eco 3311 final

large numbers of depositors withdrawing their deposits in a short period of time.

A bank run involves

increases the opportunity cost of holding excess reserves.

A rise in the federal funds rate

3.56%

A two-year discount note is currently priced at $9,325; therefore, it currently yields:

take too much risk

Although the FDIC was created to prevent bank failures, its existence encourages banks to

help savers smooth spending over time.

Assets with greater liquidity

Tend to have higher yields to compensate for the increased risk.

Assets with greater risk

the money multiplier to decrease from 2.8 to 2.55.

Assuming initially that r = 10%, c = 40%, and e = 0, an increase in r to 15% causes

discount loans; source

Bank loans from the Federal Reserve are called _____ and represent a _____ of funds

liquidity management.

Bankers' concerns regarding the optimal mix of excess reserves, secondary reserves, borrowings from the Fed, and borrowings from other banks to deal with deposit outflows is an example of

assets; liabilities

Banks fail when the value of bank _____ falls below the value of its _____, causing the bank to become insolvent.

financial intermediation.

Channeling funds from individuals with surplus funds to those desiring funds when the saver does not purchase the borrower's security is known as

an elimination of community banks. reduced lending to small, local businesses.

Critics of nationwide banking fear

a reduction in the quantity of money and credit relative to other goods.

Deflation refers to

encourages banks to engage in riskier lending practices than without it..

Deposit insurance

the confusion concerning the Fed's intentions about future monetary policy because of the uncertainty about what a change in the discount rate is intended to signal.

Disadvantages of discount policy include

their overly-powerful impact on the money supply

Disadvantages of using reserve requirements to control the money supply and interest rates include

increases; right

During an economic expansion, the supply of bonds _____ and the supply curve shifts to the _____.

loan sales.

Examples of off-balance-sheet activities include

an increase in the expected returns on stocks.

Factors that decrease the demand for bonds include

A) term to maturity. B) risk. C) liquidity. D) tax considerations

Factors that influence interest rates on bonds include

100 percent.

If a $10,000 face-value discount bond maturing in one year is selling for $5,000, then its yield to maturity is

$17,000.

If a bank has excess reserves of $7,000 and checking deposits of $100,000, and if the reserve requirement is 10 percent, then the bank has actual reserves of

money.

If peanuts serve as a medium of exchange, a unit of account, and a store of value, then peanuts are

The C/D ratio = 1 (1 + 1)/(1 + .075) = 1.86

If people hold one dollar in currency for every dollar of transactions accounts, and banks hold reserves at 7.5% of transactions accounts, what is the value of the deposit multiplier?

decline by $1.0 million

If the First State Bank has a gap equal to a positive $20 million, then a 5 percentage point drop in interest rates will cause profits to

$375.

If the banking system has excess reserves of $75, and the required reserve ratio is 20%, the potential expansion of checkable deposits is

its excess reserves.

If the required reserve ratio is equal to 10 percent, a single bank can increase its loans up to a maximum amount equal to

$600 billion.

If the required reserve ratio is one-third, currency in circulation is $300 billion, and checkable deposits are $900 billion, then the monetary base is

constant short-term interest rates in the near future and further out in the future.

If the yield curve has a mild upward slope, the liquidity premium theory (assuming a mild preference for shorter-term bonds) indicates that the market is predicting

a $50 increase in cash items in the process of collection and a $50 increase in checkable deposits

If you deposit a $50 check in the bank, before the check has cleared, the change in your bank's balance sheet will be

-8 percent.

If you expect the inflation rate to be 15 percent next year and a one-year bond has a yield to maturity of 7 percent, then the real interest rate on this bond is

the market price of your bond will rise.

If, while you are holding a coupon bond, the interest rates on other similar bonds fall, you know that

the Federal Reserve System.

In the United States monetary policy is carried out by

true

In the market for loanable funds, the "buyer" is the borrower.

In the market for reserves, an increase in the reserve requirement shifts the _____ curve to the _____ and causes the federal funds interest rate to rise.

In the market for reserves, an increase in the reserve requirement shifts the _____ curve to the _____ and causes the federal funds interest rate to rise.

left and causes the federal funds interest rate to rise.

In the market for reserves, an open market sale shifts the supply curve to the

the riskiness of an asset's returns due to interest-rate changes

Interest-rate risk is

hold portfolios of short-term assets.

Money market mutual funds

lower; lowering

Open market sales _____ reserves and the monetary base thereby _____ the money supply

true

Present value calculations allow us to compare assets with differing time dimensions.

adverse selection

Regular bank examinations and restrictions on asset holdings help to indirectly reduce the _____ problem because, given fewer opportunities to take on risk, risk-prone entrepreneurs will be discouraged from entering the banking industry.

deposits with the Fed plus vault cash.

Reserves equal

asymmetric information.

The "lemons problem" exists because of

instrument independence goal independence.

The Federal Reserve System enjoys

The majority opinion in Congress wants it that way.

The Federal Reserve implements monetary policy in the US because

savers are willing to pay for information about the quality of potential borrowers

The adverse selection problem in financial markets creates a profit opportunity because

11 percent.

The current yield on a $10,000, 10 percent coupon bond selling for $9,000 is

the yield on government securities being pushed close to zero.

The flight to quality during the early years of the Great Depression resulted in

M = ((1 + c)/(r + e + c)) ˛ MB.

The formula for the money supply that includes excess reserves and currency is

people who do not pay for information use it.

The free-rider problem occurs because

federal funds rate.

The interest rate on unsecured loans between banks is called the

true

The law of one price says the same tradeable goods will sell for the same price in different markets— allowing for differences in transportation costs.

it cannot control individual rates of time preference.

The main reason the Fed cannot control the real interest rate is tha

negatively; negatively

The money supply is _____ related to excess reserves ratio, and is _____ related to the currency ratio.

Is a type of information cost that may result in the borrower pledging assets as collateral.

The moral hazard problem in financial markets

true

The nominal interest rate equals the sum of the real rate plus the expected rate of inflation.

adverse selection; moral hazard

The problem created by asymmetric information before the transaction occurs is called _____, while the problem created after the transaction occurs is called _____.

market interest rates represent the opportunity cost of holding M1.

The quantity of M1 demanded tends to vary inversely with market interest rates because

yield curve

The relationship among interest rates on bonds with identical default risk, but of different maturities is called the

greater; more

The result of the too-big-to-fail policy is that big banks will take on _____ risks, making bank failures _____ likely.

risk premium.

The spread between the interest rates on bonds with default risk and default-free bonds is called the

the monetary base.

The sum of deposits at Federal Reserve banks and currency in circulation is called

U.S. Treasury securities

The term structure of interest rates is usually defined with respect to yields on

2.5 percent.

The yield on discount basis of a 360-day Treasury bill selling for $975 is

Here use Table "D" (PV of an Annuitiy, and the "annuity" is your monthly pmt). PVA = A x [Disc. Factor n=24; i=1%] $6,000 = A x 21.243 A = 282.44

What is the monthly payment for a 12%, 24-month used car loan if you borrow $6,000?

Open market operations

What is the principal means by which the Fed attempts to change the monetary base?

reserves increase by $200,000.

When $1 million is deposited at a bank, the required reserve ratio is 20 percent, and the bank chooses not to hold any excess reserves but makes loans instead, then, in the bank's final balance sheet,

sacrificing liquidity for return.

When households and businesses substitute Treasury bills, commercial paper, and repurchase agreements for short-term bank deposits in their portfolios, they are

lenders to borrowers.

When inflation is higher than expected, it redistributes wealth from

falls; left; falls

When real income _____, the demand curve for money shifts to the _____ and the interest rate _____.

reserves in the banking system decline.

When the Federal Reserve sells a government bond in the open market,

Banks that hold too little capital impose costs on other banks because they are more likely to fail.

Which of the following is an argument in support of a regulated minimum capital requirement?

It includes large-denomination time deposits.

Which of the following statements is true about M3?

The Fed pays little interest on reserves (more could be earned from lending).

Why do banks avoid holding excess reserves?