ECON 2035 Stahl Exam 2&3 Review

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if people hold $4000 in checking deposits and $1000 in currency, the currency-deposit ratio is

.25 the currency deposit ratio is the ratio of currency to checking deposits

if the currency deposit ratio is 0.20 and the reserve deposit ratio is 0.20, the money multiplier is

3 the money multiplier is 1 + the currency deposit ratio divided by the sum of the currency deposit ratio and the reserve deposit ratio (=1.2/0.4)

during the 2008 flight to safety, financial institutions wanted to purchase only

U.S. Treasury bills they wanted to buy only the safest assets

a contagious loss of confidence in banks may cause

a bank panic

CAMELS ratings asses insolvency risk based on all the following except

a bank's liabilities Capital, Assets quality,Management,Earnings,Liquidity and Sensitivity

a factor causing an increase in the reserve deposit ratio is

a growth in the number and use of ATMs reductions in reserve requirements and use of sweep programs reduce banks reserves, while ATM use requires more vault cash, increasing banks reserves

the "lender of last resort" function of a central bank is intended to assist during

a liquidity crisis the lender of last resort makes loans to banks during a liquidity crisis, avoiding asset sales at fire sale prices

a financial crisis may develop into a vicious circle due to

a recession that worsens banking problems the recession exacerbates the crisis

the policy response to the 2008 financial crisis included

a reduction of the target federal funds rate, a tax cut and increased federal government spending

an example of a defensive open market operation is

a sale of bonds that offsets an increase of the money multiplier

a shock that triggered the Great Depression was

a series of bank panics the GD was triggered by two shocks, the stock market crash of 1929 and a series of bank panics from 1930-1933

forbearance means that regulators

allow banks to operate with negative capital

U.S. regulators fear that the Basel 2 recommendations will

allow banks to reduce capital

the Treasury's use of TARP funds to purchase bank stock was

an equity injection bank capital was increased by the stock sales

a factor leading to Argentina's 2001-2002 crisis was

an increased government debt fears of an end to the currency board also contributed to the crisis

a nonfinancial firm may legally enter the banking business through the ownership of

an industrial loan company. a legal loophole allows a non-financial firm to provide banking services through the ownership of an ILC

bank illiquidity may result in insolvency due to

asset sales at fire sale prices an illiquid bank may become insolvent if it is forced to sell assets at fire sale prices since losses reduce the bank's net worth

bubbles are typically followed by

asset-price crashes asset-price crashes are believed to be the ends of bubbles in asset prices

the reserve deposit ratio equals

bank reserves divided by checking deposits

current regulations prohibit commercial banks from owning

corporate stock

a factor that worsened the Great Depression was

deflation that increased the real value of debts resulted from the reduced money supply. the higher real value of debts caused loan defaults that increased bank failures, worsening the crisis

the reason bank panics have not occurred since 1933 is

deposit insurance

banking crises are least likely when countries have

deposit insurance and strong supervision

depositors have greater incentive to monitor bank behavior if

deposit insurance insures 90% of deposits. the risk of loss increases the incentive of depositors to monitor bank behavior

capital flight from an emerging-market economy

depreciates the real exchange rate capital flight increases net capital outflows, depreciating the real exchange rate. loan supply decreases due to the increased net capital outflows. due to real depreciation, the foreign debts denominated in foreign currency increases

a common element of financial crises is

failures of financial institutions common elements of financial crises are asset-price crashes and failures of financial institutions

Because insolvent banks have an incentive to gamble for resurrection, economists believe that regulators should

force insolvent banks to close because gambling for resurrection may increase losses, economists believe this

the payoff method of bank closure involves

giving depositors their insured balances and selling assets

if the target value for the money supply is above the current value, a central bank would

increase the money supply

a reduction in the reserve-deposit ratio

increases the money multiplier and the money supply

under a policy of interest-rate targeting, an increase in aggregate spending

increases the money supply interest rate targeting requires adjusting the money supply to maintain the interest rate at the target value. an increase in aggregate spending increases money demand, requiring an increase in the money supply to keep the interest rate constant

bank regulators are primarily concerned with a bank's

insolvency risk

opponents of monetary targeting argue that the monetarist experiment of 1979-1982 failed because

interest rate instability caused recessions argued that money demand fluctuations during this period resulted in interest rate and economic instability, resulting in two recessions

the Too Big To Fail problem involves

large banks with numerous links large banks with many connections may be too big to fail as their failure may result in failure of other linked institutions

a direct cost of a financial crisis is

losses due to asset holders when prices fall

if the Fed desires to increase the money supply it would

lower the discount rate

deposit insurance increases moral hazard by giving bankers an incentive to

make risky loans

a policy of money targeting works best when

money demand is stable a money target is desirable when money demand is stable. changing transactions technologies and volatile aggregate spending make money demand unstable

the 2010 Dodd-Frank Act created the Financial Services Oversight Council to

monitor the financial system for systemic threats, threats to its stability

if deposit withdrawals force a bank to sell $100 worth of assets for $70,the effect on the bank's balance sheet is to

reduce net worth by $30

an indirect cost of a financial crisis is

reduced lending due to bank failures indirect costs are changes that affect the aggregate expenditure following a crisis, but are not financial losses directly attributable to the crisis. the reduction of bank lending due to a bank failure is an indirect cost of a financial crisis

an open market sale of bonds

reduces the monetary base and the money supply

the incentive for excessive risk taking by financial institutions can be reduced by

requiring that security issuers have "skin in the game" requiring that security issuers hold some of the risk of the securities they create reduces the incentive to create risky securities

a bank run can be caused by

self-fulfilling expectations

to increase the federal funds rate the Fed would

sell bonds in the open market to increase the federal funds rate the Fed must reduce the money supply which is accomplished by selling bonds in the open market

the Fed reduces the monetary base when it

sells a bond for $1000

the Basel Accord

sets international standards for bank capital; establishes international capital requirements

one way to stop a bank run is to

suspend payments

state chartered commercial banks that are not members of the Federal Reserve System are regulated by

the Federal Deposit Insurance Corporation

bank deposits are insured by

the Federal Deposit Insurance Corporation (FDIC)

Federal Reserve policy is set by

the Federal Open Market Committee (FOMC)

a national bank charter is obtained from

the Office of the Comptroller of the Currency

a criticism of the conditions attached to the IMF loans is that

the conditions impose economic hardships in the short-run; force painful adjustments on the borrowing countries

the monetary base is equal to

the currency in circulation plus bank reserves

the interest rate the Fed charges to banks that request a loan from the Fed is

the discount rate

the current Federal Reserve policy is to target

the federal funds rate of interest

a factor that contributed to the Great Depression was

the increase of the currency-deposit ratio that reduced the money supply bank panics caused the public to switch from holding bank deposits to holding cash. this increase of the currency deposit ratio reduced the money multiplier and the money supply, contributing to the Great Depression

the insolvency of a financial institution can spread and cause a financial crisis due to

the losses suffered by its depositors and lenders a crisis can spread because a banks depositors and lenders have reduced net worth when a failing bank is unable to pay its debts. the losses to these other institutions and people can create insolvency, spreading the crisis

when banks increase their holdings of excess reserves

the reserve-deposit ratio increases

the run on money market mutual funds , following the Lehman Brothers failure damaged the economy because

this reduced demand for commercial paper used to cover firms' short-term cash needs money market mutual finds are major purchasers of commercial paper. the run on the funds reduced demand for commercial paper that firms sell for short term cash needs, forcing forms to reduce costs and lay off workers


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