Financial Institutions Exam 1
Government deficits can complicate monetary policy because government borrowing can lead to
"crowding out," which leads to higher interest rates.
The entity responsible for making the monetary policy decisions in the European Central Bank is the
governing council
The three governing bodies of the European Central Bank (ECB) are the
governing council, general council, and executive board.
When the economy is caught in a liquidity trap, expansionary monetary policy will
have little impact on the economy
Consider the following data about the economy: currency outstanding (C) = $2 trillion, total deposits (D) = $1 trillion, total reserves (R) = $60 billion, and the required reserve ratio (RR ratio) = 5%. If the Federal Reserve increases the monetary base by $1 billion, the money supply will
increase by $1.46 billion; The money multiplier is equal to (1 + k)/(k + rr + re), where k is the currency ratio, rr is the required reserve ratio, and re is the excess reserve ratio. In this case, the money multiplier = (1 + 2)/(2 + 0.05 + 0.01) = 3/2.06 = 1.46. A $1 billion increase in the monetary base will result in a $1.46 billion increase in the money supply.
If the goal of monetary policy is to keep interest rates stable, the Federal Reserve's response to increases in the demand for money will be to
increase the supply of money.
Those who argue against the pursuit of the dual objectives of stable prices and high employment point to the __________ as evidence that the pursuit of dual objectives is misguided.
inflation of the 1970s
To achieve its goal of monetary stability, the Bank of England sets a target
inflation rate of 2% per year.
One of the biggest challenges the Federal Reserve faces in conducting monetary policy is the existence of __________ lags.
information and impact
The biggest change in the Federal Reserve's balance sheet between March 2007 and May 2013 was the __________ on the __________ side of the balance sheet.
jump in depository institution deposits; liability
Consider the following data about the economy: currency outstanding (C) = $1 trillion, total deposits (D) = $750 billion, total reserves (R) = $76 billion, and the required reserve ratio (RR ratio) = 10%. What is the money multiplier for this economy?
1.63; The money multiplier is equal to (1 + k)/(k + rr + re), where k is the currency ratio, rr is the required reserve ratio, and re is the excess reserve ratio. In this case, the money multiplier = (1 + 1.33)/(1.33 + 0.1 + 0.00133) = 2.33/1.43133 = 1.63.
Three rounds of extraordinary expansionary monetary policy (QE1, QE2, and QE3) were undertaken by the Fed beginning in November 2008 and ending when?
2014
If GDP is $20 trillion and the money supply is $4 trillion, what is the velocity of money?
5
The Federal Reserve notices an increase in the public's desire to hold cash and fears that it may cause an increase in interest rates. To keep interest rates steady, the Federal Reserve would likely execute which of these plans?
A repurchase agreement to provide a short-term boost to the money supply
During the Great Recession and immediate post-recession years between 2008 and 2014, what happened to the price level in the United States?
The price level fell sharply but then rebounded somewhat.
Which of these statements best describes why the required reserve ratio is no longer relevant in most cases today?
About 70% of banks already have reserves that exceed their level of required reserves.
Through which of these methods can the Fed impact the money supply?
Bank reserves, open market operations, and interest rates
Monetary policy has the best chance of influencing the level of __________ unemployment.
Cyclical
Suppose the current real federal funds rate in the economy is 2.0%, the current inflation rate is 1.0%, the Federal Reserve's target inflation rate is 2.0%, and the output gap is -2.0%. According to the Taylor Rule, the Federal Reserve's target federal funds rate should be
FF Target = Real FF rate + Inflation rate + 1/2(Inflation gap) + 1/2(Output gap). In this case, FF Target = 1.5% + 3.0% + 1/2(3.0% - 2.0%) + 1/2(1.0%) = 1.5% + 3.0% + 0.5% + 0.5% = 5.5%.
Following the Great Depression, the power of the Fed shifted to the
Federal Open Market Committee.
To get around the problems of information lag and impact lag, Alan Greenspan led the Fed in using which of these methods for a period of nearly 20 years, and with what results?
Greenspan used implicit inflation targeting to stop inflation before it began; inflation stayed relatively low and recessions were modest.
Which of these is most often used in practice to maintain a relatively stable price level?
Inflation targeting
When there is a decrease in the required reserve ratio (rr) what will be the change, if any, in the money supply multiplier?
It will be increased or strengthened?
When a bank repays a loan at the discount window to the Federal Reserve, which of the following will happen?
It will decrease bank reserves and decrease the monetary base.
When the Federal Reserve makes a loan at the discount window to a bank, which of the following will happen?
It will increase bank reserves and increase the monetary base.
Joe has a $1,000 debt with no interest. He is a plumber and earns $50 per hour. The real burden of Joe's debt is
Joe's real debt can be measured by the number of hours of work required to pay off his debt. In this case, that would be $1,000/$50 per hour = 20 hours.
Which of these open market operations in the European Central Bank is most central to overall monetary policy and carried out weekly?
Main refinancing
Which of these is the most often used and the most flexible monetary tool used by the Federal Reserve?
Open market operations
Economist Joseph Stiglitz has argued that, at the time of the Great Recession, the conduct of monetary policy in the United States focused on six generally accepted principles, including which of these as one of the more important?
Price stability is a necessary and almost sufficient condition for economic stability
When a central bank wants to pursue an expansionary monetary policy, it can do which of these things?
Pump excess reserves into the banking system
Which of these categories is the largest asset on the Federal Reserve's balance sheet—by far?
Securities
Which of these entities and/or groups can directly affect the monetary base?
The Federal Reserve, commercial banks, and the cash-holding public
Until the implementation of the Financial Services Act of 2012, the United Kingdom had a three-part framework for regulation of its financial system, consisting of the Bank of England, the Treasury Department, and which other entity?
The Financial Services Authority (FSA)
When there is a high degree of trust in a country's banking system, the amount of cash held out of banks relative to deposits in banks would tend to be what?
The amount of cash held out of banks would be close to zero.
Which of these statements is true of the board of governors of the Fed?
The board of governors consists of six members plus the chair; the term length for members is fourteen years.
Which of these is currently true for the chair of the Federal Reserve?
The chair position has no formal qualifications; the four-year term is renewable.
Consider the following data about the economy: currency outstanding (C) = $1 trillion, total deposits (D) = $750 billion, total reserves (R) = $76 billion, and the required reserve ratio (RR ratio) = 10%. What is the currency ratio in this economy?
The currency ratio is the ratio of currency to deposits, or $1 trillion/$750 billion = 1.33.
The sum of Federal Reserve notes in circulation, plus US coins, plus bank reserves is collectively referred to by which of these designations?
The monetary base
Christopher buys a US Treasury security from the Federal Reserve in the secondary market. He pays cash. What is the result of this transaction?
The monetary base will decrease, and bank reserves will stay the same.
Claire sells a US Treasury security to the Federal Reserve on the secondary market. She receives a check as payment and then cashes the check at her bank, keeping the cash. Which of the following best describes the result?
The monetary base will increase but bank reserves will stay the same.
Suppose the US Treasury engages in a foreign exchange intervention to lower the value of the dollar relative to the euro. The Fed sells dollars and buys euros in the foreign market. How will this affect the monetary base?
The monetary base will increase.
The economy is experiencing a decrease in excess reserves relative to the level of bank deposits. What effect will this have on the money supply multiplier?
The money supply multiplier will increase; it will be strengthened.; The money supply multiplier is equal to (1 + k)/(k + rr + re), where k is the currency ratio, rr is the required reserve ratio, and re is the excess reserve ratio. Because reis in the denominator of the fraction, when rechanges, the money supply multiplier will change in the opposite direction to the change in re. Thus, a decrease in re will lead to an increase in the money supply multiplier.
When the Federal Reserve was created in response to the Panic of 1907, it operated under a doctrine meant to correct the previous problems that led to the panic. Which of these statements best names and describes that doctrine?
The real bills doctrine meant that central banks should lend money to commercial banks with collateral only if those banks, in turn, would support "real" but not speculative economic activity.
According to Nobel Prize-winning economist Joseph Stiglitz, US monetary policy was largely understood before the Great Recession to be based on several generally accepted ideas, including the idea that there is no such thing as an asset bubble. Which of these did history show according to Stiglitz?
There was a stock market bubble in the United States in the 1920s, there was a Japanese asset bubble in the 1980s, and most recently, there was the dot-com asset bubble in the United States in the late 1990s.
When the Federal Reserve was created in 1913, what were its two primary purposes?
To maintain the gold standard and be a "lender of last resort" to commercial banks
John Maynard Keynes argued that people demand money for three reasons. What are these three reasons?
Transactions motive, precautionary motive, and speculative motive
In 1968, Congress passed a key piece of legislation to protect consumers called the __________ Act.
Truth in Lending
The securities that the Federal Reserve holds on its balance sheet include
US Treasury securities, federal agency debt, and privately issued mortgage-backed securities.
Irving Fisher's equation of exchange is expressed as
V = (PL × T)/MS.
The central bank of Substantia uses a price level target to conduct monetary policy. In the current year, a shock has lowered the inflation rate from 1.5% to 1.0%. Following the shock, firms and households can expect an inflation rate of
When a central bank uses a price level targeting approach to monetary policy, deviations from the target will result in the monetary authority conducting monetary policy in the future to average out the price level over time. In this case, firms and households can expect an inflation rate of 2.0% in the next year.
Consider the following data about the economy: currency outstanding (C) = $1 trillion, total deposits (D) = $750 billion, total reserves (R) = $76 billion, and the required reserve ratio (RR ratio) = 10%. What is the level of required reserves for this economy?
With a required reserve ratio of 10% and the level of deposits equal to $750 billion, the level of required reserves is 0.1 × $750 billion = $75 billion.
The Bank of Japan's ability to respond to the global financial crisis that began in 2007 was limited by
a bloated balance sheet, which was a result of its response to a financial crisis in Japan in the late 1990s.
When the Federal Reserve began its policy of quantitative easing in November 2008, there was __________ in the monetary base.
a dramatic increase
The two major goals of Canadian monetary policy are __________ and __________.
flexible exchange rates; inflation control
Initially, quantitative easing was not much help in creating economic growth because
banks did not lend out the excess reserves that were created by quantitative easing.
When the Federal Reserve increases the required reserve ratio, the impact will be to
decrease the size of the money multiplier.
Banks that have some financial difficulty and borrow from the Federal Reserve in what is known as secondary credit will pay an interest rate equal to the
discount rate plus a penalty.
Federal government budget surpluses can lead to a "crowding out" effect, which pushes interest rates upward.
false
Having to deal with the political process slows the conduct of monetary policy.
false
When a negative shock to the economy becomes more intense due to worsening financial market conditions, it's known as a negative shock accelerator.
false, its called a financial accelerator
Public mistrust of banks was a factor in limiting the effectiveness of the quantitative easing policies that began in 2008.
false; The effectiveness of quantitative easing was limited by the failure of banks to resume making sufficient loans; one might say that banking mistrust of the public was a factor in limiting the effectiveness of quantitative easing.
When the US Treasury decides to reduce the value of the US dollar relative to the British pound, there will be a decline in the monetary base in the United States.
false; When the US Treasury wants the US dollar to fall in value relative to the British pound, it will order the Federal Reserve to buy pounds on the open market. When the Federal Reserve executes this order, it will buy pounds from commercial banks, thus increasing bank reserves and, in the process, increasing the monetary base.
Open market operations in which the European Central Bank specifies an interest rate at which it will lend and then participating banks submit bids on the amount of money they wish to borrow at that rate are known as __________ tenders.
fixed-rate standard
One emergency lending procedure put into place in 2008 was the creation of the Term Securities Lending Facility. This entity was set up to
lend up to $200 billion of Treasury securities to primary securities dealers for a fee.
Federal Reserve notes are considered to be
liabilities of the Federal Reserve.
When the Federal Reserve buys US Treasury securities on the open market, it is attempting to
lower interest rates.
The academic literature on central bank independence shows
mixed results with some studies showing a negative correlation between central bank independence and inflation and other studies showing a positive correlation.
The responsibilities of the European Central Bank include
monetary policy, foreign exchange operations, and maintenance of the payments system.
The Bank of England has two primary responsibilities, which are __________ and __________.
monetary stability; financial stability
As a country's financial markets become more highly developed, we can expect monetary policy to be
more effective
One of the concerns about the Federal Reserve targeting high employment is that it might
neglect the goal of stable prices.
In the Taylor Rule formulation for setting a federal funds target rate, a negative output gap means that the
output in the economy is below the economy's potential output.
Eight times a year, the Bank of Canada announces the key policy rates for the nation. These key rates refer to what?
overnight interest rate
Alistair tells a friend that he likes to deposit his entire paycheck into his checking account just in case prices fall. This is an example of the __________ demand for money.
precautionary
A financially healthy bank borrowing overnight from the Federal Reserve is known as
primary credit
The purchase of direct debt and mortgage-backed securities by the Federal Reserve in November 2008 is referred to as
quantitative easing
If the European Central Bank is pursuing a contractionary monetary policy, it will
raise the minimum reserve requirement.
In the early days of the Fed, the discount rate, the rate at which the regional Federal Reserve banks would lend to commercial banks, was determined by the
regional Federal Reserve banks.
When the link between M1, M2, and inflation broke down in the 1980s, many economists argued that the best policy approach was to have an explicit inflation target. The biggest problem with an explicit inflation target is
that it requires perfect foresight on the part of the Federal Reserve because of the lagged impact of monetary policy instruments.
Some would argue that it is better to "clean up" the economic fallout after an asset bubble breaks than to interfere with markets beforehand. The economist Joseph Stiglitz argues that this is ill-advised because
the attempt to do so immediately following the Great Recession was insufficient to the task.
Currently, the power of the Federal Reserve rests with
the chair of the Federal Reserve and a board of six governors.
The Federal Reserve district banks are primarily responsible for
the check-clearing system, supervising and examining banks in their districts, and keeping track of the economy in their districts.
A proposed alternative to the Taylor Rule is the Mankiw Rule, which uses what factors to determine what the federal funds rate should be?
the consumer price index core inflation rate over the previous 12 months and the seasonally adjusted unemployment rate
The board of governors of the Federal Reserve has three primary responsibilities, which are
the operations of the Fed, commercial bank regulation, and monetary policy.
In order to overcome the stigma that might come from borrowing from the Federal Reserve following the 2007 financial crisis, the Federal Reserve first created
the term auction facility (TAF)
Prior to the 1980s, the Federal Reserve could use targets for M1 and M2 to conduct monetary policy because
there was a fairly good link between M1, M2, and inflation.
In the early stages of the 2007 financial crisis, the Fed introduced term auction lending
to increase the amount of liquidity in the financial system.
A rational market is one in which all participants use all of the available information to make predictions about the future and market participants learn from and adjust to their mistakes.
true
In application, the use of the Taylor Rule produces a variety of results, due to different measures of inflation, GDP level, and differing weights placed on the output and inflation gaps.
true
One of the Federal Reserve's most used tools of monetary policy is the buying and selling of US government securities in the secondary market.
true
The Financial Services Act of 2012 made it clear that the Bank of England is now the main regulator of British financial markets.
true
The Mankiw Rule works well to fit the data for US monetary policy during the 1990s, but it doesn't work as well starting in the first decade of the twenty-first century.
true
The money supply multiplier is equal to (1 + k)/(k + rr + re).
true
The primary responsibility of all central banks is monetary policy.
true
Times of financial uncertainty tend to cause an increase in the overall demand for money.
true
When the US Treasury decides to reduce the value of the US dollar relative to the British pound, there will be a decline in the monetary base in the United States.
true
Responding to asset bubbles makes it plain that monetary policy must be made in a world full of
uncertainty and unpredictable market behaviors.
When the currency ratio increases, the impact of changes in the monetary base on the money supply is
weakened. The money supply multiplier is equal to (1 + k)/(k + rr + re), where k is the currency ratio, rr is the required reserve ratio, and re is the excess reserve ratio. With k in both the numerator and denominator, the impact of a change in k seems uncertain; however, the change in k will have a bigger impact on the denominator than on the numerator, so an increase in k causes a bigger increase in the denominator than in the numerator. This will cause the money supply multiplier to move in the opposite direction to the change in k.
At its inception and during its early days, the power of the Federal Reserve bank lay mostly
with the 12 independent regional Federal Reserve banks.
