Econ Quizlets
true
Assets are things that are useful or things that have value. t/f
Donna is in the business of buying houses, fixing them up, and then reselling them quickly (flipping). Donna might be interested in a
easer-rate ARM.
General obligation bonds generally do not have to be approved by taxpayers.
f
On a home with a $200,000 purchase price, a typical 20% down payment would mean the borrower would have to have $20,000 in cash.
f
The stocks that make up the S&P 500 are the stocks of the 500 biggest corporations in the United States.
f
You work for a firm that exports toys to retail customers around the world. In fact, 75 percent of your sales revenue comes from exports. Because you work for a firm that relies heavily on exports, you want to see your home country currency strengthen or appreciate and gain value in the foreign exchange markets.
f
It is illegal for an employer to underfund a pension.
f
Savings & Loans were set up as nonprofit institutions to provide consumer credit to the working class and small business.
f
ABC Manufacturing Corporation has a AA bond rating according to Standard & Poor. This means that ABC's bonds are rated
high quality.
You have just read an article in today's Wall Street Journal that states that the US economy is growing at a healthy 3% per year, US interest rates are falling, and emerging economies around the world are growing at a healthy 7% per year. Based on this information, you predict that US stock prices will
increase.
Commercial paper
is essentially unsecured IOUs.
Rachel's homeowner's policy specifically covers damage from earthquakes. It is a(n) __________ policy.
named-peril
Commercial banks and thrifts claim that __________ gives credit unions an unfair advantage.
not paying corporate income taxes
interest rates are stable, exchange rates are stable, and financial crises do not occur.
ome economists would argue that financial market stability should be an important goal for the Federal Reserve. This could be achieved by making sure that
A flaw of the dividend discount model is that it assumes that a corporation's dividends will remain constant forever.
t
Arbitrage opportunities due to actual price differences for the exact same good sold by two different countries will not last long due to the tendency towards purchasing power parity.
t
If a corporation issues stock, it does not have to pay any of its profits to the shareholders in the form of dividends if it doesn't want to.
t
Where do finance companies get the funds they use to make loans?
Bank loans
generating interest income.
Commercial banks often buy money market instruments for the purpose of
False
Rational expectations refers to the idea that people are adaptive in nature, and once something happens they will adapt to it.
decrease the size of the money multiplier.
When the Federal Reserve increases the reserve ratio, the impact will be to
have little impact on the economy.
When the economy is caught in a liquidity trap, expansionary monetary policy will
10%
You give your friend $10,000 to help start a business, and you get $1,000 back. Your rate of return is
A type of stock that entitles the owner to a claim on the corporation's assets at liquidation and gives the owner voting rights for the board of directors and corporate policy is known as __________ stock.
common
Northwest Power Corporation has a Caa bond rating according to Moody's. This means that Northwest's bonds are rated
poor grade
History tells us that stock prices tend to be
procyclical.
In the autumn of 2008, a flight to __________ occurred as investors pulled their money out of markets with various levels of uncertainty and put it into "safe" markets such as Treasury securities. risk
quality
Fannie Mae is largely responsible for creating a secondary mortgage market in the United States.
t
Health care costs accounted for _____ of GDP in the United States in 2012.
17.9 %
long-term consumer
A mortgage loan is an example of a __________ loan.
Which of the following is NOT a type of loan provided by a consumer finance company?
Education loan
Why were credit default swaps initially considered low risk?
Home mortgages historically have a low default rate.
10%
Midtown Bank has net income of $50 million, total assets of $1 billion, and equity capital of $500 million. Midtown's ROE is
real interest rates plus inflation.
Nominal interest rates are made up of
$250,000.
The FDIC insures deposits up to
need in the United States for a central bank.
The primary lesson learned from the Panic of 1907 was the
weekly.
To raise the funds the federal government needs for its spending, the Treasury Department auctions T-bills
chair of the Federal Reserve.
Today in the Federal Reserve system, the power rests with the
Credit cards
Today, in the United States, several assets function as money. Which of the following would NOT be considered money?
Demand deposits
Which of the following qualifies as a liability to a bank?
The downfall of a foreign government where a bank's biggest customers do significant business
Which of the following would be classified as country risk?
One of the advantages of municipal bonds is that they
are exempt from federal income taxes.
In acting to help create a secondary mortgage market, Fannie Mae solved the size problem by
pooling mortgages together and creating a new financial instrument called a mortgage pass-through.
The secondary market is where __________ is/are sold.
previously owned stocks
False
A corporate bond offering an interest rate of 5% is as good a deal as a municipal bond offering the same interest rate.
increase; imports
A decrease in aggregate demand would be caused by a(n) __________ in __________.
f
A gap analysis is something a bank can do to better understand its liquidity risk.
long-term business
A leveraged buyout is an example of a __________ loan.
greater than 1.
A measure that can be used to determine whether banks have sufficient liquidity is the liquidity coverage ratio. A banks is considered to have sufficient liquidity when this ratio is
primary; secondary
A money market has a __________ market, where a given IOU is issued for the first time, and a much larger __________ market.
an expansion in the money supply that is larger than the size of the one-time deposit.
A one-time deposit in a bank will result in
is not tied to a specific transaction so is more general in nature.
A standby letter of credit differs from a commercial letter of credit in that it
operational
ABC Bank acquires XYZ Bank through a merger but subsequently fails due to some unforeseen incompatibilities resulting from their widely different cultures. This is an example of __________ risk.
Country risk
ABC Bank has made several big loans to a mining equipment manufacturer that sells its equipment to the copper mining industry in Chile. Political unrest in Chile is a source of what kind of risk for ABC Bank?
A loan with real estate used as collateral and where the terms of the contract allow the lender to change the interest rate is known as a(n)
ARM
thinks that future interest rates will be exactly the same as current interest rates.
According to the pure expectations theory, a flat yield curve means the market
required reserves + excess reserves.
Actual bank reserves are equal to
C + I + G + (X - M).
Aggregate demand is equal to
NOT Demand deposits
Among the assets on a bank's balance sheet are
emand deposits.
Among the liabilities on a bank's balance sheet are
True
An increase in consumer income tends to cause an increase in the demand for money.
True
An individual who begins to participate in extreme sports after taking out a $1,000,000 life insurance policy is an example of the issue of moral hazard.
short-term consumer
An unsecured personal loan is an example of a __________ loan.
increases.
As the federal marginal tax rate rises, the advantage of municipal bonds over corporate bonds is eliminated.
uncertainty.
Asset bubbles make it plain that monetary policy must be made in a world full of
repurchase agreement.
Assume that Merrill Lynch, a government securities dealer, sells T-bills to First Central Bank with a promise to buy the T-bills back the next day. This agreement is known as a
12 independent regional Federal Reserve banks.
At its inception, the power of the Federal Reserve rested in the
Savings & Loans.
At the conclusion of World War II, an explosion in the home mortgage market was led by depository institutions known as
classical economists
At the time of the Great Depression, the __________ believed that the economic disruptions being experienced were temporary and that market forces would eventually reestablish prosperity.
Consider a share of stock in a company that will pay a dividend of $20 one year from today and immediately liquidate its assets. Your expected share of the liquidated assets is $5. Your time value of money is such that you consider $1.05 a year from today is equivalent to $1.00 today. What is the maximum you would be willing to pay for a share of stock in this company?
$23.81
If Mercury Corporation's stock is currently trading at $40.45 per share with an expected earnings per share of $1.67, Mercury's PE ratio would be
$24.22.
pay the bondholder $500 every year for 10 years and also a $10,000 payment in 10 years.
A 10-year, $10,000 bond with a coupon rate of 5% is a promise by the issuer of the bond to
f
A bank's pretax net income = Net interest income + Noninterest income.
a decrease in expectations about future inflation.
A decrease in the demand for loanable funds would be caused by
Which of the following is an example of pure risk?
A house being destroyed in a natural disaster
equities
A limitation on US banks is the prohibition from holding __________ in their asset portfolios.
term to maturity of bonds and the interest rate they pay, at a particular point of time.
A yield curve illustrates the relationship between the
Which of the following is consulted in determining what premium should be paid on a policy?
Actuary
acting as the fiscal agent of the US Treasury.
Among the responsibilities of the Fed is
economy is headed for recession.
An inverted yield curve likely means the
offers a minimal rate of return.
Banks want to hold as little cash as possible because holding cash
inversely related.
Bond prices and interest rates are
mutual funds, investment banks, and insurance companies.
Commercial banks face competition from a variety of institutions, including
Which of the following is a significant difference between thrifts and credit unions
Credit unions are nonprofit, but thrifts are generally for-profit.
mplemented wage and price controls, issued war bonds, and rationed many commodities.
During World War II, US policymakers feared inflation would result from the dramatic increase in wartime spending. In order to prevent that inflation, US policymakers
5%
Emily is in the 10% marginal income tax bracket and earned a 4.5% return on the corporate bonds that just matured. The nominal interest rate paid on these bonds was
The federal agency created during the Great Depression to establish a secondary mortgage market by purchasing FHA-insured loans at par and accrued interest was the
Federal National Mortgage Association (FNMA).
Money, bonds and stocks
Financial assets include which of the following?
below par
If the market interest rate is higher than the coupon rate on a newly issued bond, then the bond will sell
1050$
If you borrow $1,000 today to be paid back one year from today at 5% interest, the payment you will have to make in one year will be
required reserve ratio.
Imagine that Roland goes to his bank and deposits $10,000 in cash into his savings account. The bank, wanting to use those funds to generate revenue for itself, will look to make a loan with this cash. An important determinant of how much of that $10,000 the bank can lend is the
depend on the number of goods exchanged in the economy.
In a barter economy, the number of prices necessary will
take deposits; make loans
In a very basic sense, banks perform two functions in society: they __________ and __________.
price stability.
In modern times, the primary goal of central banks is
the cost associated with searching for a suitable lender.
In the absence of banks and other lending institutions, when Sally is looking to borrow some money to buy a house, one of the biggest problems she faces is
horizontally
In the early twentieth century, the business scene in America was transformed by the formation of trusts. Business trusts are __________ integrated ownership structures.
NOW accounts that were similar to checking accounts but paid interest.
In the late 1960s and early 1970s, when inflation was driving up interest rates, the prohibition against banks paying interest on checking accounts became a real problem. In response to this prohibition, Ronald Haselton created
drive the better used cars out of the market.
In the market for used cars, asymmetric information will tend to
banks did not lend out the excess reserves that were created by quantitative easing.
Initially, quantitative easing was not much help in creating economic growth because
can represent the price of money.
Interest rates
increases; reduces
Keynes's interest rate effect suggests that when the price level rises it causes an increase in the demand for money, which __________ the interest rate and __________ the level of business spending.
a medium of exchange.
Mandy goes to the grocery store to buy groceries, and at the checkout counter she pays cash. This is an example of money being used as
they are issued by only the biggest and safest borrowers.
Money market instruments have a "low level of default risk" because
information and impact
One of the biggest challenges the Federal Reserve faces in conducting monetary policy is the existence of __________ lags.
the money supply matters and has a very real impact on economic activity.
One of the important lessons that economists learned from the battle with stagflation in the late 1970s and early 1980s was that
adverse selection; moral hazard
One of the main reasons that banks exist is to deal with the issues of __________ and __________.
horizontal; vertical
Originally, Keynes conceived of the aggregate supply curve as consisting of two distinct segments. In this conception, below the full-employment level of output the aggregate supply curve is __________, and once the economy reaches the full-employment level of output it becomes __________.
asymmetric information
Ridley goes for a job interview at Exeter Corporation. When she sits down with the human resources director, we might say that a situation of __________ exists.
Kayla recently inherited a substantial sum of money and is looking to invest some of it in the bond market. Because she has never invested before, she would prefer to know exactly how much she will be paid when the bond matures. Kayla should purchase a revenue bond.
STRIPS.
5%
Saladin is willing to lend her friend Astro $500 to buy a new smart phone. Saladin wants a 3% real rate of return on the loan when it is paid back at the end of the year. She believes that during the year the general level of prices will rise by 2%, so she should charge her friend Astro a nominal interest rate of
What act phased out Regulation Q?
The Depository Institution Deregulation and Monetary Control Act
the check-clearing system, supervising and examining banks in their districts, and keeping track of the economy in their districts.
The Federal Reserve district banks are primarily responsible for
adaptive.
The Keynesian aggregate demand/aggregate supply model assumed that people's expectations were
excessive speculation in the stock market, excessively loose lending by banks and trusts, and a lack of effective oversight of financial markets.
The Panic of 1907 was triggered by
Understanding the stagflation of the late 1960s and early 1970s
The aggregate demand, three-part aggregate supply model has performed relatively well in all but which of the following situations?
Dodd-Frank Wall Street Reform and Consumer Protection
The banking legislation that created the Bureau of Consumer Financial Protection is the __________ Act.
Truth in Lending
The banking legislation that ensures that borrowers know what they are getting themselves into when they agree to borrow money is known as the __________ Act.
NOT federal funds purchased.
The biggest gross interest expense for banks is interest paid on
appointed by the president of the United States and confirmed by the US Senate.
The chair of the Federal Reserve becomes the chair by being
dollarization
The country of Bountiful is suffering from disastrous inflation of 100% per month, and as a result, the merchants and citizens have stopped using the domestic currency, bounties, for transactions. Instead they have begun to use zombies, the currency of their closest neighbor, Dark Shadows, for transactions. This practice is known as
inverse
The demand for bonds is best described as a(n) __________ relationship between the price of bonds and the quantity of bonds demanded, all else equal.
liquidity.
The ease of being able to convert one asset into another asset, especially into money, is referred to as
an upward-sloping short-run aggregate supply curve and a vertical long-run supply curve at the full-employment level of GDP.
The rational expectations approach postulates two aggregate supply curves:
indirect.
The relationship between the economy-wide price level and the level of real GDP illustrated by the aggregate demand curve is
default
The risk that a bond issuer will not be able to live up to the promise they make when they issue a bond is known as __________ risk.
the face value, the coupon rate, and the term to maturity.
Three things fully describe the aspects of a bond. They are
In the United States, how do most people acquire health insurance?
Through their employer
Jordan recently purchased a 20-year bond from the federal government with a face value of $10,000. Jordan has purchased a
Treasury bond.
Liquidate my investment as soon as possible.
Tristate Bank has just had a visit by the bank examiner and received a rating of 5 across the board for each of the CAMELS categories. If you were an investor in this bank, how would you react to this news?
financial assets that are close substitutes for money.
When economists refer to "money markets," they are referring to markets for
rational
When people use all available information to develop expectations about the future and use their expectations about the future to make current decisions, this is called __________ expectations.
inflation.
When there is too much money chasing too few goods, the likely impact is
You own a local company. In the past year, you successfully expanded your sales market into Europe, and you now have profits and cash denominated in euros. You want to convert the euros to your home country currency to repatriate the profits and pay taxes. You are
a demander of your home country's currency in the foreign exchange market.
A major challenge for banks with lots of mortgage loans is a lack of liquidity. The solution to this problem has been the emergence of
a secondary mortgage market.
Part ownership of a corporation, such as General Electric, is represented by ownership of
a share of General Electric stock.
Throughout the 1880-1914 time period, the gold standard was maintained because the three major economic powers (the United Kingdom, the United States, and France)
allowed interest rates to change in response to flows of gold.
Techguru Corporation issues bonds that include specifications on what management may or may not do during the life of the bond. This portion of the bond agreement is known as a(n)
bond covenant.
You are a foreign exchange student studying in Switzerland. You are from Australia and currently have Australian dollars and some euros to use, so you decide to travel to Great Britain to sightsee on holiday break. In order to have pounds sterling to travel in Great Britain, you are a __________ in the foreign exchange market.
buyer of pounds and seller of Australian dollars and euros
Regulation Q imposed an interest rate
ceiling on deposits.
Under their current business model, bond-rating agencies earn their income by
charging fees to only the issuers of bonds for their bond ratings.
Graeham has moved abroad to pursue his career after college. Unfortunately, the country where he is now living is experiencing a period of very high inflation. Graeham can expect the currency of his newly adopted country to
decrease in value due to a decrease in demand as potential investors are no longer interested in investing in an inflationary economy.
The US dollar-to-euro exchange rate was $1 = 0.921384 euros yesterday. Today, the US dollar-to-euro exchange rate is $1 = 0.891560. This means that between yesterday and today, the
dollar has depreciated against the euro.
Bonds that are issued by Ginnie Mae, Fannie Mae, and Freddie Mac are known as __________ bonds.
government agency
When an economy sees higher real, risk-adjusted interest rates, it will most likely experience a(n) __________ in demand for its currency in the foreign exchange market, and the value of its currency will __________.
increase; appreciate
Malpractice insurance is an example of
liability insurance.
Mortgages for which lenders did not verify the income or assets of the borrowers were known as
no documentation home mortgages.
B&G Corporation issues convertible bonds. Convertible bonds allow B&G bondholders to convert their bonds into __________ at some point in the future.
shares of common stock
Tori has a home mortgage where the lender is providing 100% of the purchase price of the house. Tori's mortgage is a
zero-down home mortgage.
directly from her bank.
Cameron is looking to buy $1,000 worth of T-bills. She can purchase them at all of the following places EXCEPT
interest rate risk.
Consider a bank that has a customer who deposits $10,000 into a 12-month CD that pays 2.5% interest, and at the end of the 12 months, the customer rolls the funds over into another 12-month CD and continues the rolling every 12 months. Further, suppose the bank uses these funds to grant a 5-year auto loan on which the bank charges 4% interest. After a couple of rollovers, imagine the interest rate the bank must pay on CDs rises to 3%. This is an illustration of
1.63 Billion
Consider the following data about the economy: currency outstanding (C) = $1 trillion, total deposits (D) = $750 billion, total reserves (R) = $76 billion, and the required reserve ratio (RR ratio) = 10%. If the Federal Reserve increases the monetary base by $1 billion, the money supply will increase by
Not .50
Consider the following data about the economy: currency outstanding (C) = $1 trillion, total deposits (D) = $750 billion, total reserves (R) = $76 billion, and the required reserve ratio (RR ratio) = 10%. What is the currency ratio in this economy?
1$ Billion
Consider the following data about the economy: currency outstanding (C) = $1 trillion, total deposits (D) = $750 billion, total reserves (R) = $76 billion, and the required reserve ratio (RR ratio) = 10%. What is the level of excess reserves for this economy?
1.46
Consider the following data about the economy: currency outstanding (C) = $2 trillion, total deposits (D) = $1 trillion, total reserves (R) = $60 billion, and the required reserve ratio (RR ratio) = 5%. What is the money multiplier for this economy?
the monetary base will decrease but bank reserves will stay the same.
If Clem were to buy a US Treasury security from the Federal Reserve in the secondary market, paying cash, then
NOT increase in deposits.
If a bank has a positive interest rate gap and interest rates decline, then the bank will experience a(n)
NOT The monetary base will increase.
If the US Treasury engages in a foreign exchange intervention to increase the value of the dollar relative to the yuan renminbi by having the Federal Reserve buy dollars and sell yuan renminbi in the foreign market, how will this affect the monetary base?
5.25%
If the before-tax rate of return on a corporate bond is 7%, an individual in the 25% marginal tax bracket would earn a _____ rate of return on the bond.
decrease the demand for money.
If the goal of monetary policy is to keep interest rates stable, the Federal Reserve's response to increases in the demand for money will be to
true
If the market interest rate exceeds the coupon rate on a bond, the selling price of the bond will be greater than the bond's face value. t/f
establish a price floor on the interest rate in the federal funds market.
In 2008, the Federal Reserve began paying interest on the bank deposits it holds. By doing this, its goal is to
Dodd-Frank Wall Street Reform and Consumer Protection
In 2010, the passage of the __________ Act removed the restriction on the paying of interest on demand deposits that had been established with Regulation Q.
John Maynard Keynes.
In order to fund World War II, the United States followed the policy prescription of
the term auction facility (TAF).
In order to overcome the stigma that might come from borrowing from the Federal Reserve following the 2007 financial crisis, the Federal Reserve created
keep up with the increased paperwork associated with the administration of federal government debt.
In the 1970s, the Fed created the automated clearing house (ACH) in order to
False
In the conduct of monetary policy, the Federal Reserve has greater control over discount loans than it does over open market operations.
increase; $200 billion
In the country of Trivia, it is widely believed that the marginal propensity to consume is 0.75. This means that a onetime increase in spending of $50 billion will result in a(n) __________ in GDP equal to __________.
lower interest rates to inject liquidity into the financial system.
In the face of a credit crunch, the Federal Reserve will most likely attempt to
keep interest rates low in order to keep spending high.
In the period following World War II, the US Treasury was in charge of monetary policy and instructed the Federal Reserve to
Shadow
Institutions that compete with commercial banks because they perform some but not all of the functions of commercial banks are said to be part of the __________ banking industry.
How did subprime mortgage defaults affect the insurance market?
Insurance companies that issued credit default swaps no longer had the reserves they needed to pay claims.
supply of money; real
Irving Fisher's equation of exchange led to the conclusion that the __________ is a function of the level of __________ income in the economy
You are a manager in a pharmaceutical company, and you oversee manufacturing operations in North America, Europe, and India. Under your careful management, the European operation becomes significantly more productive than either of the other two. This increase in productivity spreads to other manufacturers in Europe as well, and total factor productivity soars higher in Europe relative to other economies. Based on this information, which of the following statements is true?
The value of the euro will appreciate.
If the Ohio Teachers Retirement Fund is considering buying bonds issued by Johnson Electric Corporation and is wanting to evaluate the default risk of the bonds, under the current business model used by the bond-rating agencies, Johnson Electric Corporation must pay the bond-rating agencies to provide the bond rating.
True
fixed payments; debt-to-income ratio
Two approaches banks may use to evaluate a consumer's capacity to handle more debt include the __________ approach and the __________ approach.
Glass-Steagall Act
Under which of the following banking acts were banks forbidden from underwriting almost all stocks and bonds and were banned from selling insurance?
20
Using the debt-to-income ratio approach, a consumer should typically have a ratio of less than _____ to be considered a good credit risk.
NOT decrease the required reserve ratio.
When a central bank wants to pursue a contractionary monetary policy, it should
unit of account.
When a coffee shop lists a tall coffee on its menu at $2.95, the coffee shop is using money as a
financial accelerator.
When a negative shock to the economy is intensified by worsening financial market conditions, it is referred to as a(n)
regulatory capture.
When bankers are in control of the regulatory agencies to the point that regulations are enforced in ways favorable to the banks, it is known as
increase; increasing
When the Federal Reserve makes a loan at the discount window to a bank, it will __________ the monetary base by __________ bank reserves.
stagflation.
When the economy simultaneously experiences growing unemployment and rising rates of inflation, it is called
NOT typically increase taxes to generate more revenue.
When the federal government runs a budget deficit, or spends more than they take in, they
hat it requires perfect foresight on the part of the Federal Reserve because of the lagged impact of monetary policy instruments.
When the link between M1, M2, and inflation broke down in the 1980s, many economists argued that the best policy approach was to have an explicit inflation target. The biggest problem with an explicit inflation target is
worse; increased
When the price level falls, indebted persons will be __________ off because the real value of their debt will have __________.
Easily divisible, physically durable, and easy to carry around
Which of the following characteristics would make a commodity a good candidate to function as money?
The Federal Reserve
Which of the following is NOT a supplier of financial instruments in the primary market?
Demand deposits and other checkable deposits
Which of the following is included in the M1 definition of the money supply?
Cash
Which of the following is the most liquid of a bank's assets?
NOT The interest rates paid on negotiable CDs are determined solely by the issuing bank.
Which of the following statements about negotiable certificates of deposit (CDs) is true?
Which of the following events brought an end to the gold standard?
World War I
Money market instruments offer a higher yield than leaving funds on deposit at a commercial bank.
XYZ Corporation is trying to decide whether it should buy money market instruments or leave its funds on deposit at a commercial bank. Which of the following is an advantage of buying money market instruments over leaving funds on deposit at a commercial bank that XYZ should be aware of?
term premium
You are having a conversation with your friend Belinda about the upward-sloping yield curve that currently exists in the bond market. She explains this to you by saying that the upward slope to the yield curve is because longer-term bonds are less desirable than shorter-term bonds so that the issuers of longer term bonds must offer a higher interest rate as an incentive to attract buyers. Her observation means that she is a proponent of the __________ theory of interest rates.
pure expectations
You are having a conversation with your friend Yvonne about the upward-sloping yield curve that currently exists in the bond market. She explains this to you by saying that the upward slope to the yield curve is because the market expects future interest rates to be higher than current interest rates. Her observation means that she is a proponent of the __________ theory of interest rates.
$9,628
You own a 10-year, $10,000 US Treasury bond with a coupon rate of 3%. There are two years left to maturity, and you are planning to sell the bond in the secondary market. If the interest rate is 5%, how much can you expect to get for the bond?
John Maynard Keynes
__________ proposed the aggregate supply/aggregate demand framework to explain what was happening in the economy during the Great Depression.
Finance companies; mutual funds; private equity partnerships
__________, __________, and __________ are part of the "shadow banking industry."
False
An increase in the price of bonds will cause a decrease in the demand for bonds. t/f
hedge exchange rate risk.
Banks will often use derivative contracts to
government-sponsored deposit insurance.
Because a bank's depositors also suffer from asymmetric information in that it is difficult for them to know if a bank is being run well, the US government created
many kinds of borrowers.
Bonds are issued by
How did most Savings & Loans begin?
Building & Loan associations
the monetary base will increase but bank reserves will stay the same.
If Claire were to sell a US Treasury security to the Federal Reserve in the secondary market, receiving a check from the Fed as payment, and then cash the check at her bank and hold onto the cash, then
interest
One of the most important prices determined in financial markets is the __________ rate.
Federal Housing Administration.
One of the things that made the Savings & Loans eager to lend money for home mortgages was the existence of the
T
One thing a bank can do if it faces a liquidity crisis is to sell off some of its Treasury bills.
Not Federal funds borrowing
Overnight bank borrowing from the Federal Reserve is known as
Randolph & Chase Electronics has just declared an initial public offering (IPO). This means that
Randolph & Chase will be selling its shares in the primary market to the public for the first time.
interest on checking accounts.
Regulation Q, part of the Banking Act of 1933, prohibited banks from paying
nontransaction
Savings accounts and certificates of deposit are commonly referred to as __________ accounts.
secondary bond
Shareen buys a 30-year, $10,000 US Treasury bond with a coupon rate of 5%. After two years she needs some cash so she decides to sell her bond. Shareen will sell her bond in the __________ market.
$94.26
Shonda says that she would need to earn 3% interest in order to lend you money which you will pay back in two years. This implies that for Shonda the present value of $100 to be received two years from today is
the Federal Reserve, the European Central Bank, and the Bank of England.
Some of the most important central banks in the world include
a high and rising price level and little economic growth with high unemployment.
Stagflation is an economic condition where an economy is experiencing
upward-sloping
Suppose that the interest rate on a one-year bond is currently 3% and the market believes that the rate on a one-year bond one year from now will be 5%. If you follow the pure expectations theory of interest rates, then you would expect to see a(n) __________ yield curve.
False
The Bernanke Rule is a formula to help the Federal Reserve conduct monetary policy to achieve a target federal funds rate.
less expensive
The FDIC prefers to use the purchase and assume strategy to deal with a failed bank rather than the pay off and liquidate approach because it is typically
False
The Federal Reserve is part of the US Treasury.
NOT a department of the executive branch of government.
The Federal Reserve operates as
Panic of 1907.
The Federal Reserve was created largely in response to the
True
The Federal Reserve's largest asset is its holdings of securities.
branching across state lines.
The McFadden Act of 1927 was passed to prohibit federally chartered banks from
False (pIERPONT MORGAN)
The Panic of 1907 was essentially ended by one person, John D. Rockefeller.
jump in depository institution deposits; liability
The biggest change in the Federal Reserve's balance sheet between May 2007 and March 2013 was the __________ on the __________ side of the balance sheet.
the operations of the Fed, commercial bank regulation, and monetary policy.
The board of governors of the Federal Reserve has three primary responsibilities, which are
adverse selection.
The bond rating system, in which companies like Moody's and Standard & Poor's provide ratings for a company's default risk, is one way to deal with
the business of asset transformation.
The business of banking can be described as
a liquidity mismatch with savers desiring liquidity and borrowers desiring illiquid loans.
The business of banking solves the problem of
1.5%
The central bank of Elousia has an inflation target of 1.5%. In the current year, a shock has lowered the inflation rate to 1.0%. Following the shock, firms and households can expect an inflation rate of
2
The central bank of Substantia uses a price level target to conduct monetary policy. In the current year, a shock has lowered the inflation rate from 1.5% to 1.0%. Following the shock, firms and households can expect an inflation rate of
original amount of money borrowed by the bond issuer.
The face value of a bond is the
NOT gross interest expense.
The income generated from federal funds sold is counted on a bank's income statement as
a better flow of information.
The key to solving the adverse selection problem that banks face hinges on
15%
The lending or extension of credit to a single entity is limited to _____ of a bank's combined capital and reserves on an unsecured loan.
transaction deposit accounts.
The liquid bank accounts most often used by accountholders to transfer funds to other parties are known as
False
The market for bonds is a subset of the market for loanable funds.
True
The money supply multiplier is equal to (1 + k) / (k + rr + re).
open market operations.
The most often used of the Federal Reserve's monetary tools is
NY
The president of which district bank is a permanent member of the Federal Open Market Committee?
True
The primary responsibility of all central banks is monetary policy.
Housing
The rise of Savings & Loans following World War II played a key role in the post-war __________ boom.
decline in the usefulness of the reserve ratio
The rising popularity of ATMs has resulted in a(n) __________ as a tool of monetary policy.
True
The risk of bank losses due to the impact of a natural disaster are known as operational risks.
US Treasury securities, federal agency debt, and privately issued mortgage-backed securities.
The securities that the Federal Reserve holds on its balance sheet include
direct
The supply of bonds is best described as a(n) __________ relationship between the price of bonds and the quantity of bonds supplied, all else equal.
the Pigou effect, Keynes's interest rate effect, and the foreign trade effect.
The three reasons that the economy-wide price level and the level of real GDP move in opposite directions are
fell sharply.
During the Great Recession, the price level in the United States
Capital, Assets, Management, Earnings, Liquidity, and Sensitivity.
Bank regulators use the CAMELS system to provide a standardized assessment of a bank, where CAMELS stands for
False
Bank reserves are a liability to banks.
what to hold in their portfolio of assets.
Banks must weigh the risk versus the return in deciding
3%
Daniella is considering the purchase of a 10-year, $10,000 bond being issued by Disreputable, Inc. The bond offers an interest rate of 5.5%. The rate on a similar US Treasury bond is 2.5%. All else equal, Daniella will be getting a default premium of _____, if she purchases the Disreputable, Inc. bond.
increasing tax rates and selling war bonds.
During World War II, the US government financed the dramatic increase in wartime spending by
only the amount of Treasury bills he wishes to buy.
Ethan is planning to enter a noncompetitive bid for a T-bill next Monday. In order to do so, Ethan will include in his bid
liabilities of the Federal Reserve.
Federal Reserve notes are considered to be
False
Federal government budget surpluses can lead to a "crowding out" effect, which pushes interest rates upward.
Borrowers and Lenders
Financial markets bring together __________ and __________.
Federal Open Market Committee.
Following the Great Depression, the power of the Fed shifted to the
true
For a criminal justice class, you take a field trip to a prison, and while there you notice something curious. Several times you see prisoners exchanging cigarettes for other items, such as a candy bar, a magazine, a soft drink, and so on. In this circumstance, cigarettes could be considered money. t/f
false
For an asset to function as money, it must be easily divisible, easily standardized, easy to carry around, physically attractive, and broadly demanded. T/f
inversely related.
For bank executives, the level of bank capital and the level of executive compensation are
"crowding out," which leads to higher interest rates.
Government deficits can complicate monetary policy because government borrowing can lead to
Maud has a higher rate of time preference than Harold.
Harold would be equally happy with receiving $95 today or $100 one year from today. Harold's friend Maud would be just as happy receiving $90 today or $100 one year from today. Based on this information, which of the following best describes the difference between Harold and Maud?
This will make her more likely to buy municipal bonds because it will increase the difference between the nominal interest rate paid on the bonds and the after-tax interest rate she will receive relative to corporate bonds.
Harper just got a big raise at work, which pushed her from the 15% federal marginal tax bracket to the 25% marginal tax bracket. Which of the following best describes how this might affect her decision to buy municipal bonds?
False
Having to deal with the political process slows the conduct of monetary policy.
compensating balance as a way to mitigate the problem of moral hazard.
Holly goes to her bank to take out a loan, and the bank agrees to the loan on the condition that Holly maintain a balance of $1,000 in her savings account with the bank. This is an example of a bank using a
Secondary market
Jenny has had a portion of stock in an e-commerce company for some time. She is ready to resell her stock. On what market would she do this?
transactions motive, precautionary motive, and speculative motive.
John Maynard Keynes argued that there were three reasons that people demand money. They are the
4.5%
Julia is in the 10% marginal income tax bracket and earned a 4.5% return on the municipal bonds that just matured. The nominal interest rate paid on these bonds was
True
Liquidity is a term that refers to the ease with which one asset can be converted into another.
When purchasing life insurance, who would you expect to have the highest premium?
Middle age smoker
borrow in the federal funds market.
Miserly Bank finds itself short of reserves at the end of the day. One solution to this dilemma would be for Miserly Bank to
anything generally accepted in exchange for goods and services.
Money is generally thought of as
they are issued by only the biggest and safest borrowers.
Money market instruments have a "low level of default risk" because
price stability is a necessary and almost sufficient condition for economic stability.
Nobel Prize-winning economist Joseph Stiglitz has argued that, at the time of the Great Recession, the conduct of monetary policy in the United States focused on six generally accepted principles, including
Given the spotty performance of the bond-rating agencies in sounding the alarm of impending failure among many large borrowers, the Dodd-Frank Act of 2011 created the __________ to oversee the rating agencies.
Office of Credit Ratings
True
One of the Federal Reserve's most used tools of monetary policy is the buying and selling of US government securities in the secondary market.
a lender of last resort.
One of the most important functions of the US Federal Reserve is to serve as
A big advantage to the borrower of a 15-year mortgage loan compared to a 30-year mortgage loan is that
ar less interest will be paid over the life of the loan.
