Money and Banking Exam 2

Government deficits can complicate monetary policy because government borrowing can lead to

"crowding out," which leads to higher interest rates

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?

$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 currency ratio in this economy?

1.33

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

1.5%

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?

1.63

At its inception, the power of the Federal Reserve rested in the

12 independent regional Federal Reserve banks.

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 (#)

2,000,000

Which of the following would be considered an asset on a bank's balance sheet?

A consumer loan

If the public's confidence in the banking system is shaken, it may cause

A run on banks

When the parties to a transaction have different levels of knowledge about each other and/or the nature and implications of the transaction, it is said that there exists __________ information.

Asymmetric

When the Federal Reserve increases the reserve ratio, the impact will be to

Decrease the size of the money multiplier

Which of the following qualifies as a liability to a bank

Demand Deposits

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

Discount rate plus a penalty

The Federal Reserve is part of the US Treasury

False

When central banks were first created, their primary function was to

Finance government spending

Monetization of public debt can lead to a rapid increase in the money supply and hence to

Inflation

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

Inflation of the 1970's

An advantage of inflation rate targeting is

It reduces inflationary expectations

When the Federal Reserve buys US Treasury securities on the open market, it is attempting to

Lower interest rates

Within an economy, money gets created when banks

Make loans

The president of which district bank is a permanent member of the Federal Open Market Committee?

New York

The Federal Reserve was created largely in response to the

Panic of 1907

Overnight bank borrowing from the Federal Reserve is known as

Primary credit

The main responsibility of the Bank of Japan is to use monetary policy to

Pursue price stability

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

Required reserve ratio

By far, the largest asset on the Federal Reserve's balance sheet is

Securities

Currency in circulation plus bank reserves plus US Treasury currency in circulation is referred to as

The monetary base

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?

The monetary base will increase

Damon goes to the ATM machine and withdraws $500 in cash. How will this affect the monetary base?

The monetary base will remain unchanged with the increase in the currency in circulation being exactly offset by a decrease in bank reserves.

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

True

The securities that the Federal Reserve holds on its balance sheet include

US Treasury securities, federal agency debt, and privately issued mortgage-backed securities.

When the currency ratio increases, the impact of changes in the monetary base on the money supply is

Weakened

When the price level falls, indebted persons will be __________ off because the real value of their debt will have __________.

Worse; increased

In Vance's homeowner's insurance policy, it states that he is required to pay out-of-pocket the first $5,000 for any homeowner's insurance claim that he submits before the insurance company will reimburse for any loss. This is an example of using

a deductible to try to mitigate the problem of moral hazard.

The business of banking solves the problem of

a liquidity mismatch with savers desiring liquidity and borrowers desiring illiquid loans.

One of the main reasons that banks exist is to deal with the issues of __________ and __________.

adverse selection; moral hazard

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

an expansion in the money supply that is larger than the size of the one-time deposit

The Federal Reserve operates as

an independent entity

The chair of the Federal Reserve becomes the chair by being

appointed by the president of the United States and confirmed by the US Senate.

An example of asymmetric information in financial markets is that, in banking,

borrowers know more about their capacity to repay loans than lenders

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

compensating balance as a way to mitigate the problem of moral hazard

Monetary policy has the best chance of influencing the level of __________ unemployment

cyclical

In the market for used cars, asymmetric information will tend to

drive the better used cars out of the market

An example of asymmetric information in financial markets is that, in equity markets, directors __________ than shareholders

have a better sense of future profitability

Term auction lending was introduced by the Fed in the early stages of the 2007 financial crisis in order to

increase the amount of liquidity in the financial system

When the Federal Reserve makes a loan at the discount window to a bank, it will __________ the monetary base by __________ bank reserves

increase; increasing

One of the biggest challenges the Federal Reserve faces in conducting monetary policy is the existence of __________ lags

information and impact

When there is a high degree of trust in a country's banking system, the currency ratio will be

low

Harmon opens a new restaurant, which he insures for twice its worth. Knowing his business is insured, Harmon becomes careless in his management of the restaurant, with the result being that he suffers a bad fire which burns down his restaurant. This is an example of

moral hazard.

Following the 2007 financial crisis, the Federal Reserve created the term auction facility (TAF) in order to

overcome the stigma banks experienced from borrowing from the Fed at the discount window in order to add liquidity to financial markets

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

repurchase agreement to provide a short-term boost to the money supply

In a very basic sense, banks perform two functions in society: they __________ and __________.

take deposits; make loans

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

the cost associated with searching for a suitable lender

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 but bank reserves will stay the same

The board of governors of the Federal Reserve has three primary responsibilities, which are

the operations of the Fed, commercial bank regulation, and monetary policy

John Maynard Keynes argued that there were three reasons that people demand money. They are the

transactions motive, precautionary motive, and speculative motive.

Unemployment is not only terribly costly to people who are unemployed but also to society as a whole because

unemployment represents an underutilization of society's available resources