Lessons 11-19
The Fed often issues its policy statements in vague language that is difficult to understand. Why doesn't the Fed come right out and tell the public what it is going to do? The Fed does not want to influence financial markets. The Fed's intentions are obvious if one watches its trading activity on any given day. The Fed does not want to be accountable for its errors. The Fed does not want to tell the public what it knows about what is going to happen in the economy.
The Fed does not want to influence financial markets.
In the 1970s, the Federal Reserve Open Market Committee instructed the Open Market Trading Desk to implement policies that would achieve both interest rate stability and monetary aggregate growth stability. What was wrong with this policy directive? Fiscal policy was highly effective in stabilizing the economy,so monetary policy was considered unnecessary. Using the fed funds rate as an operating target may result in a counter cyclical monetary policy; that is, in shrinking the money supply during an economic upturn. The Fed cannot attain both interest rate stability and monetary aggregate growth stability simultaneously. Monetary aggregates are much more difficult to measure than are changes in interest rates.
The Fed cannot attain both interest rate stability and monetary aggregate growth stability simultaneously.
Which of the following Fed actions would not increase the monetary base? The Fed buys U.S. Treasury securities. The Fed increases the amount of discount loans. All Fed actions result in an increase in currency in circulation. The Fed sells U.S. Treasury securities.
The Fed sells U.S. Treasury securities.
If the Fed can use either expansionary or contractionary policy to shift the AD curve,how should it act to return output to its full employment level when the AD curve intersects the SRAS curve to the left of the full employment level of output? The Fed could sell bonds. The Fed could buy bonds. The Fed could seek a hike in the fed funds rate. The Fed could seek to lower the inflation rate.
The Fed could buy bonds.
Which of the following countries hold the largest total of foreign liabilities and assets? Japan U.K. France China
U.K.
Which two countries have the longest history of international banking? U.S. and Japan U.S. and Italy U.K. and Switzerland France and Germany
U.K. and Switzerland
Why aren't Treasury deposits with the Fed part of the monetary base? because no deposits at the Fed are included in the monetary base because the Fed is unable to exercise effective control over their size because they aren't assets of either the nonbank public or banks because they are currency and currency is not included in the monetary base
because they aren't assets of either the nonbank public or banks
The main purpose of increasing the focus on liability management by commercial banks is to reduce the amount of required reserves borrow additional funds so they can make more loans make sure the bank's balance sheet balances reduce bank debt
borrow additional funds so they can make more loans
By saying that the U.S. has a dual banking system, we mean that both state and federal governments may charter, regulate and examine banks in the U.S. both commercial banks and savings & loan intermediaries exist in the U.S. both the U.S. Treasury and the Federal Reserve are involved in regulating banks the U.S. has both a central bank and a system of commercial banks
both state and federal governments may charter, regulate and examine banks in the U.S.
Which of the following statements about the Fed's Open Market Committee is correct? The district Federal Reserve banks conducted open market operations before 1935. Federal open market operations affect prices of Treasury securities, but not corporate securities. An open market purchase of Treasury securities reduces their price. The FOMC was created by the Federal Reserve Act of 1913.
The FOMC was created by the Federal Reserve Act of 1913.
If you deposit a $50 check in the bank, before the check has cleared the change in your bank's balance sheet there will be a $50 increase in reserves and a $50 increase in checkable deposits cash items in the process of collection and a $50 increase in reserves cash items in the process of collection and a $50 increase in checkable deposits cash and a $50 increase in checkable deposits
cash items in the process of collection and a $50 increase in checkable deposits
Changes in the money supply over extended time periods are primarily due to changes in the monetary base rather than changes in the money multiplier changes in the money multiplier rather than changes in the monetary base increases in Treasury issuance of currency increases in the percentage of deposits held in currency and excess reserves
changes in the monetary base rather than changes in the money multiplier
Which of the following will not shift the short-run aggregate supply function? changes in the price level changes in the costs of non-labor inputs changes in labor costs changes in the expected price level
changes in the price level
Financial institutions are important because they are a major source of jobs in the U.S. economy are profit-seeking businesses create a link between savers and borrowers by creating IOUs provide a means of cashing checks
create a link between savers and borrowers by creating IOUs
An exchange of expected future returns on debt instruments denominated in different currencies is called: exchange rate risk risk management currency swap banker's acceptance
currency swap
An Edge Act Corporation may: engage only in domestic banking services engage in domestic and international banking services engage only in international banking services
engage only in international banking services
Fluctuations in a bank's net worth that accompanies increases or decreases in exchange rates are called: exchange rate risk global risk liquidity risk interest rate risk
exchange rate risk
If the Treasury sells $2 million in gold, the Fed's gold and SDR certificate account will fall by $2 million, whereas the monetary base will rise by $2 million rise by $2 million, as will the monetary base fall by $2 million, as will the monetary base rise by $2 million, whereas the monetary base will fall by $2 million
fall by $2 million, as will the monetary base
If Treasury currency outstanding increases, the monetary base will increase whether the increase in currency is held by banks or by the public increase, provided the increase in currency is held by banks increase, provided the increase in currency is held by the public decrease
increase whether the increase in currency is held by banks or by the public
If the economy is in short-run equilibrium an excess supply of aggregate output will occur output will take place at the level where the short-run aggregate supply curve crosses the aggregate demand curve households and business firms will demand more output than is currently being produced an excess demand for aggregate output will occur
output will take place at the level where the short-run aggregate supply curve crosses the aggregate demand curve
Demand-pull inflation results from workers' pressure for higher wages Wage pressure represents a cost pressure, not a demand pressure. attempts by financial markets to deal with bracket creep policymakers' attempts to increase aggregate demand for current output above the full employment level attempts by the public to receive higher after-tax returns on their savings
policymakers' attempts to increase aggregate demand for current output above the full employment level
Perhaps the most important reason why the U.S. created the Federal Reserve System in 1913 was to enable banks to keep their reserves on deposit at the Fed provide a lender of last resort prevent banks from selling securities to their own trust accounts provide open market purchases and sales of Treasury securities by the central bank
provide a lender of last resort
The three most important functions of the financial system are selling stocks, bonds, and mutual funds setting interest rates on bonds, loans, and savings accounts providing risk-sharing, liquidity, and information services eliminating financial fraud, eliminating risk, and eliminating liquidity
providing risk-sharing, liquidity, and information services
The result of the supply shocks of 1973-1974 was to reduce the price level and raise aggregate output reduce aggregate output and raise the price level raise both aggregate output and the price level reduce both aggregate output and the price level
reduce aggregate output and raise the price level
Geographic restrictions on banks reduce their ability to take advantage of economies of scale reduce their exposure to credit risk reduce the amount of local lending they undertake raise the costs of their providing risk-sharing, liquidity, and information services
reduce their ability to take advantage of economies of scale
An increase in Treasury cash holdings reduces the federal budget deficit reduces currency in the hands of the public increases the federal budget deficit increases the monetary base
reduces currency in the hands of the public
Securitization refers to banks insisting that collateral be supplied on previously unsecured loans changing the mix in an investment portfolio away from stocks and toward bonds selling directly to investors' loans or securities that were formerly held by financial intermediaries reducing the exposure of a bank's portfolio to interest rate risk
selling directly to investors' loans or securities that were formerly held by financial intermediaries
An increase in the expected price level results in a movement along the short-run aggregate supply curve rather than a shift in the short-run aggregate supply curve has no effect on the short-run aggregate supply curve shifts the short-run aggregate supply curve down and to the right shifts the short-run aggregate supply curve up and to the left
shifts the short-run aggregate supply curve up and to the left
The main problem in making transactions in a barter economy is the loss of value in goods that are exchanged solving the problem of double coincidence of wants using different items such as seashells and livestock for money exchanging cash for a fair amount of goods and services
solving the problem of double coincidence of wants
During the postwar period which of the following goals has been emphasized by the Fed? stabilizing the value of the dollar versus the yen stabilizing short-term nominal interest rates stabilizing economic growth stabilizing share prices on the New York Stock Exchange
stabilizing economic growth
The Fed uses operating targets as well as intermediate targets because the Fed controls intermediate targets only indirectly if one set of targets proves ineffective in attaining policy goals, the other set is available the public is much less familiar with the variables used as operating targets, so for policy to be effective intermediate targets must also be announced the Federal Reserve Act of 1913 requires it to do so
the Fed controls intermediate targets only indirectly
Under a rules strategy for enhancing central bank credibility the Fed would select a rule for money growth but not announce it to the public the Fed would announce a rule for money growth and then stick to it Congress would assign a money growth rate to the Fed the Fed would adjust the money supply by a higher percentage in an economic upturn than in an economic downturn
the Fed would announce a rule for money growth and then stick to it
The natural rate of unemployment is that unemployment rate at which the economy produces the full employment level of output there is no structural unemployment all frictional unemployment has vanished the aggregate demand curve crosses the short-run aggregate supply curve
the economy produces the full employment level of output
The largest percentage change in quantity of financial assets held by financial intermediaries between 1978 and 2003 occurred in the growth in bank deposits the growth in mutual fund shares the growth in pension fund reserves the growth in home mortgages
the growth in mutual fund shares
Which of the following types of information does the manager of the Open Market Trading Desk not take into account when implementing open market directives from the Fed? bids and offers from Treasury security dealers the level of reserves in the banking system the desired level of reserves recommended by the open market directive the level of inflation in the overall economy
the level of inflation in the overall economy
Which of the following statements best describes the economic meaning of risk? the level of uncertainty of an asset's return the problems involved in converting assets into cash the profits earned by gamblers the difficulties that banks have in making profitable loans
the level of uncertainty of an asset's return
The new classical explanation of aggregate supply is also known as the adaptive expectations theory Monetarism the misperception theory Keynesianism
the misperception theory
Over periods of several years, the primary determinant of changes in the money supply is changes in the money multiplier discount loans the non-borrowed monetary base the required reserve ratio
the non-borrowed monetary base
Which of the following situations affecting the nonbank public would cause the currency-to-deposit ratio (C/D) to rise? An increase occurs in the interest paid on checkable deposits. Wealth increases for the economy as a whole. A period of bank panics occurs. The size of the underground economy decreases.
A period of bank panics occurs.
Which of the following is not true of membership in the FDIC? Most large state banks are members of the FDIC. All national banks are members of the FDIC. All commercial banks are members of the FDIC. Some state banks are not members of the FDIC.
All commercial banks are members of the FDIC.
In what sense can a reserve requirement be said to be a tax on bank intermediation? Banks are unable to lend out all their deposits. Banks must pay taxes on the amount by which they fail to meet their reserve requirements. Banks must pay tax on any funds deposited in a reserve account at a rate equal to the applicable corporate income tax rate. Banks must pay tax on any funds removed from a reserve account at a rate equal to the applicable corporate income tax rate.
Banks are unable to lend out all their deposits.
Which of the following statements correctly identifies the principal problem of using floating-rate debt to reduce interest-rate risk? Floating-rate debt increases interest-rate risk for banks but reduces interest risk for borrowers. Floating-rate debt will eliminate interest-rate risk. Borrowers may default on floating-rate debt if interest rates rise. Bank profits may fluctuate more than they would if interest rates were fixed.
Borrowers may default on floating-rate debt if interest rates rise.
If a wave of counterfeit currency hit the United States, what would happen to the currency-deposit ratio? C/D falls cannot tell from the data provided. C/D stays the same C/D rises
C/D falls
Which of the following statements best explains why the U.S. was without a central bank between 1836 and 1913? Conflicts among various business, government, geographic, and financial interests prevented agreement on how to organize and establish a central bank. The commercial banking system worked well enough, so little concern existed over financial system stability. Little need for a check-clearing system existed until 1913. Major U.S. private bankers like J. P. Morgan had enough resources to maintain liquidity in the banking system.
Conflicts among various business, government, geographic, and financial interests prevented agreement on how to organize and establish a central bank.
The main source of power in the Federal Reserve System rests on the Fed's Independence from the legislative and executive branches of the federal government Ability to eliminate business cycles Control of monetary policy Control of fiscal policy
Control of monetary policy
Which of the following statements best illustrates the role of economic analysis in the study of money and banking? Economic analysis provides a theoretical approach to money and banking so that we can solve problems without depending on facts. The use of theoretical models or explanations in economic analysis depends on appropriate use of facts both in developing and in testing the validity of theories. Economic analysis provides a means of linking changes in interest rates and the money supply to changes in economic activity throughout the economy. The main value of economic analysis is to provide a better understanding of events that happened in the past. Economic analysis helps us understand an idealized version of how the financial system should operate, but we must depend on facts to solve current problems.
Economic analysis helps us understand an idealized version of how the financial system should operate, but we must depend on facts to solve current problems.
Deposits of U.S. Dollars in European banks (maintained in dollars)are called: banker's acceptance currency swap global dollars Eurodollar
Eurodollar
Which of the following statements does not describe Fed actions during the Great Depression of the 1930s? The Fed raised the interest rate it charged on loans to member banks in 1931. The Fed failed to act decisively as a lender of last resort. The Fed thought the economy would work itself out of the Depression by itself. Fed actions lowered the value of the dollar against other currencies.
Fed actions lowered the value of the dollar against other currencies.
Monetizing the government debt occurs when the Fed buys Treasury bonds to finance the budget deficit Treasury deposits tax revenues in its tax and loan (T&L)accounts Fed sells Treasury bonds to finance the budget deficit Treasury transfers its deposit accounts from commercial banks to the Fed
Fed buys Treasury bonds to finance the budget deficit
Which of the following forms of money is considered legal tender in the United States? Federal Reserve Notes checks electronic funds transfers credit cards
Federal Reserve Notes
Which of the following statements is correct? Federal Reserve district banks pay dividends on their earnings to member banks. Federal Reserve district banks are owned by the government. The boards of directors of the district banks are all local bankers. Member banks receive no return on the stock they own in Federal district banks.
Federal Reserve district banks pay dividends on their earnings to member banks.
Banking markets that have little or no regulation and low taxation on profits are called: offshore markets international banking markets Edge Act corporations Euromarkets
offshore markets
If the Fed reduces the money supply unexpectedly, the new Keynesians believe that the effect will be which of the following? In the short run the AD curve shifts left, and in the long run the SRAS curve shifts downward. In the short run the AD curve shifts right, and in the long run the SRAS curve shifts upward. In the short run the AD curve remains unchanged, but the SRAS curve shifts upward in the long run. In the short run the AD curve shifts right, but the SRAS curve remains unchanged in the long run.
In the short run the AD curve shifts left, and in the long run the SRAS curve shifts downward.
One problem that money as a store of value and money as a standard of deferred payment have in common is that People prefer to hold physical assets such as land rather than cash. Money can lose purchasing power through inflation and thus reduce the value of cash held as wealth and reduce the value of money repaid by borrowers to lenders. Lenders would be better off if borrowers paid them in goods rather than in cash.
Money can lose purchasing power through inflation and thus reduce the value of cash held as wealth and reduce the value of money repaid by borrowers to lenders.
The issue of Fed independence typically rises over Negative reaction by the public to Fed policy Academic disagreement regarding monetary policy Role of the Fed in managing monetary policy Expansion of the money supply
Negative reaction by the public to Fed policy
Which of the following statements is correct? New Keynesians believe that the aggregate supply curve is vertical in the short run. New Keynesians believe that the aggregate supply curve slopes upward in the long run. New classicals believe that the aggregate supply curve slopes upward in the short run. New classicals believe that the aggregate supply curve is vertical in the short run.
New classicals believe that the aggregate supply curve slopes upward in the short run.
Members of the Board of Governors May serve no more than three consecutive four-year terms Serve one nonrenewable 14-year term Must resign when the President who has appointed them leaves office Serve for life or good behavior
Serve one nonrenewable 14-year term
Savings institutions (savings and loan associations) are regulated today by the Federal Savings and Loan Insurance Corporation the Federal Reserve Board state banking regulatory agencies the Office of Thrift Supervision
Office of Thrift Supervision
We often hear that government spending is inflationary. Which of the following statements correctly describes the inflationary effect of government spending and tax changes? Persistent increases in government spending may cause permanent inflation. Even a temporary reduction in taxes may cause inflation. A one-time change in government spending can cause permanent inflation. If the money supply is constant, expansionary fiscal policy is inflationary.
Persistent increases in government spending may cause permanent inflation.
The Depository Institutions Deregulation and Monetary Control Act of 1980 Eliminated the requirement that banks hold reserve deposits with the Fed Prohibited nonmember banks from receiving discount loans Required all state banks to join the Federal Reserve System Required all banks to maintain reserve deposits with the Fed
Required all banks to maintain reserve deposits with the Fed
In which of the following cases would a Federal open market purchase not increase the monetary base? The Fed sells securities to the nonbank public. The Fed buys securities from the nonbank public, which deposits the checks for the proceeds in the banking system. The Fed buys securities from the nonbank public, which holds the proceeds in currency. The Fed buys securities from the nonbank public, which deposits the checks for the proceeds in the banking system but leaves the balance on deposit without spending it.
The Fed sells securities to the nonbank public.
. Which of the following statements is true? The Fed sets both the discount rate and the conditions for the availability of discount loans. The Secretary of the Treasury sets both the discount rate and the conditions for the availability of discount loans. The Fed sets the discount rate, but Congress sets the conditions for the availability of discount loans. The Fed sets the discount rate, but the Secretary of the Treasury sets the conditions for the availability of discount loans.
The Fed sets both the discount rate and the conditions for the availability of discount loans.
Which of the following conditions may limit the Fed's independence from external pressure? The Fed's profits have exceeded $15 billion per year. Board members are appointed for long, nonrenewable terms of office. The President can appoint a new Board chairman every four years. The Fed is exempt from the congressional appropriations process.
The President can appoint a new Board chairman every four years.
If a bank has deposits of $10 million, reserves of $1 million (the required reserve ratio is 10%), and a bank customer writes a check for$1 million, which of the following statements best explains the condition of the bank? The bank has experienced liquidity risk which it could manage by borrowing $1 million in the fed funds market. The bank has experienced liquidity risk which it could manage by buying $1 million worth of T-bills. The bank has experienced credit risk which it could manage through raising the amount it spends on information costs. The bank has experienced liability risk which it could manage by not renewing large CDs (time deposit certificates).
The bank has experienced liquidity risk which it could manage by borrowing $1 million in the fed funds market.
If a bank customer writes a check on the bank for $10,000, and the bank's reserve ratio is 10%, what is the reserve status of the bank? The bank must make up $90,000 in deficient reserves. The bank must make up $10,000 in deficient reserves. The bank must make up $100,000 in deficient reserves. The bank must make up $9,000 in deficient reserves.
The bank must make up $9,000 in deficient reserves.
Who among the following components of the Federal Reserve System has the greatest power in influencing monetary policy? The governors (other than the chairman) of the Board of Governors The district Federal Reserve banks The chairman of the Board of Governors The member banks
The chairman of the Board of Governors
Which of the following appears to be evidence against the public interest view of the Fed's motivation? The failure of the Fed to emphasize the goal of price stability The unwillingness of the Fed to turn over its excess profits to the Treasury The independence of Fed chairmen from the authority of the President The conflict with the Treasury over interest rate fixing during World War II
The failure of the Fed to emphasize the goal of price stability
. Suppose the Fed buys $150 million of Japanese yen with Federal Reserve notes. What is the net effect on the monetary base? The net effect cannot be determined without knowing the dollar/yen exchange rate. The monetary base falls by $150 million. The monetary base rises by $150 million. The monetary base stays the same since Japanese yen would not count in the Fed's balance sheet.
The monetary base rises by $150 million.
The main difference between money aggregates M1 and M2 is that Short-term Treasury securities make up a big part of M2 and are not included in M1. M1 is larger in quantity than is M2. The savings deposits, time deposits, money market accounts,overnight Eurodollars and overnight repurchase agreements contained in M2 are less liquid than the components of M1. M2 excludes liquid currency and checks that are part of M1 and,thus, is a less liquid category of money.
The savings deposits, time deposits, money market accounts,overnight Eurodollars and overnight repurchase agreements contained in M2 are less liquid than the components of M1.
To conduct open market operations, the FOMC issues a directive to The Board of Governors in Washington, D. C. The presidents of the district banks The trading desk at the Federal Reserve Bank of New York Chairman of the New York Stock Exchange
The trading desk at the Federal Reserve Bank of New York
An important difference between wealth and income is that Wealth is a medium of exchange, whereas income is a store of value. Wealth constitutes a flow of earnings over time, while income represents a stock at a given moment in time. Wealth measures the value of a stock of accumulated assets at a given moment in time, but income measures a flow of earnings over a period of time, such as a year. Wealth is more easily spent than is income.
Wealth measures the value of a stock of accumulated assets at a given moment in time, but income measures a flow of earnings over a period of time, such as a year.
When a bank issues a checkable deposit and loans the funds out to a business, it has transformed a financial asset for a saver into a liability for a borrower a financial liability for a saver into a financial asset for a borrower one liability into another liability a short-term liability to a borrower into a long-term asset to a saver
a financial asset for a saver into a liability for a borrower
Long-term inflation is principally the result of the slowdown in the growth rate of aggregate supply since 1973 the result of chronic federal budget deficits a monetary phenomenon caused by excess wage demands by unionized workers
a monetary phenomenon
Which of the following will cause inflation? a one-time increase in the money supply a reduction in government spending a fall in aggregate supply a reduction in private investment
a one-time increase in the money supply
Which of the following changes in variables affecting the complete money multiplier will cause the money supply to fall? a rise in the required reserve ratio a fall in the excess reserves/deposit (ER/D) ratio a fall in the required reserve ratio a fall in the currency/deposit (C/D) ratio
a rise in the required reserve ratio
The monetary base is equal to all currency in circulation plus all deposits in depository institutions checkable deposits in depository institutions plus reserves held by banks all currency in circulation plus reserves held by banks all currency in circulation plus checkable deposits in depository institutions
all currency in circulation plus reserves held by banks
To organize foreign activities, U.S. banks can use which of the following? branches Edge Act Corporations interests in foreign financial firms all of these options
all of these options
Most economists believe that changes in the price level have an effect on the quantity of output supplied in both the short run and the long run no effect on the quantity of output supplied in either the short run or the long run an effect on the quantity of output supplied in the long run,but not in the short run an effect on the quantity of output supplied in the short run, but not in the long run
an effect on the quantity of output supplied in the short run, but not in the long run
Which of the following would cause the long-run aggregate supply curve to shift? a decrease in the expected price level an increase in labor productivity an increase in the price level an autonomous increase in consumption spending
an increase in labor productivity
Which of the following would shift the aggregate demand curve to the left? an increase in money demand an increase in the money supply a cut in federal income taxes an increase in the price level
an increase in money demand
Which of the following open market operations is considered to be a dynamic transaction? an open market operation that is intended to influence interest rates and the money supply an open market operation that compensates for fluctuations in Treasury deposits from tax and loan accounts to the Fed's accounts an open market operation that compensates for increased currency demand during the Christmas season an open market operation that offsets a sharp rise in the Fed float
an open market operation that is intended to influence interest rates and the money supply
Which of the following best defines the term "Eurodollar"? dollars spent by European tourists in the U.S. any dollar deposited by a European central bank in a New York bank any European currency borrowed by American banks any U.S. dollar deposited in a bank outside the U.S. anywhere in the world
any U.S. dollar deposited in a bank outside the U.S. anywhere in the world
If a bank anticipates a fall in interest rates, it should arrange to have a negative duration gap arrange to have a positive duration gap lengthen the average duration of its liabilities relative to the average duration of its assets
arrange to have a positive duration gap
An order to pay a specified amount of money to the holder of this document on a specified date is called a: currency swap banker's acceptance check euroloan
banker's acceptance
A credit crunch (reduces willingness to borrow from banks) may occur when banks raise interest rates on business loans the government lifts Regulation Q ceilings on passbook savings disintermediation occurs households and firms are more willing to borrow from banks
banks raise interest rates on business loans
In a Federal Reserve repurchase agreement, the Fed does not require collateral if it agrees to buy securities from a dealer overnight, since the dealer may just buy them back tomorrow does not consider such transactions as open market operations sells securities to a dealer in the government securities market and agrees to buy them back the next day buys securities from a dealer in the government securities market, and the dealer agrees to buy them back at a given price at a specified future date
buys securities from a dealer in the government securities market, and the dealer agrees to buy them back at a given price at a specified future date
If the Fed buys $1 million in securities from a local Bank, the local bank's balance sheet would reflect a $1 million increase in securities and a $1 million decrease in reserves decrease in liabilities decrease in securities and a $1 million increase in reserves increase in liabilities
decrease in securities and a $1 million increase in reserves
Attempts by the federal government to maintain banking stability resulted in giving banks a competitive advantage in the market for loans an increase in loans granted by banks to high-quality borrowers limits on sources of funds for large borrowers decreased stability in banks because unregulated financial institutions began offering close substitutes for bank deposits and loans
decreased stability in banks because unregulated financial institutions began offering close substitutes for bank deposits and loans
The most serious cost of inflation is distortion of information provided by prices caused by inflation uncertainty menu costs distortion of taxes paid on nominal incomes shoe-leather costs
distortion of information provided by prices caused by inflation uncertainty
What is the dominant currency of the Euromarket? Euro Yen Dollar
dollar
Although open market operations and discount loans both change the monetary base, the Fed has very little control over either discount loans or open market operations complete control over both discount loans and open market operations greater control over discount loans than over open market operations greater control over open market operations than over discount loans
greater control over open market operations than over discount loans
The key reason that expected inflation can distort financial decisions is that expected inflation results in substantial menu costs expected inflation reduces the real value of the national debt lenders pay taxes on nominal rather than real returns lenders have an easier time calculating expected inflation than do borrowers
lenders pay taxes on nominal rather than real returns
The major reason why U.S. banks are regulated so heavily is that banks cannot make a profit without federal subsidies liquidity risk and information problems are closely associated with bank runs banks are subject to substantial interest rate risk the FDIC lacks sufficient funds to bail out failing banks
liquidity risk and information problems are closely associated with bank runs
According to new Keynesians, the cost of reducing the inflation rate is greater trade deficits greater government spending higher interest rates lost jobs and output
lost jobs and output
Compared to the banking systems in other major industrial countries, the banking system in the United States has fewer banks and is less concentrated more banks and is more concentrated fewer banks and is more concentrated more banks and is less concentrated
more banks and is less concentrated
The largest source of funds for commercial banks is borrowings from the fed funds market non-transaction deposits discount loans from the Fed checkable deposits
non-transaction deposits
Banks use credit rationing rather than simply raising the interest rate charged borrowers with higher default risks because of fear of offending the loan applicants use of credit rationing is encouraged by the Federal Reserve of fear of adverse selection problems of interest rate ceilings in many states
of fear of adverse selection problems
The government budget constraints best explain that the Fed can increase the budget deficit by conducting open market operations that countries in which the government has a high level of control over their central banks tend to monetize government budget deficits at higher levels than countries in which central banks have a higher level of independence that an increase in government deficits leads to an increase in the monetary base the relationship between federal budget deficits, changes in Treasury security holdings by banks and the nonbank public, and changes in the monetary base
the relationship between federal budget deficits, changes in Treasury security holdings by banks and the nonbank public, and changes in the monetary base
A major problem in relying on discount loan policy as a monetary policy tool is that the spread between the fed funds rate and the discount rate set by the Fed can cause unintended increases or decreases in the monetary base and the money supply increases in the discount rate may provide erroneous signals of Fed monetary policy intentions discount policy is ineffective in addressing the illiquidity problems of individual banks the Fed has a tighter rein over discount policy than it has over open market operations
the spread between the fed funds rate and the discount rate set by the Fed can cause unintended increases or decreases in the monetary base and the money supply
If the federal government raises taxes by $1 billion and then spends the money to pay government bills, the effect on the monetary base will be a net decline in bank reserves a fall in the monetary base of $1 billion a rise in the monetary base of $1 billion zero
zero