Money and Banking Chapter 4

What makes the Federal Reserve so unique compared to other central banks around the world is its

decentralized structure.

Holding the expected return on bonds constant, an increase in the expected return on common stocks would ________ the demand for bonds, shifting the demand curve to the ________.

decrease; left

The nominal interest rate minus the expected rate of inflation

defines the real interest rate.

A bond that is bought at a price below its face value and the face value is repaid at a maturity date is called a

discount bond.

The price of a consol equals the coupon payment

divided by the interest rate

The two types of open market operations are

dynamic and defensive.

There are two types of open market operations: ________ open market operations are intended to change the level of reserves and the monetary base, and ________ open market operations are intended to offset movements in other factors that affect the monetary base.

dynamic; defensive

The Federal Open Market Committee usually meets ________ times a year.

eight

For simple loans, the simple interest rate is ________ the yield to maturity.

equal to

The Depository Institutions Deregulation and Monetary Control Act of 1980

established uniform reserve requirements for all banks.

The ________ is the final amount that will be paid to the holder of a coupon bond.

face value

Everything else held constant, an increase in the riskiness of bonds relative to alternative assets causes the demand for bonds to ________ and the demand curve to shift to the ________.

fall; left

A credit market instrument that requires the borrower to make the same payment every period until the maturity date is known as a

fixed-payment loan.

The yield to maturity is ________ than the ________ rate when the bond price is ________ its face value.

greater; coupon; below

Higher government deficits ________ the supply of bonds and shift the supply curve to the ________, everything else held constant

increase; right

When an economy grows out of a recession, normally the demand for bonds ________ and the supply of bonds ________, everything else held constant.

increases; increases

The riskiness of an asset's returns due to changes in interest rates is

interest-rate risk.

Prices and returns for ________ bonds are more volatile than those for ________ bonds, everything else held constant.

long-term; short-term

The price of a coupon bond and the yield to maturity are ________ related; that is, as the yield to maturity ________, the price of the bond ________.

negatively; rises; falls

The policy tool of changing reserve requirements is

no longer used.

Each governor on the Board of Governors can serve

one full nonrenewable fourteen-year term plus part of another term.

The most important advantage of discount policy is that the Fed can use it to

perform its role as lender of last resort.

The concept of ________ is based on the common-sense notion that a dollar paid to you in the future is less valuable to you than a dollar today.

present value

The most common type of discount lending, ________ credit loans, are intended to help healthy banks with short-term liquidity problems that often result from temporary deposit outflows.

primary

The discount rate refers to the interest rate on

primary credit

The most common type of discount lending that the Fed extends to banks is called

primary credit.

The Federal Reserve System was created to

promote financial market stability.

If the Fed expects currency holdings to rise, it conducts open market ________ to offset the expected ________ in reserves.

purchases; decrease

The ________ is defined as the payments to the owner plus the change in a security's value expressed as a fraction of the security's purchase price.

rate of return

The ________ interest rate more accurately reflects the true cost of borrowing.

real

When the ________ interest rate is low, there are greater incentives to ________ and fewer incentives to ________.

real; borrow; lend

Although neither ________ nor the ________ are officially set by the Federal Open Market Committee, decisions concerning these policy tools are effectively made by the committee.

reserve requirements; discount rate

An increase in ________ reduces the money supply since it causes the ________ to fall.

reserve requirements; money multiplier

Everything else held constant, during a business cycle expansion, the supply of bonds shifts to the ________ as businesses perceive more profitable investment opportunities, while the demand for bonds shifts to the ________ as a result of the increase in wealth generated by the economic expansion.

right; right

Everything else held constant, an increase in the liquidity of bonds results in a ________ in demand for bonds and the demand curve shifts to the ________.

rise; right

During business cycle expansions when income and wealth are rising, the demand for bonds ________ and the demand curve shifts to the ________, everything else held constant.

rises; right

If the Fed expects currency holdings to fall, it conducts open market ________ to offset the expected ________ in reserves.

sales; increase

The Fed is considering eliminating

seasonal credit lending

When the Fed acts as a lender of last resort, the type of lending it provides is

secondary credit.

The Federal Open Market Committee consists of the

seven members of the Board of Governors and five presidents of the regional Fed banks.

Each Federal Reserve bank has nine directors. Of these ________ are appointed by the member banks and ________ are appointed by the Board of Governors.

six; three

When the government has a surplus, as occurred in the late 1990s, the ________ curve of bonds shifts to the ________, everything else held constant.

supply; left

While the discount rate is "established" by the regional Federal Reserve Banks, in truth, the rate is determined by

the Board of Governors.

The public's fear of centralized power and distrust of moneyed interests led to the demise of the first two experiments in central banking:

the First Bank of the United States and the Second Bank of the United States.

Everything else held constant, when prices in the art market become more uncertain,

the demand curve for bonds shifts to the right and the interest rate falls.

The discount rate is

the interest rate the Fed charges on loans to banks

The majority of members of the Federal Open Market Committee are

the seven Federal Reserve governors.

The discount rate is ________ kept ________ the federal funds rate.

typically; above

Economists consider the ________ to be the most accurate measure of interest rates.

yield to maturity.

The interest rate that equates the present value of payments received from a debt instrument with its value today is the

yield to maturity.

If you expect the inflation rate to be 12 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

-5 percent.

When referring to changes in yields, a basis point equals

0.01 percent.

To say that a yield increased by twenty basis points means the interest rate increased by

0.2 percent.

If the interest rates on all bonds rise from 5 to 6 percent over the course of the year, which bond would you prefer to have been holding?

A bond with one year to maturity

Which of the following are generally true of all bonds?

Even though a bond has a substantial initial interest rate, its return can turn out to be negative if interest rates rise.

The Federal Reserve entity that makes decisions regarding the conduct of open market operations is the

Federal Open Market Committee.

Which set of goals can, at times, conflict in the short run?

High employment and price level stability.

The president from which Federal Reserve Bank always has a vote in the Federal Open Market Committee?

New York

The Federal Open Market Committee makes the Fed's decisions on the purchase or sale of government securities, but these purchases or sales are executed by the Federal Reserve Bank of

New York.

Which of the following is NOT an entity of the Federal Reserve System?

The Comptroller of the Currency

In which of the following situations would you prefer to be borrowing?

The interest rate is 25 percent and the expected inflation rate is 50 percent.

In which of the following situations would you prefer to be the lender?

The interest rate is 4 percent and the expected inflation rate is 1 percent.

Which of the following are generally true of bonds?

The only bond whose return equals the initial yield to maturity is one whose time to maturity is the same as the holding period.

Which of the following are true for discount bonds?

The purchaser receives the face value of the bond at the maturity date.

Which of the following are true concerning the distinction between interest rates and returns?

The rate of return on a bond will not necessarily equal the interest rate on that bond.

Examples of discount bonds include

U.S. Treasury bills.

The financial panic of 1907 resulted in such widespread bank failures and substantial losses to depositors that the American public finally became convinced that

a central bank was needed to prevent future panics.

At its inception, the Federal Reserve was intended to be

a lender-of-last-resort.

Banks subject to reserve requirements set by the Federal Reserve System include

all banks whether or not they are members of the Federal Reserve System.

Since 1980, _______ are subject to reserve requirements

all depository institutions

Having interest rate stability

allows for less uncertainty about future planning.

Factors that can cause the supply curve for bonds to shift to the right include

an expansion in overall economic activity.

Members of the Board of Governors are

appointed by the president of the United States and confirmed by the Senate as members resign

The research document given to the Federal Open Market Committee that contains information on the state of the economy in each Federal Reserve district is called the

beige book.

An important function of the regional Federal Reserve Banks is

clearing checks.

A credit market instrument that pays the owner a fixed coupon payment every year until the maturity date and then repays the face value is called a

coupon bond.

The interest rate on a consol equals the

coupon payment divided by the price.

The Fed's lender-of-last-resort function

creates a moral hazard problem