Monetary Final: Test 1 & 2 Questions

The principle characteristic of a dual banking system is that

a bank charter may be obtained from either the national or the state/ provincial government

When the Federal Reserve began its policy of quantitative easing in November 2008, there was ____________ in the monetary base

a dramatic increase

The Federal Reserve operates as

an independent entity

The FDIC insures deposits up to

$250,000

It is found that when the disposable income of Elvania increases by $100 billion, household consumption spending increases by $70 billion. In Elvania, the marginal propensity to consume is

0.7

The bond rating system, in which companies like Moody's and Standard & Poor's provide ratings for a company's default risk, is one way to deal with

Adverse selection

The loan application process that banks require potential borrowers to go through is an attempt to deal with

Adverse selection

When the parties to a transaction have different levels of knowledge about each other and/or the nature and implications of the transaction, it is said that there exists____________ information

Asymmetric

When a newly issued bond sells above its face value, it is said to sell

At a premium

The __________ attempt to set international standards for bank capital

Basel Accords

If bankers lose their confidence about the future, they may become very conservative about making loans, creating a credit crunch which

Can result in a significant decline in real output

At the time of the Great Depression, the_____________ believed that the economic disruptions being experienced were temporary and that market forces would eventually reestablish prosperity

Classical economists

One of the most important prices determined in financial markets is the __________ rate.

Interest

The coupon rate of a bond refers to the

Interest rate to be paid to the holder of the bond

Bond prices and interest rates are

Inversely related

In a very basic sense, banks perform two functions in society: they_________ and ____________

Take deposits; make loans

The securities that the Federal Reserve holds on its balance sheet include

US Treasury securities, federal agency debt, and privately issued mortgage-backed securities

Among the assets on a bank's balance sheet are

consumer loans

Monetary policy has the best chance of influencing the level of ____________ unemployment

cyclical

In a barter economy, the number of prices necessary will

depend on the number of goods exchanged in the economy

When the FDIC decides to deal with a failed bank using the pay off and liquidate policy, what is being paid off?

deposit balances to the bank's depositors

By far, the largest liability on the banking system's balance sheet is

deposits

The biggest gross interest expense for banks is interest paid on

deposits

An inverted yield curve likely means the

economy is headed for recession

When there is too much money chasing too few goods, the likely impact is

inflation

One of the biggest challenges the Federal Reserve faces in conducting monetary policy is the existence of __________ lags

information and impact

Periodic physical examinations of banks by bank regulators typically include

inspection of the quality of a bank;s management, assets, lending policies and compliance with banking regulations

A mortgage loan is an example of a ____________ loan

long-term consumer

In the face of a credit crunch, the Federal Reserve will most likely attempt to

lower interest rates to inject liquidity into the financial system

Which type of risk became a major problem with the financial crisis that began in 2008?

market risk

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

The risk that a bank faces from the possibility of a foreign terrorist hacking into its computer network is known as _________ risk

operational

Following the 2007 financial crisis, the Federal Reserve created the term auction facility (TAF) in order to

overcome the stigma banks experienced from borrowing from the FED at the discount window in order to add liquidity to financial markets

The purchase of direct debt and mortgage-backed securities by the Federal Reserve in November 2008 is referred to as

quantitative easing

On payday you get paid in cash, so each week you put $10 into a shoebox in your closet so that you can buy a big-screen TV at the end of the year. In this situation, money is serving as a

store of value

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 major advantage that municipal bonds have over corporate bonds for investors is that

the income earned on municipal bonds is not subject to federal income tax

T/F In the early 1980s, Paul Volcker used an easy monetary policy to bring inflation under control

False

T/F The Federal Reserve is part of the US Treasury

False

The primary lesson learned from the Panic of 1907 was the

Need in the United States for a central bank

A 10-year, $10,000 bond with a coupon rate of 5% is a promise by the issuer of the bond to

Pay the bondholder $500 every year for 10 years and also a $10,000 payment in 10 years

At the conclusion of WWII, an explosion in the home mortgage market was led by depository institutions

Savings & Loans

Jenny has had a portion of stock in an e-commerce company for some time. She is ready to resell her stock. On what market would she do this?

Secondary Market

When the economy simultaneously experienced growing unemployment and rising rates of inflation, it is called

Stagflation

Unemployment is not only terribly costly to people who are unemployed but also to society as a whole because

unemployment represents an underutilization of society's available resources

When a coffee shop lists a tall coffee on its menu at $2.95, the coffee shop is using money as a

unit of account

Liquidity risk is the risk that a financial firm

will not be able to meet its current and/or future cash needs

Which of the following qualifies as a liability to a bank?

Demand deposits

The acquisition of a public or private company that is financed largely by debt is referred to as a

Leveraged buyout

An inverted yield occurs when

Long-term interest rates are lower than short-term interest rates

The term monetary aggregates refers to things like

M1 and M2

T/F 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

T/F An output gap exists in an economy when there is a difference between the actual level of real GDP and the economy's potential real GDP

True

T/F Bank reluctance to loan out excess reserves limited the effectiveness of the Federal Reserve's policy of quantitative easing in 2008

True

T/F Banks perform a very important function in society called asset transformation

True

T/F Default risk is the risk that a borrower will not live up to their promise to pay the interest or principal on their loan

True

T/F The Federal Reserve's largest asset is its holdings of securities

True

T/F The risk of bank losses due to the impact of a natural disaster are known as operational risks

True