Quiz Ch 12 and 13

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Which of the following is associated with asymmetric information in a financial​ crisis?

ALL 1.Moral hazard could occur when only borrowers know if the funds will be used to finance​ high-risk activities. 2.There is a lack of information about one or more of the parties involved in a transaction. 3.Adverse selection can occur if lenders must select from a pool of bad credit risks

If uncertainty about​ banks' health causes depositors to begin to withdraw their funds from​ banks, the country experiences​ a(n)

banking crisis.

When a fire sale​ occurs,

banks may become insolvent.

The teal book is the Fed research document containing

both A and B A.the forecast of national economic variables for the next three years B.forecasts of the money aggregates conditional on different monetary policy stances.

The political business cycle refers to the phenomenon that just before​ elections, politicians enact​ ________ policies. After the​ elections, the bad effects of these policies​ (for example,​ ________ ) have to be counteracted with​ ________ policies

expansionary; a higher inflation​ rate; contractionary

The interest rate on overnight loans from one bank to another is the _____. ________________are the most important policy tool the Fed has for controlling the money supply.

federal funds rate; Open market operations

The ability of a central bank to set monetary policy goals is

goal independence.

The trend in recent years is that more and more governments

have been granting greater independence to their central banks

The growth of the subprime mortgage market led to

increased demand for houses and helped fuel the boom in housing prices.

The new Consumer Financial Protection Bureau is an independent agency but is funded and housed within

the Federal Reserve.

Prior to​ 1980, member banks left the Federal Reserve System due to

the high cost of required reserves.

Recent research indicates that inflation performance​ (low inflation) has been found to be best in countries with

the most independent central banks.

One suggested method of reducing excessive −taking by SIFIs is to require them to hold​ ________ capital when credit is expanding rapidly and​ ________ capital when credit is contracting.

​more; less

Which of the following does not cause a reduction in the net worth of the borrowing firm in a loan​ market?

an unanticipated increase in the price level that reduces the value of the firm's liabilities.

The​ ________, the difference between the interest rate on Baa corporate bonds and U.S. Treasury bonds. rose sharply during the Great Depression

. credit spread

How does an unanticipated decline in the price level cause a drop in​ lending?

A decline in the price level raises the real value of borrowing​ firms' liabilities while lowering the​ firms' real net worth

Why is the shadow banking system an important part of the​ 2007-2009 financial​ crisis?

A decrease of funding from the shadow banking system caused a restriction of lending and a decline in economic activity.

The oldest central​ bank, having been founded in​ 1694, is the

Bank of England.

Which of the following is NOT a reason why bank failures worsen financial​ crises?

Bank panics reduce the amount of asymmetric​ information, which makes it more difficult to lend funds

Why were consumer protection provisions included in the​ Dodd-Frank bill, a bill designed to strengthen the financial​ system?

Consumer protection will avert future financial problems in the housing market.

​'A general increase in uncertainty as a result of a failure of a major financial institution makes it easier to separate good credit from bad​ credit, which can lead to a reduction in adverse selection and moral hazard​ problems.' Is this statement true or​ false?

False

The Federal Reserve entity that makes decisions regarding the conduct of open market operations is the

Federal Open Market Committee.

Choose the components of the shadow banking system. ​(Check all that​ apply.)

Money market funds. Hedge funds Investment banks.

The Federal Reserve Bank of​ ________ houses the open market desk.

New York

Which of the following functions is not performed by any of the twelve regional Federal Reserve​ Banks?

Setting interest rates payable on time deposits

Which of the following is a duty of the Board of Governors of the Federal Reserve​ System?

Setting margin​ requirements, the fraction of the purchase price of the securities that has to be paid for with cash.

Which of the following is NOT a​ principal-agent problem resulting from the originate-to-distribute business​ model?

Since mortgage brokers do not intend to hold the mortgage loans they​ make, they take extra care to gather as much information as possible about the borrower.

Which of the following is an entity of the Federal Reserve​ System?

The FOMC

The Depository Institutions Deregulation and Monetary Control Act of 1980

established uniform reserve requirements for all banks

Which of the following is a correct statement about the​ Dodd-Frank Act of​ 2010?

The​ Dodd-Frank Act created a new independent —the Consumer Financial Protection Bureau—that is funded and housed within the Federal Reserve.

When the risk that some banks might fail​ increases, depositors may not have enough information to determine whether their bank is a good one or one of the banks at greater risk to fail. Depositors have an incentive to withdraw their deposits before the bank runs out of funds. If this becomes a widespread​ occurrence, it is known​ as:

a bank panic.

The financial panic of 1907 resulted in such widespread bank failures and substantial losses to depositors that the American public finally became convinced that

a central bank was needed to prevent future panics.

A substantial decrease in the aggregate price level that reduces​ firms' net worth may stall a recovery from a recession. This process is called

debt deflation


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