Chapter 12 LearnSmart

True or false: Monetary policy is a science for which economics can provide unambiguously correct answers to policy questions.

False

True or false: The financial sector is important to the economy because it is the largest sector.

False

The practice of buying an asset with borrowed money is known as _____. a) leverage b) down payments c) equity purchases d) discounting

a

True or false: The FDIC is a government institution that guarantees bank deposits up to $250,000.

True

True or false: The debate about using unconventional monetary policy is a debate that economic reasoning alone cannot answer.

True

Banks can be considered too-big-to-fail if they a) are essential to the workings of an economy. b) channel federal funds into the economy. c) facilitate the trade of assets. d) provide an important tax base.

a

In financial terminology, leverage is a) the practice of buying an asset with borrowed money. b) buying an asset at a discounted value. c) the down payment on the purchase of an asset. d) selling assets that are not yet owned.

a

Leverage contributes to a financial bubble by increasing a) the ability of people to finance the purchase of financial instruments. B) the money multiplier, amplifying effects of monetary policy. c) the discounted value of financial assets. d) the interest rate at which borrowers must pay to finance purchases.

a

Operation twist is a) selling short-term Treasury bills and buying long-term Treasury bonds without creating more new money. b) the purchase of long-term nongovernmental securities, such as mortgage-backed securities, to change the quality of assets the Fed buys. c) buying financial assets from banks and other financial institutions with newly created money. d) committing to a policy of expansionary monetary policy for a prolonged period of time.

a

Quantitative easing is a policy of targeting a particular quantity of money by a) buying financial assets from banks and other financial institutions. b) selling short-term Treasury bills and buying long-term Treasury bonds without creating new money. c) buying long-term nongovernmental securities, such as mortgage-backed securities or other private assets. d)committing to a policy of expansionary monetary policy for a prolonged period of time.

a

The Dodd-Frank Wall Street Reform and Consumer Protection Act a) requires banks to report their holdings so that regulators could assess their risk-taking behavior. b) established government-owned banks to resolve the too-big-to-fail problem. c) increased the required reserve rate and reduced the money multiplier. d) reduced the amount of deposits insured under the FDIC.

a

The effect of quantitative easing on interest rates is to a) lower both long and short-term interest rates. b) raise long-term interest without changing short-term interest rates. c) raise short-term interest and lower long-term interest rates. d) raise both long-term and short-term interest rates.

a

The too-big-to-fail problem is an example of the _____. a) moral hazard problem b) restricted money multiplier problem c) limited oversight problem d) regulatory control problem

a

Select all that apply Which of the following were unconventional policies of the Fed following the recent financial crisis? a) Quantitative easing b) Operation twist c) Liquidity facilitation

a & c

Select all that apply Which of the following are actions the government did to offset the moral hazard problem created by deposit insurance? a) Established strict regulations b) Separated banks from other financial institutions c) Designed systems so that financial transactions central to the economy stayed within banks d) Expanded the money supply to cover lost deposits

a, b, & c

Select all that apply Which of the following are stages in the progression of a financial crisis? a) Precipitous fall of asset prices b) The economy falls into a financial crisis c) The creation of an asset price bubble d) Unsustainably low unemployment

a, b, & c

Select all that apply Precepts about dealing with financial crises that most economists would sign onto are: a) deal with moral hazard. b) raise deposit insurance to avoid bank runs. c) publish economic models consumers can understand. d)set as few bad precedents as possible. e) deal with the law of diminishing control.

a, d, & e

Buying financial assets from banks and other financial institutions in order to stimulate the economy is known as _____. a) qualitative easing b) quantitative easing c) operation twist d) credit easing

b

One central aspect of the Glass-Steagall Act was to a) create the Federal Reserve Bank as a regulator institution. b) keep commercial banks from investing in the securities market. c) facilitate financial transactions in equity markets. d) encourage commercial banks to hold sufficient reserves for withdrawals.

b

The effect of quantitative easing is to a) flatten the yield curve. b) shift the yield curve down. c) steepen the yield curve.

b

What did the Glass-Steagall Act do? a) Established the Federal Reserve Bank as an independent institution b) Established deposit insurance and prohibited commercial banks from investing in the securities market c) Required all U.S. citizens with Social Security cards to hold a checking account d) Prohibited banks from merging to promote competition

b

According to the efficient market hypothesis, all financial decisions are made by _____. a) consumers b) investors c) rational people d) The Fed

c

Deposit insurance is best defined as a system in which a) banks promise to provide assets equal to the value of deposits in accounts. b) banks guarantee the value of deposits at the value on the day of deposit. c) the federal government promises to reimburse an individual for losses due to bank failure. d) the federal government promises to reimburse an individual for losses due asset price bubbles.

c

In the efficient market hypothesis, decision makers are assumed to a) know the costs and benefits of collecting information after gathering that information. b) not use leverage to purchase financial assets. c) have all the relevant information both today and in the future. d) assume that prices do not reflect the true value of financial assets.

c

The Dodd-Frank Wall Street Reform and Consumer Protection Act is designed to a) limit Federal Reserve Bank profit. b) reduce consumer spending. c) limit risk-taking by banks. d) increase the money multiplier.

c

The FDIC contributes to the moral hazard problem by a) requiring minimum investment, which limits the ability of banks to meet withdrawals. b) requiring minimum reserves, which limits the ability of banks to meet withdrawals. c) insuring deposits, which encourages depositors to not worry whether their bank will fail. d) insuring deposits, which encourages people to withdraw deposits during bank runs.

c

The Federal Deposit Insurance Corporation guarantees a) excess reserves at financial institutions. b) a minimum interest rate paid on deposits. c) bank deposits up to $250,000. d) financial assets held by banks.

c

The moral hazard problem occurs when a) people's actions are restricted by social institutions. b) people have been influenced by institutions with no explicitly stated code of ethics. c) people's actions do not reflect the full cost of their decisions. d) people cannot purchase assets without leverage.

c

The moral hazard problem would most likely occur in which situation? a) Market transactions are taxed b) Unemployment rises c) Deposits are insured by government d) Housing prices decline

c

Which of the following is the beginning stage of a financial crisis? a) Rapidly increasing and erratic changes in goods prices b) Significant decline in potential output c) Unsustainable rapidly rising prices of some type of asset d) Precipitous decline in the unemployment rate

c

According to the structural stagnation model, the Fed should unwind policies as the lender of last resort after a financial crisis because it hypothesized that the economy a) would bring about asset price declines. b) needed to slow down or inflation would rise. c) was restrained by the new regulations. d) was suffering from problems caused by globalization.

d

By insuring deposits, which allowed depositors to not be concerned about whether the bank was making sensible loans, the FDIC contributed to the a) limited oversight problem. b) restricted money multiplier problem. c) regulatory control problem. d) moral hazard problem.

d

Credit easing is a policy of a) buying financial assets from banks and other financial institutions with newly created money. b) committing to a policy of expansionary monetary policy for a prolonged period of time. c) selling short-term Treasury bills and buying long-term Treasury bonds without creating new money. d) buying long-term nongovernmental securities, such as mortgage-backed securities, to change the quality of assets the Fed buys.

d

Politics is a reason regulation becomes less effective over time because a) interest rates inevitably rise. b) inevitably other pressing issues arise. c) the moral hazard becomes restraining. d) those being regulated lobby to dismantle them.

d

Politics is a reason that regulation becomes less effective over time because a) politicians often misunderstand the moral hazard problem. b) institutions to implement the regulations cease to be funded. c) elections promote avoiding regulations. d) when regulation is effective, people forget it was necessary.

d

The financial sector is important to the economy because it is a) where currency is traded. b) a small part of the entire economy. c) a large part of the entire economy. d) essential to all other sectors.

d

The law of diminishing control states that a) expansionary monetary policy by the Fed will be less effective in financial crises as banks find ways to reduce reserves holdings in greater amounts. b) any regulation will be contested as unconstitutional as individuals and firms find the regulation to be unsustainably binding. c) expansionary monetary policy by the Fed will be less effective in financial crises as banks find ways to hold more reserves. d) any regulation will become less effective over time as individuals or firms being regulated will figure out ways to circumvent those regulations.

d

The observation that any regulation will become less effective over time as individuals or firms being regulated will figure out ways to circumvent those regulations through innovation, technological change, and political pressure is known as _____. a) regulatory retreat b) the fallacy of institution c) implementation restraint d) the law of diminishing control

d

Why didn't standard expansionary monetary policy after the recent financial crisis increase money and credit? a) Long-term interest rates had risen too high. b) Banks failed to trust the Federal Reserve Bank. c) Banks had merged. d) The Fed funds rate could not be sufficiently lowered.

d

With deposit insurance, a) banks are required to hold reserves equal to the value of deposits. b) the Federal government is given 0.1% of all deposits. c) bank investors are reimbursed for deposit declines. d) government promises to reimburse individuals for losses due to bank failure.

d