Econ 330 Test 3
List Four factors that affect exchange rates in the long-run
1. Relative Price levels/ inflation rate 2. Trade Barriers 3. Relative productivity levels 4. Preference for domestic vs foreign goods
list 2 theory of purchasing power parity assumptions
1. all goods are identical 2. trade barrier and transportation costs are low 3. many goods are not traded across the border
what three parties play a role in determining the money multiplier and thus the money supply?
1. central banks 2. commercial banks 3. depositors
order the dynamics of the financial crisis
1. credit asset boom 2. banking crisis 3. debt deflation 4. price deflation
what are the three major parts of the federal reserve system?
1. federal open market committee (fomc) 2. Board of governors 3. District Banks
how did competitive forces lead to the repeal of the glass-stegall act's separation of the banking and securities industries?
1. the act's restrictions put americans at a competitive disadvantage relative to foreign banks 2. the fed allowed holding companies to enter the underwriting business 3. financial innovation motivated bank and other financial institutions to bypass the intent of the Glass- Steagall Act
the U.S. got its first national currency around the
1860s
If you expect the inflation rate to be 4 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?
3% real rate= nominal- inflation
example of indirect finance
An individual borrows from a bank; you buy shares in a mutual fund
Bond market after consumers have a decrease in the the desire to consume.
Borrowing and lending go up interest rate go down (I save more you lend more)
c=
C/D
An increase in wealth affects Demand or Supply and shifts to the right or left?
Demand; right
e=
ER/D
Bond market after an increase in technology makes i possible to buy and sell bonds with more ease.
Liquidity increases, lending & borrowing increase interest rates decrease
what happens if the Japanese economy's productivity grows faster than the US
Yen appreciates $ depreciates demand (quantity) increases supply ($) decreases
income effect
a higher level of income causes the demand for money at each interest rate to increase and the demand curve to shift to the right
unit of account
a means for comparing the values of goods and services (price per sqft.)
response to an increase in the foreign interest rate:
a rise in the domestic interest rate shifts the demand curve to the right the exchange rate increases
Price-Level Effect
a rise in the price level causes the demand for money at each interest rate to increase and the demand curve to shift to the right
the interest rate parity
a situation in which the rates of return on assets in different currencies are equal
Currency includes A) paper money and coins. B) paper money, coins, and checks. C) paper money and checks. D) paper money, coins, checks, and savings deposits.
a. paper money and coins
who was the first treasury secretary of the U.S. ?
alexander hamilton
what is the global pool of money
all the money the world is saving now
store of value (function of money)
an item people can use to transfer purchasing power from the present to the future (store away money for childs college)
the fed. usually conduct open market operations using
any government security: - municipal bonds - any thing with the word treasury
transaction costs
as ATM fees go up you take out more money on each visit- internet lowered transaction costs so you don't keep a lot of wealth in your checking account.
Why do bank runs occur?
asymmetric information
why is financial regulation probably necessary?
asymmetric information systemic risk
the federal reserve was created after the crisis surrounding?
banking panics of the early 1900s
Foreign Bonds
bonds sold in a foreign country and denominated in that country's currency
bond suppliers
borrowers
why isn't china appreciating like it does for Japan?
china is buying our debt
The 1980s is known for banking
consolidation, deregulation, and innovation
Money supply=
currency + deposits
if money market price goes up from decrease in demand the fed will, in response:
decrease money supply (shift left); sell bonds
commercial bank liabilities
deposits from customers discount loans
a higher domestic money supply causes the domestic currency to:
depreciate
a (blank) is bought at a price below its face value, & the (blank) value is repaid at the maturity date.
discount; face
describe the process of securitization/ mortgage backed securities
each security is backed by thousands of mortgages from pooling together mortgages and creating securities out of them
financial intermediaries lower transaction cost by providing what two things?
economies of scale liquidity
what happens if Europe becomes a more attractive vacation destination.
euro appreciates supply shifts right $ depreciates
bonds that are sold in a foreign country and denominated in a currency other than that of the country in which it is sold are known as
eurobonds
Eurocurrencies
foreign currencies deposited in banks outside the home country
the most comprehensive measure of aggregate output is:
gross domestic product
what role did the global pool of money play in the housing bubble
growth of pool went looking for a place to save money and got attracted to mortgage back securities, which required more mortgages, which led to the relaxing of mortgage standards
what happens if real interest rates on Mexican bonds rise relative to American bonds?
if rates rise demand increases (you want to invest in) pesos appreciate dollar depreciates demand shift right supply shifts left
Which bonds have the highest default risk?
junk bonds
bond demanders
lenders
liquidity services
make it easier for customers to conduct transactions
As a result of strict banking regulations, the United States has:
many more smaller banks when compared to other industrialized countries
the greatest period of financial regulation in the U.S occurred in the
mid 1900s
the greatest period of financial regulation in the U.S. occurred in the
mid 1900s
what happens to money demand if inflation rises?
money demand decreases
what happens to money demand if real interest rates rise?
money demand decreases
what happens to money demand if Real GDP rises
money demand increase
what happens to money demand if transaction costs rise?
money demand increases
what happens to money demand is price levels rise?
money demand increases
the federal reserve did not rescue the investment bank lehman brothers because of
moral hazard
the yield to maturity for a discount bond is () related to the current price
negatively
what is the key disadvantage of commodity money?
no control of supply
there is (blank) for any bond that whose time to maturity matches the holding period
non interest- rate- risk
what gives the federal reserve the ability to be so independent
own budget and board of govenors have a 14 year non renewable term
In order to reduce risk and increase the safety of financial institutions, commercial banks and other depository institutions are prohibited from A) owning municipal bonds. B) making real estate loans. C) making personal loans. D) owning common stock.
owning common stock
examples of contractual savings institution:
pension fund a life insurance company a fire and casualty insurance company
law of one price
price of identical goods should be identical throughout the world.
if monetary base is lower then previous and wants money supply to stay the same they should:
purchase bonds
the troubled asset relief program (tarp) authorized the treasury to:
purchase subprime mortgage assets from troubled financial institutions
open market operations refer to the fed doing what?
purchasing bonds to increase money supply and selling bonds to decrease money supply
TR= R+ ER R=
r*d
what affects exchange rates in the short run? why? example?
real risk adjusted interest rate because dramatic changes can happen in short period of time ex: Global pool of money: German bonds pay a higher interest rate than american bonds that are of the same relative risk. with the global pool of money people can sell all their dollar denominated bonds in dollars to buy euros so they can buy the European higher German interest rate bonds.
if banks want to decrease money supply they should buy or sell bonds
sell bonds
if money demand goes down and price goes up fed will need to:
sell bonds, supply shifts right
bond market: An increase in risk
shifts demand (lending) to the left
an increase in liquidity
shifts demand to the right
an increase in expected probability of investment opportunities
shifts supply to the right
increase in government deficits
shifts supply to the right
what happens when the Fed uses open market operations to raise the federal funds rate to 1.75%
supply shift left; they would have to sell bonds to increase the rate
the federal reserve rescued the investment bank bear sterns because of
systemic risk
what is the key disadvantage of fiat money? solution?
temptations to print away to pay bills; independent central banks
which entity in the federal reserve system controls the discount rate
the board of govenors
which entity of the federal reserve sets reserve requirements
the board of govenors
why does trump want the fed to lower interest rates? 2 reasons
the demand for the dollar by Europeans would decrease lowering interest rates will cause the dollar to depreciate. Thus, american products will become cheaper, and increase international sales of american goods
Which entity of The Federal Reserve System is responsible for establishing open market operations?
the federal open market committee (FOMC)
when the federal reserve conducts an expansionary monetary policy, what happens to the money supply?
the money supply increases, but the supply of dollar assets does not change since dollar currency is a small part of total U.S. dollar denominated assets
theory of purchasing power parity
the theory that exchange rates between two countries is equal to the ratio of currencies' respective purchase power
Monetary base=
total reserves+ currency
3 functions money must fulfill
unit of account, store of value, medium of exchange
what is the key advantage of commodity money
universally accepted