25%, and it remained at this level for
7 years
Who organized the Bank of the United States?
Alexander Hamilton
Which of the following statements regarding member banks is TRUE?
A minority of banks are part of the Federal Reserve System, but they hold a majority of all bank deposits.
Which president failed to renew the charter of the Second Bank of the United States?
Andrew Jackson
Which of the following expressions is correct?
B = Bnon + BR
Which central bank has its exchange rate as a focus of its monetary policy?
Bank of Canada
Which central bank gained the power to set interest rates independent of the government in the late 1990s?
Bank of England
Which of the following assumptions made in deriving the simple deposit multiplier is unrealistic?
Banks loan out all of their excess reserves.
The members of Federal Reserve district bank boards of directors who are bankers are known as
Class A directors
Under which chair did the Fed implement the policy of inflation targeting?
Bernanke
The members of Federal Reserve district bank boards of directors who are leaders in industry, commerce, and agriculture are known as
Class B directors
The members of Federal Reserve district bank boards of directors appointed by the Board of Governors are known as
Class C directors
The members of Federal Reserve district bank boards of directors who represent the public interest are known as
Class C directors
Which government agency regulates futures markets?
Commodity Futures Trading Commission
Which of the following statements about the natural rate of unemployment is correct?
Currently, most economists think that the natural rate is about 5%.
The Dodd-Frank Act removed which group from decisions regarding the presidents of Federal Reserve Banks?
Class A directors
If C represents currency, D represents checkable deposits, N represents savings accounts, and MM represents money market mutual funds, which of the following equations is correct?
M1 = C + D
If the nonbank public wants to move funds from checkable deposits to savings accounts
M1 would fall and M2 would remain unchanged.
If the nonbank public wants to move funds from savings accounts to checkable deposits
M1 would rise and M2 would remain unchanged.
Which of the following is an intermediate target?
M2
Which of the following is NOT considered one of the four groups in the Federal Reserve System?
Federal Deposit Insurance Corporation
Which of the following cities contains a Federal Reserve bank?
Dallas
Which of the following statements is correct?
Decisions by both banks and the Fed determine the volume of discount loans.
Which of the following statements is NOT true?
Each Federal District Bank can charge a different discount rate.
To deal with difficulties in administering pension funds, Congress in 1974 passed the
Employee Retirement Income Security Act.
Which of the following accurately describes the relationship between excess reserves and checkable deposits following the financial crisis of 2007-2009?
Excess reserves exceeded checkable deposits.
Which country was least supportive of expansionary policy by the European Central Bank during the Financial Crisis of 2007-2009?
Germany
Which of the following countries experienced hyperinflation during the 1920s?
Germany
In 1976, Congress passed legislation which requires most federal government agencies to give public notice before a meeting. This legislation is the
Government in the Sunshine Act.
The national economic forecast for the next two years prepared by the staff of the Board of Governors is published in the
Green Book
If a member of the Board of Governors is limited to one 14-year term, how did Alan Greenspan serve 19 years on the Board of Governors?
He completed the remaining years left on someone else's term and then served one 14-year term.
Which agency did Congress create in the 1930s to reduce information costs in financial markets?
SEC
Which of the following is an accurate description of the steps by which the FOMC causes the actual federal funds rate to rise into its target range when it votes to raise the federal funds rate target?
IOER is increased → this affects depository institutions that can borrow and lend in the federal funds market AND are paid interest on their deposits with the Fed → this pushes the federal funds rate to the top of the target range → federal funds rate rises into this new range.
Which of the following statements concerning seasonal credit is TRUE?
Improvements in credit markets have reduced the need for a seasonal credit facility.
Which of the following best describes a policy of inflation targeting?
It allows monetary policy to focus on inflation and inflation forecasts except in the case of severe recession.
Which of the following statements accurately describes the Fed's control of discount policy?
It controls discount policy less completely than it controls open market operations.
Which of the following statements about the Depository Institutions Deregulation and Monetary Control Act of 1980 is NOT correct?
It eliminated restrictions on interstate banking for member banks.
Which of the following was NOT a result of the passage of the Gramm-Leach-Bliley Act?
It increased the capital requirements for commercial banks.
Which of the following is NOT an accurate description of open market operations prior to 2008?
It involved buying and selling long-term securities.
What does it mean for an investment bank to conduct a "road show"?
It involves visits to institutional investors who might want to buy the security issue.
What is the main reason the Fed operates in a political arena?
It lacks a constitutional mandate.
Which of the following accurately describes the Fed's inflation target?
It seeks to maintain an average inflation rate of 2% per year.
Who had served as a de facto lender of last resort during the 1907 panic?
J.P. Morgan
Which of the following rules affected hedge funds as a result of the Dodd-Frank Act of 2010?
Large hedge funds must register with the SEC.
Which of the following cities does NOT contain a Federal Reserve bank?
Los Angeles
The president of which Federal Reserve Bank is always a voting member of the Federal Open Market Committee?
New York
Why did fewer state banks choose to become or remain members of the Federal Reserve System during the 1960s and 1970s?
Nominal interest rates rose.
Which of the following is an accurate description of the steps by which the FOMC causes the actual federal funds rate to rise into its target range when it votes to raise the federal funds rate target?
ON RRP is increased → this affects certain nonbank financial institutions that can borrow and lend in the federal funds market BUT ARE NOT paid interest on their deposits with the Fed → this keeps the federal funds rate above the bottom of the target range → federal funds rate rises into this new range.
The Fed ended QE3 in
October 2014
Which of the following statements is correct?
Open market purchases are expansionary and open market sales are contractionary.
What was the name of the plan, enacted in 2011, in which the Fed bought $400 billion worth of long-term securities while selling $400 billion worth of short-term securities?
Operation Twist
In 2010, doubts were raised about the debt of all of the following countries EXCEPT
Poland
Which of the following is a contractual saving instituition?
Prudential Insurance Company
Why might Congress benefit from the Fed being self-financed?
Self-financing gives the Fed an incentive to expand the money supply, which ultimately results in Congress having additional funds to spend.
Which of the following statements is correct?
The Fed completely controls the volume of open market operations.
Which of the following statements is correct?
The Fed is only partially insulated from external pressures.
Which of the following statements is correct?
The Fed's profits are substantial, even when compared to the largest U.S. corporations.
What is the name of the entity, composed of Federal Reserve district bankers, that consults on monetary policy?
The Federal Advisory Council
Which of the following statements is correct?
The discount rate is generally above the federal funds rate.
Why didn't the surge in the monetary base between 2008-2012 lead to a similar surge in the money supply?
The excess reserve-deposit ratio rose significantly, resulting in a much smaller money multiplier.
Which of the following statements is NOT true?
The federal courts have never upheld the constitutionality of the Federal Reserve Act.
Which of the following statements is correct?
The volume of defensive open market operations is much greater than the volume of dynamic open market operations.
Which of the following statements is correct?
The volume of open market operations is determined solely by the Fed.
Which best describes the Federal Reserve district banks?
They are private-government joint ventures.
Which of the following statements is NOT true of consumer finance companies?
They are strictly regulated by state governments.
How were open market operations conducted prior to 1935?
They were carried out by the district Federal Reserve banks.
Which of the following is NOT a reason that firms in the shadow banking system were more vulnerable than commercial banks during the financial crisis of 2007-2009?
They were more heavily regulated than commercial banks, making them less able to adjust to changing market conditions.
In the long run, gold has shown to be
a poor hedge against inflation.
During the financial crisis of 2007-2009, Fed Chairman Ben Bernanke relied on an informal group of three advisors to help make quick decisions on policy actions. Which of the following was NOT one of those advisors?
Treasury Secretary Henry Paulson
Which of the following officially ended the cooperation between the Treasury and the Fed that had taken place during World War II?
Treasury-Federal Reserve Accord
The Fed's portfolio of securities consists principally of
U.S. Treasury obligations
When an insurance company makes a direct loan to a firm, the loan is known as
a private placement
When is the Fed likely to return to to using normal monetary policy procedures?
While the Fed may eventually return to normal monetary policy procedures, it is unlikely to do so in the near future.
If the Fed sells securities worth $10 million to a commercial bank, the Fed's balance sheet will show
a decrease in securities held of $10 million and a decrease in bank reserves of $10 million.
If the Fed purchases securities worth $10 million from a commercial bank, the banking system's balance sheet will show
a decrease in securities held of $10 million and an increase in bank reserves of $10 million.
Which of the following decreases the M2 multiplier?
a decrease in the nonbank public's preference for money market-type accounts relative to checkable deposits
A specified amount of a claim that the insurance company does NOT need to pay is called
a deductible
A syndicate is
a group of investment banks underwriting a large security issue.
As large investment banks converted from partnerships to corporations, the separation of ownership from control had the potential to lead to
a moral hazard problem resulting in a principal-agent problem
The FOMC states its overall objectives for interest rates in
a policy directive
A Federal Reserve repurchase agreement involves
an agreement by a dealer to buy back securities she has sold to the Fed.
If the Fed makes a discount loan of $2 million to a commercial bank, the Fed's balance sheet will show
an increase in discount loans of $2 million and an increase in bank reserves of $2 million.
Which of the following increases the M2 multiplier?
an increase in the nonbank public's preference for nontransaction accounts relative to checkable deposits
If the account manager does NOT use a Federal Reserve reverse repurchase agreement or a matched sale-purchase transaction in carrying out open market operations, he will use
an outright purchase or sale
Entry-level hires in investment banking firms are usually called
analysts
Members of the Board of Governors are
appointed by the President of the United States, subject to confirmation by the Senate.
Sales finance companies
are affiliated with companies which manufacture or sell goods.
Dynamic open market operations
are aimed at achieving changes in monetary policy.
Open market operations
are more flexible than other traditional policy tools.
Defensive open market transactions
are used to offset disturbances to the supply or demand for reserves.
Reserve deposits are
assets for financial institutions, but liabilities for the Fed.
When conducting open market operations, at what price is the Fed willing to buy or sell securities?
at whatever price is necessary to carry out its open market operations
Which of the following is NOT a form of a short-term loan in the shadow banking system?
bank deposits
Most of the increase in the monetary base between 2008 and 2016 was due to increases in
bank reserves
As of August 2016, which of the following was TRUE?
bank reserves > currency in circulation > deposits of foreign government and international organizations
If the Fed buys securities worth $10 million, then
bank reserves will increase by $10 million.
In 2016, federal regulators proposed that at least half of the bonuses investment banks pay top managers
be deferred for four years
In 2006, the Bank of Japan
began to scale back its expansionary policy, only to return to an expansionary policy following the financial crisis.
Which of the following is NOT a way in which power was divided up in the Federal Reserve System?
between importers and exporters
In 1913, Congress and the president did not envision that the Fed would control
broad control over most aspects of money and the banking system.
If the Fed purchases $50,000 in T-bills from a bank, by how much will the bank's excess reserves increase?
by $50,000
As of early 2016, carried interest was taxed as
capital gains
The mix of stocks and bonds a firm uses to raise funds is called
capital structure
The fee charged by a typical hedge fund are sometimes called
carried interest
Which of the following is NOT a responsibility of the Board of Governors?
carrying out open market operations
Who sets the inflation target for the Bank of England?
chancellor of the Exchequer
A load fund
charges a commission for purchases or sales.
The chair of the Federal Reserve is
chosen by the president
If the account manager finds that the current level of bank reserves is greater than the desired level indicated in the most recent directive from the FOMC, he will
conduct an open market sale.
In order to increase its target for the federal funds rate, the Fed would normally
conduct open market sales
Shadow banks ________ borrow short-term funds that are not federally insured and use them for long-term investment, and therefore ________ to runs similar to those that occurred during the financial crisis.
continue to; are vulnerable
In which of the following have pension funds invested the most?
corporate equities and mutual fund shares
The risk that the party on the other side of a financial transaction fails to meet its obligation is called
counterparty risk
Generally
countries with the most independent central banks have the lowest inflation rates.
During the financial crisis, which type of risk was the biggest problem faced by investment banks?
credit risk
Included in both M1 and M2 are
currency and checkable deposits.
Which of the following is a liability of the Fed?
currency in circulation
The aggregate M1 consists of
currency plus checkable deposits in financial institutions.
Federal Reserve districts
cut across state and economic boundaries.
As a result of the financial crisis of 2007-2009, the size of the shadow banking system
declined, but remained larger than the commercial banking system.
Suppose an investment bank has a leverage ratio of 10 and the value of its securities decline by 10%. What happens to its return on equity investment?
declines by 100%
An open market sale
decreases the price of Treasury securities and increases their yield.
Reserves equal
deposits with the Fed plus vault cash.
The original Federal Reserve Act
did not specifically mention open market operations.
Congress authorized the Second Bank of the United States partly in response to
difficulty in funding the War of 1812.
When the Fed lends to depository institutions, the loans are called
discount loans
The primary assets of the Fed are
discount loans and government securities.
Which of the following is an asset of the Fed?
discount loans to banks
The Beige Book is prepared by
district banks
The facts show that the political business cycle theory
does not generally hold true in the United States.
The FDIC ________ short-term borrowing by shadow banks, and shadow banks are normally ________ to receive loans from the Fed when they suffer liquidity problems.
does not insure; not eligible
A majority of the members of the boards of the 12 Federal Reserve Banks are
elected by bankers
The Federal Reserve district banks
engage in monetary policy directly through discount lending.
In the early post-war years, the Fed was reluctant to continue its wartime agreement with the Treasury because it believed the result would be
inflation
The ECB has emphasized what type of goal for monetary policy?
inflation targeting
The Fed's inability to instantaneously observe changes in inflation and economic growth result in
information lag.
In 2016, the Bank of Japan
instituted a negative interest rate on deposits it receives from Japanese banks, effectively requiring banks to pay the Bank of Japan for keeping their deposits.
Most of the Fed's earnings come from
interest on the securities it holds.
The risk that increased market interest rates will cause a decline in the value of an investment bank's holdings of long-term securities is known as
interest-rate risk.
The money multiplier
is an expression that converts the monetary base to the money supply.
Most economists believe that a zero rate of unemployment
is consistent with a well-functioning economy
The M2 multiplier
is larger than the M1 multiplier.
When banks hold excess reserves, the size of the money multiplier
is less than the simple deposit multiplier would suggest.
The Fed's goal of interest rate stability
is motivated by political pressure as well as by a desire for a stable saving and investment environment.
Factoring
is purchasing accounts receivable at a discount.
The Fed tends not to use discount policy as its principal tool in influencing the money supply since
it does not have as much control over discount loans as it has on open market operations.
When the Fed extends loans to depository institutions
it increases the level of reserves
The Fed does NOT have to go through the normal congressional appropriations process because
it is self financing
If the Fed desired to reduce the federal funds rate
it would conduct an open market purchase, increasing reserve supply.
All of the following arguments are presented in favor of inflation targeting EXCEPT
it would reduce the lags inherent in monetary policy.
What is the maximum amount a bank can lend?
its excess reserves
The Glass-Steagall Act was designed to
legally separate investment banking from commercial banking.
The original intent of the Federal Reserve Act of 1913 was to provide the Fed with what role?
lender of last resort
A falling dollar makes U.S. goods
less expensive abroad and increases the volume of U.S. exports.
Reserve requirements are changed
less frequently than open market operations are conducted and less frequently than the discount rate is changed.
Vault cash is a(an)
liability of the Fed and is counted as reserves.
The Open Market Trading Desk is
linked electronically to a group of private securities firms that the Fed has selected to participate in open market operations.
The resolution plans of an investment bank that "must describe the company's strategy for rapid and orderly resolution in the event of material financial distress or failure of the company" is called a
living will
Which of the following is the most common goal for central banks of industrialized countries?
low inflation
All of the following are potential benefits of defined contribution plans EXCEPT
lower risk for employees
An important service provided by underwriters is
lowering of information costs.
Interest rate fluctuations
make it difficult for households and firms to plan for the future.
Inflation is an economic problem because it
makes prices less useful as signals for resource allocation.
Which of the following was NOT advocated by former Texas Congressman Ron Paul?
making the Fed Board of Governors lifetime appointments
As a result of an open market purchase, bank reserves
rise and interest rates fall
If the Fed purchases $1 million worth of securities and the required reserve ratio is 8%, by how much will deposits change (assuming no change in excess reserves or the public's currency holdings)?
rise by $12.5 million
Between late 2007 and 2016, the Fed's balance sheet
rose fivefold
In 2008, as the financial crisis was at its worst, the sale of 1-ounce American Eagle gold coins
rose to more than 10 times the pre-crisis level.
Included in M2 but not in M1 are
savings accounts and money market mutual funds.
Temporary, short-term discount loans to banks in areas in which agriculture and tourism are important are known as
seasonal credit
Discount loans intended for banks that are NOT financially healthy are called
secondary credit
All of the following are new rules affecting the shadow banking system as a result of the Dodd-Frank Act EXCEPT
securitized loans must now be insured.
Finance companies...
sell commercial paper and securities and make loans to borrowers with the funds.
Mutual funds
sell shares to savers and purchase assets with the funds.
In a matched sale-purchase transaction, the Fed
sells securities to a dealer and the dealer agrees to sell them back.
Members of the Board of Governors
serve one nonrenewable fourteen-year term.
Which of the following is NOT a role of Federal Reserve Banks?
set the interest rate on reserves
Federal Reserve district banks perform all of the following roles EXCEPT
setting the federal funds rate.
In the federal funds market diagram, a decrease in the required reserve ratio
shifts the demand curve for reserves to the left
In the federal funds market diagram, an open market sale by the Fed
shifts the reserve supply curve to the left
When economists, policymakers, or journalists refer to the Fed's balance sheet, they are typically referring to the
size of the Fed's assets.
Which groups were opposed to the Bank of the United States?
southern and western agrarian and small-business interests
The Federal Reserve Act of 1913
specified neither the boundaries nor city locations for the district banks.
Modern hedge funds typically make investments that involve
speculating
The unemployment that is caused by changes in the economy, such as shifts in manufacturing techniques, increased use of computers and electronic machines, and increases in the production of services instead of goods, is called
structural unemployment
Sally Jones lost her job at a steel company because of a permanent decline in the demand for steel. Sally Jones is considered by economists to be
structurally unemployed
Which of the following activities is NOT a primary concern of investment banks?
taking in deposits and making loans
Which of the Fed's three new policy tools connected with bank reserve accounts is the least important?
term deposit facility
The European Central Bank is responsible for the monetary policy of
the 19 sovereign countries that use the euro as their currency.
When did the Fed first begin to use open market operations as a policy tool?
the 1920s
Increases in interest rates are often blamed on
the Fed
Reserve requirements are set by
the Fed
The political business cycle theory predicts that
the Fed acts to stimulate economic activity before an election.
During World War II
the Fed agreed to hold interest rates on short-term Treasury securities at low levels.
Open market operations generally involve
the Fed buying and selling U.S. government securities.
Who is considered to wield the most power in the Federal Reserve System?
the Fed chair
The Fed uses operating targets as well as intermediate targets because
the Fed controls intermediate targets only indirectly.
All of the following arguments are made against inflation targeting EXCEPT
the Fed has little influence on inflation.
The information lag facing the Fed is
the delay in receiving accurate information about the state of the economy.
The inflation gap can best be described as
the difference between inflation and its target.
The interest rate the Fed charges on loans to depository institutions is known as
the discount rate
The size of the money multiplier depends upon all of the following EXCEPT
the discount rate
Which of the following appears to be evidence against the public interest view of the Fed's motivation?
the failure of the Fed to emphasize the goal of price stability
One of the extraordinary policy actions taken by the Fed in response to the financial crisis of 2007-2009 was making huge asset purchases. These asset purchases greatly increased all of the following EXCEPT
the federal funds rate
The public interest view of Fed motivation holds that the Fed acts in the interest of
the general public.
An important problem facing the Fed is that
the goals for economic growth and price stability may conflict in the short run.
The benchmark default-free interest rate of the financial system is generally considered to be
the interest rate on the 10-year Treasury note.
Vesting refers to
the length of service required of an employee before he or she is eligible for a pension.
As of 2015, the dividend the Fed pays to member banks with assets greater than $10 billion is
the lesser of 6% or the interest rate on 10-year Treasury notes.
Investment banks are vulnerable because
the maturity of their liabilities is less than the maturity of their assets.
The discount window is
the means by which the Fed makes discount loans to banks.
By the time of the annual monetary policy conference in Jackson Hole, Wyoming in 2016,
the monetary base and the Fed's balance sheet remained very large, and the target for the federal funds rate had only slightly risen.
The Fed has the greatest control over which of the following?
the nonborrowed monetary base
The output gap can best be described as
the percentage difference between real GDP and its potential.
In investment banking the "spread" is the difference between
the price of new capital guaranteed to the issuing firm and the price that can be obtained in the market.
Primary credit is only a backup source of funds for healthy banks since
the primary credit rate is set above the federal funds rate.
Who owns the Federal Reserve banks?
the private commercial banks in each district which are members of the Federal Reserve System
The issue of Fed independence is most often raised by
the public's negative reaction to Fed policy.
The Federal Reserve Act of 1913 made who the chairman of the Federal Reserve Board?
the secretary of the Treasury
The impact lag facing the Fed is
the time required for monetary policy changes to affect output, employment, and prices.
Hedge funds have been criticized for
their heavy use of short selling
All of the following statements about secondary credit are true EXCEPT
they are temporary, short-term loans to satisfy seasonal requirements.
Since 1980, discount loans have been available
to all depository institutions
The Fed has attempted to solve the problems of being unable to directly control the variables that determine economic performance and the timing lags in observing and reacting to economic fluctuations by
using targets to meet its goals.
The portfolios that mutual funds offer to savers are
usually more liquid than the underlying assets.
The difference between currency outstanding and currency in circulation is equal to
vault cash
The assumption that reserves are scarce
was accurate prior to the financial crisis of 2007-2009 but not following the crisis.
The National Monetary Commission
was created by Congress to study the setting up of a central bank.
In 2016, savings rates in Japan, Germany, Denmark, Sweden, and Switzerland
were at their highest level since 1995, indicating that negative interest rates were not increasing consumer spending.
The due diligence process is
when an investment bank researches a firm's value.
If the Fed purchases $1 million in securities from the nonbank public, the monetary base will rise by $1 million
whether the public holds the proceeds as currency or deposits them as checkable deposits.
According to Taylor's rule, all of the following variables help explain the behavior of the federal funds rate EXCEPT
yield curve
On the books of the Fed, the difference between borrowed reserves and discount loans is equal to
zero; they are the same thing.
