Finance Final :)

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Why is the shadow banking system an important part of the​ 2007-2009 financial​ crisis?

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

Why is a financial crisis likely to lead to a contraction in economic​ activity?

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

An advantage of an international lender of last resort is its ability to prevent

contagion ​, in which a successful speculative attack on one currency leads to attacks on others.

A monetary regime in which the domestic currency is backed​ 100% by a foreign​ currency

currency board

When a central bank buys its currency in the foreign exchange​ market,

it loses international reserves.

A rise in the expected future exchange rate shifts the demand for domestic assets to the​ ________ and causes the domestic currency​ to_________.

right, appreciate

A rise in the expected trade barriers shifts the demand for domestic assets to the​ ________ and causes the domestic currency​ to_________.

right, appreciate

The revenue a government receives by issuing​ money:

seignorage

In a fixed exchange rate​ regime, when the domestic currency becomes undervalued​, in order to keep the exchange rate at par the central bank must

sell domestic currency which leads to a gain of international reserves.

The immediate exchange of bank deposits in the foreign exchange market​:

spot exchange rate

If the demand for a​ country's exports falls at the same time that tariffs on imports are​ raised, will the​ country's currency tend to appreciate or depreciate in the long​ run? The effect on the​ country's currency is

uncertain

A financial crisis occurs​ when:

a particularly large disruption to information flows occurs in financial markets

A financial crisis occurs​ when:

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

The​ Dodd-Frank Act of 2010 is the most​ comprehensive:

financial reform legislation since the Great Depression.

Critics of the IMF contend that its​ bail-out of the Mexican economy in the​ mid-1990s set the stage for the Asian crisis of the late 1990s because

foreign lenders expected to be bailed out if things went wrong.

If the current account balance is minus​$510 billion and the capital account balance is ​$500 ​billion, then the official reserve transactions balance is

-10

How can a bursting of an​ asset-price bubble in the stock market trigger a financial crisis?

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 borrowing firms to have less to lose so they are willing to take on additional risk C. A reduction in asset prices causes a serious deterioration in borrowing​ firms' balance sheets D. All of the above are correct!!!

Which of the following is associated with asymmetric information in a financial​ crisis?

A. Adverse selection can occur if lenders must select from a pool of bad credit risks. B. There is a lack of information about one or more of the parties involved in a transaction. C. Moral hazard could occur when only borrowers know if the funds will be used to finance​ high-risk activities. D. All of the above are correct.!!!!!

Which of the following is not a factor that commonly initiates financial​ crises?

A. The increased uncertainty that occurs when a major financial institution fails. B. ​Asset-price booms and busts. !!!!!!C. Increases in government regulations that make it harder to manage the risks of financial assets.!!!!!!!!!! .D. The mismanagement of financial liberalization and innovation.

Why is the​ originate-to-distribute business model subject to the​ principal-agent problem?

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

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. Your answer is correct.!!!!! B. The increased uncertainty that occurs when a major financial institution fails. C. The mismanagement of financial liberalization and innovation. D. ​Asset-price booms and busts.

For each of the​ following, identify whether they increase or decrease the current account​ balance:

An American​ citizen's purchase of an airline ticket from Air France will decrease the current account balance. A Japanese​ citizen's purchase of California oranges will increase the current account balance. ​$50 million of foreign aid to Honduras will decrease the current account balance. A worker in California who sends money to his parents in Mexico will decrease the current account balance. The services an American accounting firm provides to a German firm will increase the current account balance.

If government spending increases​, describe how monetary policymakers would respond​ (if at​ all) to stabilize economic activity. Assume the economy starts at a​ long-run equilibrium.

An increase in government spending increases aggregate demand​, so monetary policymakers would pursue an autonomous tightening of monetary policy to stabilize economic activity.

What are some of the disadvantages of​ China's pegging of the yuan to the​ dollar?

An increase in the Chinese monetary base and money supply can produce high inflation. Many countries have threatened to erect trade barriers against Chinese goods.

What are some of the disadvantages of​ China's pegging of the yuan to the​ dollar?

An increase in the Chinese monetary base and money supply can produce high inflation. Many countries have threatened to erect trade barriers against Chinese goods. Your

When the U.S. dollar​ depreciates, what happens to exports and imports in the United​ States?

As the U.S. dollar​ depreciates, domestic goods become cheaper and imported goods become more expensive ​, thus domestic consumers and foreigners will buy more of the​ U.S.-produced goods.​ Hence, U.S. exports will increase and U.S. imports will decrease

What is the key advantage of dollarization over other forms of​ exchange-rate targeting?

Avoidance of speculative attacks

Identify the similarities between the United​ States' experiences during the Great Depression and the financial crisis of​ 2007-2009. ​(Check all that​ apply.)

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

What are the five areas included in the​ Dodd-Frank Act of​ 2010?

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

Why do credit spreads rise during financial​ crises?

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

The official reserve transactions balance equals

Current account​ + capital account

​__________ 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.

Debt deflation

The price of one currency in terms of another​:

Exchange rate

​"If autonomous spending​ falls, the central bank should lower its inflation target in order to stabilize​ inflation." Is this statement​ true, false, or​ uncertain? Explain your answer.

False. If the central bank pursues stabilization​ policy, it can stabilize both inflation and output simultaneously with an autonomous easing of policy.

Which of the following statements is true of financial​ frictions?

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

The exchange rate for forward transactions​:

Forward exchange rate

Why did the exchange rate peg lead to difficulties for the countries in the ERM when German reunification​ occurred?

Germany raised interest​ rates, which also raised interest rates in ERM​ countries, slowing growth and increasing unemployment.

Suppose the country imports most of the goods included in the basket of goods and services considered in the calculation of the consumer price index​ (CPI).

Given the​ information, the​ country's inflation rate is likely to increase

Choose the components of the shadow banking system. ​(Check all that​ apply.

Hedge funds. Investment banks. Money market funds.

How did financial innovations in mortgage markets contribute to the​ 2007-2009 financial​ crisis?

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. B. 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. C. 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. D. All of the above are correct.!!!!!

Suppose the Federal Reserve sells dollars in the foreign exchange market but conducts an offsetting open market operation to sterilize the intervention. If the Federal Reserve sells dollars in the foreign exchange market but conducts an offsetting open market operation to sterilize the​ intervention, what will be the effect on international​ reserves, the money​ supply, and the exchange​ rate? Based on the information given​ above, which of the following statements are likely to be​ true? ​

International reserves are likely to increase. The exchange rate is likely to remain the same.

What are the key advantages of​ exchange-rate targeting as a monetary policy​ strategy? ​

It is simple and clear. It mitigates the​ time-inconsistency problem. It helps keep inflation under control.

The idea that the prices of identical goods should be identical throughout the​ world:

Law of one price

How can the​ S&L crisis be blamed on the principal-agent problem ​? As a​ result, politicians and regulators​ __________________________, thereby increasing the cost of the​ S&L bailout.

Politicians and​ regulators, who are known as the agents, have not had the same incentives to minimise costs of deposit insurance as do the​ taxpayers, who are known as the principals . relaxed capital​ standards, removed restrictions on holdings of risky​ assets, and engaged in regulatory forbearance

In the​ mid- to late​ 1970s, the yen appreciated relative to the​ dollar, even though​ Japan's inflation rate was higher than​ America's. What does this imply about Japanese​ productivity?

Productivity in Japan rose faster than in the United States during this period.

Restrictions on the quantity of foreign goods that can be​ imported

Quotas

The price of domestic goods relative to the price of foreign goods denominated in the domestic​ currency:

Real exchange rate

Why is it important for the U.S. government to have resolution​ authority?

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

Which of the following is not a​ principal-agent problem resulting from the originate-to-distribute LOADING... business​ model?

Since mortgage brokers do not intend to hold the mortgage loans they​ make, they take extra care to gather as much information as possible about the borrower.

Taxes on imported​ goods:

Tariffs

During the last two​ decades, this agency has acted like an international lender of last resort to cope with financial​ instability:

The International Monetary Fund​ (IMF).

Suppose the Mexican central bank chose to peg the peso to the U.S. dollar and commit to a fixed​ peso/dollar exchange rate. Explain how the peg must be maintained if a shock in the U.S. economy forces the Fed to pursue contractionary monetary policy.

The Mexican central bank needs to sell foreign assets and buy domestic peso currency.

If nominal interest rates in America rise but real interest rates​ fall, predict what will happen to the U.S. exchange rate.

The U.S. exchange rate will depreciate

A given country is currently running a current account deficit of​ $450 billion but the overall balance of payments is equal to​ $0. Which of the following must be​ true?

The capital account is in surplus by an amount of​ $450 billion

If a​ country's par exchange rate was undervalued during the Bretton Woods fixed exchange rate​ regime, what kind of intervention would that​ country's central bank be forced to​ undertake?

The central bank would need to sell domestic currency and buy foreign assets. This would cause the domestic money supply to increase

From 2009 to​ 2011, the economies of Australia and Switzerland suffered relatively mild effects from the global financial crisis. At the same​ time, many countries in the euro area were hit hard with high unemployment and burdened with unsustainably high government debts. How should this affect the​ euro/Swiss franc and​ euro/Australian dollar exchange​ rates?

The currencies will appreciate against the euro because the demand for​ euro-denominated assets will decrease.

What is a credit​ spread?

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

What does this say about the ability of central banks to address domestic economic problems while maintaining a pegged exchange​ rate? ​

The domestic central bank is forced to import the monetary policy of the pegging country. There is no scope for domestic monetary policy stabilization.

In March​ 2009, the Federal Reserve announced a quantitative easing program designed to lower intermediate and​ longer-term interest rates. What effect should this have on the​ dollar/euro exchange​ rate?

The euro will appreciate relative to the dollar because demand for assets denominated in U.S. dollars will fall.

Suppose the president of the United States announces a new set of reforms that includes a new​ anti-inflation program. Assuming the announcement is believed by the​ public, what will happen to the exchange rate for the U.S.​ dollar?

The exchange rate will appreciate

The IMF does not enjoy a great reputation in many countries that were recipients of IMF loans or bailouts. Which of the following is likely to be a reason that many citizens were not happy with the role played by the​ IMF

The loans provided by the IMF forced the recipient nations to increase the domestic interest rate​, and citizens had to cope with the harsh burden of the crisis.

Suppose the Federal Reserve purchases ​$10​,000,000 worth of foreign assets. If the Federal Reserve purchases the foreign assets with ​$10​,000,000 in​ currency, show the effect of this open market operation using​ T-accounts. ​(Use a minus sign to indicate a decrease in assets or​ liabilities, if​ any.) Federal Reserve System Assets Foreign assets ​ (international reserves) ​$ 10 million Liabilities Currency in circulation ​$ 10 million

The monetary base increases by ​$10 million.

If the Federal Reserve purchases the foreign assets by selling ​$10​,000,000 in​ T-bills, show the effect of this open market operation using​ T-accounts. ​(Use a minus sign to indicate a decrease in assets or​ liabilities, if any.​) Assets Foreign assets ​ (international reserves) ​$ 10 million Government bonds ​$ negative 10 million Liabilities Currency in circulation ​$ 0 million

The monetary base remains unchanged.

The​ Fed's purchase of dollars has two effects.​ First, it reduces the​ Fed's holding of international reserves.​ Second,

The money supply decreases

If the price level recently increased by 23​% in England while falling by 5​% in the United​ States, what must be the new exchange rate if PPP​ holds? Assume that the current exchange rate is 0.55 pound per dollar.

The new exchange rate must be 0.71 pound per dollar. https://www.chegg.com/homework-help/financial-markets-and-institutions-9th-edition-chapter-15-problem-13qp-solution-9780134520421?trackid=2aa0fa136d6e&strackid=f4741c85df29&ii=2

Which of the following are likely to be the effects of the devaluation of a​ country's currency on the​ country's imports and​ exports? ​(Select all that​ apply.)

The quantity of imports is likely to decrease. Exports are likely to become cheaper.

The New Zealand dollar to U.S. dollar exchange rate is 1.39​, and the British pound to U.S. dollar exchange rate is 0.61. If you find that the British pound to New Zealand dollar were trading at 0.48​, what would be the riskless profit per U.S. dollar​ invested?

The riskless profit is ​$ 0.10 per U.S. dollar invested https://www.chegg.com/homework-help/new-zealand-dollar-us-dollar-exchange-rate-136-british-pound-chapter-15-problem-7qp-solution-9780133427073-exc

If the Indian government unexpectedly announces that the tariffs on foreign goods will be higher one year from​ now, what will happen to the value of the Indian rupee​ today?

The rupee will appreciate today.

If the Canadian dollar to U.S. dollar exchange rate is 1.26 and the British pound to U.S. dollar exchange rate is 0.64​, what must be the Canadian dollar to British pound exchange​ rate?

The spot exchange rate is 1.97 Canadian dollars per pound. https://www.chegg.com/homework-help/the-economics-of-money-banking-and-financial-markets-business-school-edition-4th-edition-chapter-20-problem-18ap-solution-9780133860375?trackid=fcb44d7c4686&strackid=f59df9fe0e3e&ii=1

The theory that exchange rates between any two countries will adjust to reflect changes in the price levels of the two​ countries:

Theory of purchasing power parity

Which of the following is a correct statement about the​ Dodd-Frank Act of​ 2010?

The​ Dodd-Frank Act created a new independent agencylong dashthe Consumer Financial Protection Bureaulong dashthat is funded and housed within the Federal Reserve

Advances in computer technology and new statistical techniques led to the development of subprime mortgages.

True

​"If a country wants to keep its exchange rate from​ changing, it must give up some control over its money​ supply." Is this statement​ true, false, or​ uncertain?

True. Necessary interventions in the foreign exchange market will affect the money supply.

When is​ exchange-rate targeting likely to be a sensible strategy for industrialized​ countries?

When monetary policy suffers from the​ time-inconsistency problem.

When is​ exchange-rate targeting likely to be a sensible strategy for emerging market​ countries?

When the credibility of​ anti-inflation policies are in question.

If American auto companies make a breakthrough in automobile technology and are able to produce a car that gets 200 miles to the​ gallon, what will happen to the U.S. exchange​ rate? The U.S. exchange rate will

appreciate

If a strike takes place in​ France, making it harder to buy French​ goods, what will happen to the value of the U.S.​ dollar? The dollar will

appreciate

An increase in the value of a currency​:

appreciation

If Mexicans go on a spending spree and buy twice as much French​ perfume, Japanese​ TVs, English​ sweaters, Swiss​ watches, and Italian​ wine, what will happen to the value of the Mexican​ peso? The value of the Mexican peso will

depreciate

A fall in the value of a currency​:

depreciation

If nominal interest rates in America rise but real interest rates​ fall, predict what will happen to the U.S. exchange rate. The U.S. exchange rate will

depreicate

If a​ country's central bank eventually runs out of international reserves when it attempts to keep the currency from​ depreciating, it cannot keep its currency from​ depreciating, and a

devaluation must​ occur, in which the par exchange rate is reset at a lower level.

The adoption of a sound​ currency, like the U.S.​ dollar, as a​ country's money:

dollarization

Fixing the value of the domestic currency to the value of another​ currency:

exchange rate peg

A monetary policy strategy designed to provide a strong nominal anchor to promote price stability through pegging of its​ currency:

exchange rate targeting

The Economist magazine is famous for its publication of the Big Mac indexlong dasha table of Big MacTM prices in different countries around the world. The use of the Big Mac allows for a highly standardized product sold throughout the world.

https://www.chegg.com/homework-help/questions-and-answers/economist-magazine-famous-publication-big-mac-indexlong-dash-table-big-mactm-prices-differ-q13700769

The Economist magazine is famous for its publication of the Big Mac indexlong dasha table of Big MacTM prices in different countries around the world. The use of the Big Mac allows for a highly standardized product sold throughout the world. Given the following abbreviated​ table: Country PriceBig Mac China ​10,000 yuan U.K. pound1.25 U.S. ​$2.50 Suppose that the exchange rate between China and the U.K.​ is: ​15,000 yuan​ = pound1.00 and that the Big MacTM could be used as a standardized commoditylong dasheasily transported and not perishable. Complete the​ following:

https://www.chegg.com/homework-help/questions-and-answers/economist-magazine-famous-publication-big-mac-table-big-mactm-prices-different-countries-a-q24581820?trackid=5e3cab233dbc&strackid=a2f4311120e4&ii=1

The following data are​ given: Et​ = yen105 ​= $1.00 Et​+1​ = yen103 ​= $1.00 iU.S.​ = 15​% If the interest parity condition is expected to​ hold, interest rates in Japan should equal 13.10

https://www.chegg.com/homework-help/questions-and-answers/following-data-given-et-yen-105-100-et-1-yen-103-100-ius-14-interest-parity-condition-expe-q28447060

Given the exchange rates and prices of a digital music player​ (produced in the United​ States) on the following two​ dates: Date Exchange Rate Price of a Digital Music Player June​ 30, 2005 yen120 ​= $1.00 ​$119 June​ 30, 2006 yen110 ​= $1.00 ​$119

https://www.chegg.com/homework-help/questions-and-answers/given-exchange-rates-prices-digital-music-player-produced-united-states-following-two-date-q27996725

Using the line drawing tool​, show the effect of an increase in the foreign interest rate i Superscript Upper F. Properly label your new line. Carefully follow the instructions​ above, and only draw the required object.

https://www.chegg.com/homework-help/questions-and-answers/suppose-increase-capital-stock-1-using-line-drawing-tool-show-effect-change-labor-market-p-q34443117?trackid=666c738e947d&strackid=2cae8315a8aa&ii=3

A case for capital inflow controls can be made because these​ inflows:

may cause a lending boom and lead to excessive risk taking.

A criticism of the activities of the IMF is that it creates a serious​ ________ problem because depositors and other creditors of banking institutions expect that they will be protected if a crisis occurs.

moral hazard

What is an advantage of currency boards over a monetary policy that uses only an​ exchange-rate target?

​Inflation-fighting credibility.


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