Money & Banking
Information costs
include the costs that savers incur to determine the credit worthiness of borrowers.
The financial system performs the role of communicating information by
incorporating all available information into the prices of financial assets
The Fed does not have to go through the normal congressional appropriations process because
it is self financing.
What is the maximum amount a bank can lend?
its excess reserves
Suppose that the banking system currency has no excess reserves and that a bank receives a deposit into a checking account of $10,000 in currency. If the required reserve ratio is 0.20, what is the maximum amount that the BANKING SYSTEM can lend out?
$40,000
Which of the following is an example of adverse selection?
A man with a bad heart condition buys a large life insurance policy.
Which of the following is NOT considered one of the four groups in the Federal Reserve System?
Federal Deposit Insurance Corporation
The original intention of the Fed's role as lender of last resort was to make loans to banks that were
illiquid, but not insolvent.
The most important economic benefit from specialization is that it
leads to an increase in the standard of living in an economy
If you buy a bond issued by Intel, the bond is a(n):
liability to Intel and an asset to you
Which of the following is the most common goal for central banks of industrialized countries?
low inflation
Dividends are
payments made to stock holders.
If the Fed purchases $1 million worth of securities and the required reserve ratio is 8%, by how much will deposits increase (assuming no change in excess reserves or the public's currency holdings)?
rise by $12.5 million
Hyperinflations are usually caused by large budget deficits financed by
selling bonds to the central bank
Federal Reserve district banks perform all of the following roles EXCEPT
setting the federal funds rate.
Limited liability can best be defined as the legal provision that
shields owners of a corporation from losing more than what they invested in a firm.
A bubble occurs when
the price of a stock is above its fundamental value.
Economies of scale are
the reduction in costs per unit that accompanies an increase in volume.
A key point made by the Gordon-Growth model is that the
value of a stock depends on investor's expectations about the future profitability of a firm.
An open economy is one that
. lends and borrows in the international capital market
If the British pound depreciates against the U.S. dollar,
British consumers lose by an increase in the pound price of U.S. exports to Britain.
How can a global savings glut affect the United States?
It can reduce the world real interest rate, thus encouraging borrowing by Americans
Why might a nation seek to maintain a pegged exchange rate?
It makes business planning easier for firms involved in the global economy.
Which of the following is NOT a primary center of foreign-exchange trading?
Munich
A capital gain occurs when the
Price of an asset increases.
Why has M2 grown more quickly than M1 in recent decades?
The amount of funds in CDs and money market mutual funds shares has grown faster than currency or checking deposits.
Which of the following will take place in the foreign exchange market if there is an increase in the demand for products made in the United States?
The demand for dollars will increase.
If foreign interest rates rise
The demand for domestic currency falls, causing it to depreciate
In what way is a stronger yen/weaker dollar a burden for Japanese exporters?
They received dollars when they sell goods but most of their costs of production are in yen.
A debt instrument represents
a promise by a borrower to repay principal plus interest to a lender
Credit rationing refers to
a restriction in the availability of credit.
If money is declared to be legal tender, it must be
accepted to settle private transactions and it must be used in paying taxes
The monetary base is equal to
all currency in circulation plus reserves held by banks.
The efficient markets hypothesis implies that stock investments should have the same expected return after adjusting for
all of the above
The supply curve for loanable funds would decline due to
an increase in expected inflation
The demand curve for bonds would be shifted to the left by
an increase in expected returns on other assets
When it takes more euros to purchase a dollar, the dollars is said to have:
appreciated
Collateral is
assets pledged to the bank in the event the borrower defaults.
Sovereign debt refers to
bonds issued by the government.
A bank lending depositors' money to a local business and a pension fund investing contributions in shares of a company are similar financial activities in that
both involve funds being channeled from savers to borrowers through financial intermediaries
If the Fed purchases $50,000 in T-bills from a bank, by how much will the bank's excess reserves increase?
by $50,000
How is the interest rate that prevails in the bond market determined?
by the demand for and supply of bonds
What happened to consumer prices as measured by the CPI between 1929 and 1933?
declined by about 25%
Bank borrowing from the Fed is referred to as:
discount loans
Short-term loans between banks are called
federal funds.
Interest-rate risk can best be characterized as the risk that
fluctuations in the price of a financial asset in response to changes in market interest rates.
Which of the following will lead to a higher interest rate on a loan?
increased perceived risk of default
Which of the following things do banks do with the funds they acquire from savers?
make loans to individuals
The main argument in favor of Fed independence is that
monetary policy is too important and too technical to be determined in the political arena.
Money is a medium of exchange in that
money is generally accepted for buying and selling goods and services
In an open economy, desired domestic lending
must equal desired domestic borrowing plus the amount of international lending
Crowd funding can best be described as:
raising small amounts of money from large numbers of people
Risk that is common to all assets of a certain type is referred to as
systematic risk
In the United States, the lender of last resort is
the Federal Reserve
Transactions costs are
the costs of direct financial transactions.
Bank capital is equal to
the difference between the value of the bank's assets and the value of its liabilities.
International capital mobility refers to
the ease with which investors move funds among international financial markets.
When market participants have rational expectations,
they use all information available to them.
Financial intermediaries emerged
to reduce transactions costs for small savers and borrowers
Congress created the Federal Reserve System
to serve as a lender of last resort
