Eco 029 Midterm #2

If a bank has $200,000 of checkable deposits, a required reserve ratio of 20 percent, and it holds $80,000 in reserves, then the maximum deposit outflow it can sustain without altering its balance sheet is

$50,000.

For each of the following assets, indicate which, if any, of the monetary aggregates includes them: Asset a. Currency (1)__________________________ b. Money market mutual funds (noninstitutional (2)____________________________ c. U.S. Tbills (with maturities of less than 90 days) (3)______________________________ d. Small-denomination time deposits (4)________________________ e. Large cap mutual funds (5)________________________________ f. Checkable deposits (6)__________________________________

(1) M1 and M2 (2) M2 only (3) Neither M1 nor M2 (4) M2 only (5) Neither M1 nor M2 (6) M1 and M2

Assume that you are interested in earning some return on idle balances you usually keep in your checking account and decide to buy some money market mutual fund shares by writing a check. Everything else the same, M1 will (1)______________ and M2 will (2) ___________________

(1) decrease (2) stay the same

​'The independence of the Fed has meant that it takes the long view and not the short​ view.' Assume this statement is correct and answer the following questions. (1) The​ Fed's personnel are not directly affected by the outcome of the next ​election; therefore, it has some level of ​ independence (2)The Fed can still be influenced by political​ pressure (3)The​ Fed's lack of accountability may make the Fed more​ irresponsible (4)The members of the board generally cannot be reappointed to their​ position; they do not need to do favours in order to keep their job in the future

(1)True (2)False (3)False (4)True

If the required reserve ratio is 10 percent, the simple deposit multiplier is

10.0

Rank the following bank assets from most liquid (1) to least liquid (4) Asset Rank: Commercial loans __________ Securities _________ Reserves ___________ Physical capital __________

3, 2, 1, 4

There are​ ________ members of the Board of Governors of the Federal Reserve System.

7

Which of the following statements are true?

A bank's balance sheet shows that total assets equal total liabilities plus equity capital

The financial panic of 1907 resulted in such widespread bank failures and substantial losses to depositors that the American public finally became convinced that

A central bank was needed to prevent future panics.

Money is

Anything that is generally accepted in payment for goods and services or in the repayment of debt

Which of the following is not an income producing asset on a bank's balance sheet?

Bank reserves.

Of the following, which would be the last choice for a bank facing a reserve deficiency?

Borrow from other banks

Which of the following is not an asset on a bank's balance sheet?

Checkable deposits.

What makes the Federal Reserve so unique compared to other central banks around the world is its

Decentralized structure.

Which of the following are reported as liabilities on a bank's balance sheet?

Discount loans

In prison, cigarettes are sometimes used among inmates as a form of payment. All of the following explain how cigarettes solve the "double coincidence of wants" problem, even if a prisoner does not smoke, except:

Exchanging cigarettes for other goods and services increases transaction costs.

The political business cycle refers to the phenomenon that just before elections, politicians enact ________ policies. After the elections, the bad effects of these policies (for example, ________ ) have to be counteracted with ________ policies.

Expansionary; a higher inflation rate; contractionary

Although reserve requirements and the discount rate are not actually set by the​ ________, decisions concerning these policy tools are effectively made there.

Federal Open Market Committee

The Federal Reserve entity that makes decisions regarding the conduct of open market operations is the

Federal Open Market Committee.

Proponents of a Fed under greater control of the president or Congress argue that

Greater control would help coordinate fiscal and monetary policies.

Bank's make their profits primarily by issuing ________.

Loans

Greater central bank independence is associated with

Lower inflation and no change in unemployment

When money is used as acceptance for payment of goods and services, it is being used as a

Medium of exchange

The Federal Open Market Committee makes the Fed's decisions on the purchase or sale of government securities, but these purchases or sales are executed by the Federal Reserve Bank of

New York

The Federal Reserve Bank of ________ houses the open market desk

New York

The president from which Federal Reserve Bank always has a vote in the Federal Open Market Committee?

New York

Each governor on the Board of Governors can serve

One full nonrenewable fourteen − year term plus part of another term.

The case for Federal Reserve independence does not include the idea that

Policy is always performed better by an elite group such as the Fed.

Members of Congress are able to influence monetary​ policy, albeit​ indirectly, through their ability to

Propose legislation that would force the Fed to submit budget requests to​ Congress, as must other government agencies.

The Federal Reserve Banks are ________ institutions since they are owned by the ________.

Quasi − public; private commercial banks in the district where the Reserve Bank is located

Why do equity holders care more about ROE than about ROA?

ROE measures how much equity holders are earning, while ROA measures how efficiently the bank is being run.

Which of the following bank assets is the most liquid?

Reserves

Eliminating the​ Fed's independence might lead to a more pronounced political business cycle because a politically exposed Fed would be more concerned with​:

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

In ancient Greece, what property made gold a more likely candidate for use as money than wine? Gold's property as a (1)_________________ made it a more likely candidate for use as money when compared to wine.

Store of value

When money is used to hold purchasing power for future use, it is being used as a

Store of value

Even economists have no single, precise definition of money because

The "moneyness" or liquidity of an asset is a matter of degree

Which of the following is an entity of the Federal Reserve​ System?

The FOMC

The public's fear of centralized power and distrust of moneyed interests led to the demise of the first two experiments in central banking, otherwise known as:

The First Bank of the United States and the Second Bank of the United States.

Instrument independence is the ability of ________ to set monetary policy ________.

The central bank; instruments

Critics of the current system of Fed independence contend that

The current system is undemocratic.

Recent research indicates that inflation performance (low inflation) has been found to be best in countries with

The most independent central banks

When we say that money is a stock variable, we mean that

The quantity of money is measured at a given point in time

Why is simply counting currency an inadequate measure of money?

There are other liquid assets similar to currency that can be used as money to purchase goods and services.

When money is used to express the relative value of goods and services, it is being used as a

Unit of account

The total collection of pieces of property that serve to store value is a person's

Wealth

If borrowers with the most risky investment projects seek bank loans in higher proportion to those borrowers with the safest investment projects, banks are said to face the problem of

adverse selection.

The three players in the money supply process include

banks, depositors, and the central bank

The process of asset transformation is frequently described by saying that banks are in the business of

borrowing short and lending long

A bank with insufficient reserves can increase its reserves by

calling in loans.

Which of the following would not be considered a managed liability?

checkable deposits

The bank manager has four primary concerns as given by the following except

credit history management

The monetary liabilities of the Federal Reserve includ

currency in circulation and reserves.

In the market for reserves, if the federal funds rate is between the discount rate and the interest rate paid on excess reserves, a decline in the reserve requirement ________ the ________ curve of reserves and causes the federal funds interest rate to fall, everything else held constant

decreases; demand

When you deposit your $4000 paycheck in your bank, which was written on an account at a different bank, the immediate impact on your bank's balance sheet is that your bank's cash items in the process of collection rise by $4000 and your bank's

deposits rise by $4000

The interest rate charged on overnight loans of reserves between banks is the

federal funds rate

The Chairman of the Board of Governors is chosen from among the seven governors and serves a​ ________ renewable term

four−year

When a new depositor opens a checking account at the First National Bank, the bank's assets ________ and its liabilities _______

increase; increase

A bank with excess reserves can economize on these reserves by:

lending reserves in the federal funds market

Everything else held constant, in the market for reserves, when the federal funds rate equals the discount rate, lowering the discount rate

lowers the federal funds rate

The opportunity cost of holding excess reserves is the federal funds rate ________.

minus the interest rate paid on excess reserves

The ratio that relates the change in the money supply to a given change in the monetary base is called the

money multiplier

Suppose that from a new checkable deposit, First National Bank holds two million dollars in vault cash, one million dollars in required reserves, and faces a required reserve ratio of ten percent. Given this information, we can say First National Bank has ________ million dollars in excess reserves.

nine

Purchases and sales of government securities by the Federal Reserve are called

open market operations.

Banks hold excess and secondary reserves to

provide for unexpected deposit outflows.

There are two ways in which the Fed can provide additional reserves to the banking system: it can ________ government bonds or it can ________ discount loans to commercial banks

purchase; extend

Long − term customer relationships ________ the cost of information collection and make it easier to ________ credit risks

reduce; screen

A $5 million deposit outflow from a bank has the immediate effect of

reducing deposits and reserves by $5 million

The percentage of deposits that banks must hold in reserve is the

required reserve ratio.

In the market for reserves, if the federal funds rate is between the discount rate and the interest rate paid on excess reserves, a ________ in the reserve requirement increases the demand for reserves, ________ the federal funds interest rate, everything else held constant

rise; raising

Because ________ are less liquid for the depositor than ________, they earn higher interest rates

savings accounts; checkable deposits

The government agency that oversees the banking system and is responsible for the conduct of monetary policy in the United States is

the Federal Reserve System

When a $10 check written on the First National Bank of Chicago is deposited in an account at Citibank, then

the liabilities of the First National Bank decrease by $10

The nine directors of the Federal Reserve Banks are split into three​ categories: ________ are professional​ bankers, ________ are leaders from​ industry, and​ ________ are to represent the public interest and are not allowed to be​ officers, employees, or stockholders of banks.

​3; 3; 3