Exam 2 Quiz Questions Szarka-Lock Haven
equities
A limitation on US banks is the prohibition from holding __________ in their asset portfolios.
ARM
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)
a secondary mortgage 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
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
may reserve the right to require seven days' notice prior to making a withdrawal
A potentially important difference between NOW accounts and demand deposits is that NOW accounts
consumer loans
Among the assets on a bank's balance sheet are
it reduces inflationary expectations
An advantage of inflation rate targeting is
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
12 independent regional Federal Reserve banks
At its inception, the power of the Federal Reserve rested in the
discount rate plus a penalty
Banks that have some financial difficulty and borrow from the Federal Reserve in what is known as secondary credit will pay an interest rate equal to the
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
securities
By far, the largest asset on the Federal Reserve's balance sheet is
deposits
By far, the largest liability on the banking system's balance sheet is
point D with a decrease in the interest rate and an increase in the amount of loanable funds borrowed and lent
Consider the figure above. The initial equilibrium in the loanable funds market in Etopia is at A when the banks in Etopia begin to see an upsurge in deposits. This upsurge in bank deposits will result in a new equilibrium at
1.33
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?
$75 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 required reserves for this economy?
1.63
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 money multiplier for this economy?
the monetary base
Currency in circulation plus bank reserves plus US Treasury currency in circulation is referred to as
The monetary base will remain unchanged with the increase in the currency in circulation being exactly offset by a decrease in bank reserves.
Damon goes to the ATM machine and withdraws $500 in cash. How will this affect the monetary base?
overcome the stigma banks experienced from borrowing from the Fed at the discount window in order to add liquidity to financial markets
Following the 2007 financial crisis, the Federal Reserve created the term auction facility (TAF) in order to
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
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
Building & Loan associations
How did most Savings & Loans begin?
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
The monetary base will increase
If the US Treasury engages in a foreign exchange intervention to lower the value of the dollar relative to the euro by having the Federal Reserve sell dollars and buy euros in the foreign market, how will this affect the monetary base?
a run on banks
If the public's confidence in the banking system is shaken, it may cause
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
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
the supply of loanable funds to increase to S', causing the equilibrium interest rate to fall to IR3
In Figure 9-1, the loanable funds market is in equilibrium at A with the interest rate IR1. In conducting monetary policy, the Federal Reserve engages in the buying of US Treasury securities on the open market, which causes
reducing systemic risk; increasing moral hazard
In the too big to fail policy, there is an inherent tension between __________ and __________.
transactions motive, precautionary motive, and speculative motive
John Maynard Keynes argued that there were three reasons that people demand money. They are the
allows them to meet the cash needs of their depositers
Liquidity is important to banks because it
cyclical
Monetary policy has the best chance of influencing the level of __________ unemployment.
inflation
Monetization of public debt can lead to a rapid increase in the money supply and hence to
no documentation home mortgages
Mortgages for which lenders did not verify the income or assets of the borrowers were known as
mortgage-backed securities
Mortgages that are pooled together and sold to investors are known as
information and impact
One of the biggest challenges the Federal Reserve faces in conducting monetary policy is the existence of __________ lags.
neglect the goal of stable prices
One of the concerns about the Federal Reserve targeting high employment is that it might
primary credit.
Overnight bank borrowing from the Federal Reserve is known as
interest on checking accounts
Regulation Q, part of the Banking Act of 1933, prohibited banks from paying
1.5%.
Suppose the current real federal funds rate in the economy is 2.0%, the current inflation rate is 1.0%, the Federal Reserve's target inflation rate is 2.0%, and the output gap is -2.0%. According to the Taylor Rule, the Federal Reserve's target federal funds rate should be
increase the amount of liquidity in the financial system
Term auction lending was introduced by the Fed in the early stages of the 2007 financial crisis in order to
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.
repurchase agreement to provide a short-term boost to the money supply
The Federal Reserve notices an increase in the public's desire to hold cash and fears that it may cause an increase in interest rates. To keep interest rates steady, the Federal Reserve would likely execute a
an independent entity
The Federal Reserve operates as
Panic of 1907
The Federal Reserve was created largely in response to the
Basel Accords
The __________ attempt to set international standards for bank capital.
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
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
systemic
The idea that the failure of one megabank could result in the collapse of the entire financial system is known as __________ risk.
pursue price stability
The main responsibility of the Bank of Japan is to use monetary policy to
New York
The president of which district bank is a permanent member of the Federal Open Market Committee?
a bank charter may be obtained from either the national or the state/provincial government
The principal characteristic of a dual banking system is that
limit competition between banks
The purpose behind Regulation Q was to
US Treasury securities, federal agency debt, and privately issued mortgage-backed securities
The securities that the Federal Reserve holds on its balance sheet include
Federal National Mortgage Association (FNMA)
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
inflation of the 1970s
Those who argue against the pursuit of the dual objectives of stable prices and high employment point to the __________ as evidence that the pursuit of dual objectives is misguided.
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?
unemployment represents an underutilization of society's available resources.
Unemployment is not only terribly costly to people who are unemployed but also to society as a whole because
Resolution Trust Corporation
What government agency was in charge of liquidating insolvent thrift institutions and selling off the assets of the failed institutions?
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
finance government spending
When central banks were first created, their primary function was to
lower interest rates
When the Federal Reserve buys US Treasury securities on the open market, it is attempting to
decrease the size of the money multiplier
When the Federal Reserve increases the reserve ratio, the impact will be to
increase; increasing
When the Federal Reserve makes a loan at the discount window to a bank, it will __________ the monetary base by __________ bank reserves.
weakened
When the currency ratio increases, the impact of changes in the monetary base on the money supply is
worse; increased
When the price level falls, indebted persons will be __________ off because the real value of their debt will have __________.
low
When there is a high degree of trust in a country's banking system, the currency ratio will be
Demand deposits
Which of the following qualifies as a liability to a bank?
A consumer loan
Which of the following would be considered an asset on a bank's balance sheet?
Retailers
Who created the first finance companies?
make loans
Within an economy, money gets created when banks
offers a minimal rate of return
Banks want to hold as little cash as possible because holding cash
Regulation Q
For much of US history, banks have been limited in how much they could pay in interest on deposits by
regulator shopping
Having multiple entities responsible for issuing bank charters in the United States has given rise to the problem of
Zombie institutions had to pay high interest rates to attract savers, forcing healthy institutions to raise their rates as well
How did zombie institutions infect healthy institutions?
$2,000,000
If the required reserve ratio is 5%, an initial demand deposit made in a bank of $100,000 can result in an expansion in the money supply of
Federal Home Loan Mortgage Corporation (Freddie Mac)
In order to be able to create mortgage pools with conventional loans as Fannie Mae did with FHA and VA loans, in 1970 Congress created the
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
subprime
Loans that are made to borrowers with substandard qualifications are referred to as __________ mortgage loans
$250,000
The FDIC insures deposits up to
Community Reinvestment
The banking legislation that requires that banks that want to merge or expand their branches must demonstrate that they are lending and providing financial services to people across their geographical area is called the __________ Act.