ECO 202 HW 6

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A central bank can​ "create money" by buying bonds because

by increasing the​ banks' reserves, banks can make loans which increase checking account​ balances, and these are part of the money supply.

The purchase of Treasury securities by the Federal Reserve​ will, in​ general,

increase the quantity of reserves held by banks

The financial firms of the shadow banking system were

more vulnerable than commercial banks to bank runs because they were more highly leveraged than commercial banks.

Firms in the shadow banking system were more vulnerable than commercial banks to​ "bank" runs because the shadow banking firms were​ ________ highly leveraged and held a​ ________ portion of​ mortgage-backed securities than commercial banks

more, higher

Firms in the shadow banking system were more vulnerable than commercial banks to​ "bank" runs because in the shadow banking​ system, unlike the commerical banking​ system, there was

no federal deposit insurance

Four of the monetary policy tools used by the Federal Reserve to manage the money supply include

open market​ operations, discount​ policy, reserve​ requirements, and interest on reserves.

If the central bank can act as a lender of last resort during a banking​ panic, banks can

satisfy customer withdrawal needs and eventually restore the​ public's faith in the banking system.

When the Federal Reserve sells Treasury securities in the open​ market,

the buyers of these securities pay for them with checks and bank reserves fall.

In response to the destructive bank panics of the Great​ Depression, future bank panics are designed to be prevented by

the establishment of the Federal Deposit Insurance Corporation.

When the Federal Reserve purchases Treasury securities in the open​ market,

the sellers of such securities deposit the funds in their banks and bank reserves increase.

The United States is divided into ___ Federal Reserve Districts. The Federal Reserve​ Bank's Board of Governors consists of ___ members appointed by the president of the U.S. to​ 14-year, ​ non-renewable terms. One of the board members is appointed to a ___ ​year, renewable term as the chairman.

12 Federal Reserve Districts; 7 members; 4 years

An article in the Wall Street Journal in 2017 noted​ that: ​"China now has one of the highest​ [required reserve] ratios in the​ world, economists​ say, even though many businesses are starved of​ credit..." ​Source: Lingling​ Wei, "China's​ Trillion-Dollar Yuan Defense Puts Growth at​ Risk," Wall Street Journal​, April​ 13, 2017. What does the article mean by Chinese businesses being starved for​ credit? Is there a connection between the Chinese central bank imposing a higher required reserve ratio on banks and Chinese businesses being starved for​ credit? Briefly explain.

Being starved for credit means Chinese businesses cannot get loans. Yes, higher required reserve ratios require banks to keep more capital as reserves instead of making loans.

Which of the following is NOT a policy tool the Federal Reserve uses to manage the money​ supply?

Changing Income tax rates.

What is the​ "shadow banking​ system"?

Financial firms that raise money from investors and provide it to borrowers.

By increasing the interest rate it pays on bank​ reserves, the Federal Reserve can​ ________ the level of reserves banks are willing to​ hold, thereby​ ________ bank lending.

Increase; decreasing

An article in the Wall Street Journal on the shadow banking system contained the following​ observation: "If investors rush to the exits en​ masse, acting as a​ herd, asset prices could plummet and markets could face funding​ problems." ​Source: Bylan​ Talley, "IMF Warns​ (Again) of Growing​ Shadow-Banking Risks," Wall Street Journal​, April​ 8, 2015. Why might investors in a money market mutual​ fund, for​ example, be more likely to​ "rush to the​ exits" if they heard bad news about the​ fund's investments, than would bank depositors if they received bad news about their​ bank's investments?

Money market mutual funds are not protected by deposit​ insurance, as commercial​ banks' deposits are through the Federal Deposit Insurance Corporation​ (FDIC).

Open market operations refer to the purchase or sale of​ ________ to control the money supply.

U.S. Treasury securities by the Federal Reserve

An opinion column in the New York Times noted that​ "private borrowers cannot create money from thin​ air" as the Federal Reserve can. ​Source: Neil​ Irwin, "How America Learned to Stop Worrying and Love Deficits and​ Debt," New York Times​, February​ 23, 2019. Does the government create money by printing​ currency?

Yes, but banks create the majority of the money supply by making loans.

In a speech delivered in June​ 2008, Timothy​ Geithner, then president of the Federal Reserve Bank of New York and later U.S. Treasury​ secretary, said: The structure of the financial system changed fundamentally during the boom. . . .​ [The] non-bank financial system grew to be very large. . . .​ [The] institutions in this parallel financial system​ [are] vulnerable to a classic type of​ run, but without the protections such as deposit insurance that the banking system has in place to reduce such risks. ​Source: Timothy F.​ Geithner, "Reducing Systemic Risk in a Dynamic Financial​ System," Remarks at the Economics Club of New​ York, June​ 9, 2008. a. What did Geithner mean by the​ "non-bank financial​ system"? b. What is a​ "classic type of​ run"? c. Why would deposit insurance provide the banking system with protection against​ runs?

a.) Money market mutual​ funds, hedge​ funds, and other financial firms that raise money from investors and provide it to firms and households. b.) Many depositors simultaneously decide to withdraw their money from a bank. c.) Since most depositors are​ insured, it is less likely that panicked buyers will simultaneously withdraw funds.


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