Money & Banking

Information costs

include the costs that savers incur to determine the credit worthiness of borrowers.

The financial system performs the role of communicating information by

incorporating all available information into the prices of financial assets

The Fed does not have to go through the normal congressional appropriations process because

it is self financing.

What is the maximum amount a bank can lend?

its excess reserves

Suppose that the banking system currency 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

Which of the following is an example of adverse selection?

A man with a bad heart condition buys a large life insurance policy.

Which of the following is NOT considered one of the four groups in the Federal Reserve System?

Federal Deposit Insurance Corporation

The original intention of the Fed's role as lender of last resort was to make loans to banks that were

illiquid, but not insolvent.

The most important economic benefit from specialization is that it

leads to an increase in the standard of living in an economy

If you buy a bond issued by Intel, the bond is a(n):

liability to Intel and an asset to you

Which of the following is the most common goal for central banks of industrialized countries?

low inflation

Dividends are

payments made to stock holders.

If the Fed purchases $1 million worth of securities and the required reserve ratio is 8%, by how much will deposits increase (assuming no change in excess reserves or the public's currency holdings)?

rise by $12.5 million

Hyperinflations are usually caused by large budget deficits financed by

selling bonds to the central bank

Federal Reserve district banks perform all of the following roles EXCEPT

setting the federal funds rate.

Limited liability can best be defined as the legal provision that

shields owners of a corporation from losing more than what they invested in a firm.

A bubble occurs when

the price of a stock is above its fundamental value.

Economies of scale are

the reduction in costs per unit that accompanies an increase in volume.

A key point made by the Gordon-Growth model is that the

value of a stock depends on investor's expectations about the future profitability of a firm.

An open economy is one that

. lends and borrows in the international capital market

If the British pound depreciates against the U.S. dollar,

British consumers lose by an increase in the pound price of U.S. exports to Britain.

How can a global savings glut affect the United States?

It can reduce the world real interest rate, thus encouraging borrowing by Americans

Why might a nation seek to maintain a pegged exchange rate?

It makes business planning easier for firms involved in the global economy.

Which of the following is NOT a primary center of foreign-exchange trading?

Munich

A capital gain occurs when the

Price of an asset increases.

Why has M2 grown more quickly than M1 in recent decades?

The amount of funds in CDs and money market mutual funds shares has grown faster than currency or checking deposits.

Which of the following will take place in the foreign exchange market if there is an increase in the demand for products made in the United States?

The demand for dollars will increase.

If foreign interest rates rise

The demand for domestic currency falls, causing it to depreciate

In what way is a stronger yen/weaker dollar a burden for Japanese exporters?

They received dollars when they sell goods but most of their costs of production are in yen.

A debt instrument represents

a promise by a borrower to repay principal plus interest to a lender

Credit rationing refers to

a restriction in the availability of credit.

If money is declared to be legal tender, it must be

accepted to settle private transactions and it must be used in paying taxes

The monetary base is equal to

all currency in circulation plus reserves held by banks.

The efficient markets hypothesis implies that stock investments should have the same expected return after adjusting for

all of the above

The supply curve for loanable funds would decline due to

an increase in expected inflation

The demand curve for bonds would be shifted to the left by

an increase in expected returns on other assets

When it takes more euros to purchase a dollar, the dollars is said to have:

appreciated

Collateral is

assets pledged to the bank in the event the borrower defaults.

Sovereign debt refers to

bonds issued by the government.

A bank lending depositors' money to a local business and a pension fund investing contributions in shares of a company are similar financial activities in that

both involve funds being channeled from savers to borrowers through financial intermediaries

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

How is the interest rate that prevails in the bond market determined?

by the demand for and supply of bonds

What happened to consumer prices as measured by the CPI between 1929 and 1933?

declined by about 25%

Bank borrowing from the Fed is referred to as:

discount loans

Short-term loans between banks are called

federal funds.

Interest-rate risk can best be characterized as the risk that

fluctuations in the price of a financial asset in response to changes in market interest rates.

Which of the following will lead to a higher interest rate on a loan?

increased perceived risk of default

Which of the following things do banks do with the funds they acquire from savers?

make loans to individuals

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.

Money is a medium of exchange in that

money is generally accepted for buying and selling goods and services

In an open economy, desired domestic lending

must equal desired domestic borrowing plus the amount of international lending

Crowd funding can best be described as:

raising small amounts of money from large numbers of people

Risk that is common to all assets of a certain type is referred to as

systematic risk

In the United States, the lender of last resort is

the Federal Reserve

Transactions costs are

the costs of direct financial transactions.

Bank capital is equal to

the difference between the value of the bank's assets and the value of its liabilities.

International capital mobility refers to

the ease with which investors move funds among international financial markets.

When market participants have rational expectations,

they use all information available to them.

Financial intermediaries emerged

to reduce transactions costs for small savers and borrowers

Congress created the Federal Reserve System

to serve as a lender of last resort