WEEK 12 STUDY

Banks that engage in riskier lending activities may reduce their odds of facing a bank run if they

keep more of their assets in reserves.

A contractionary or tight monetary policy

reduces borrowing.

The proportion of deposits that banks are legally required to maintain either on hand or in their accounts with the central bank are called

reserve requirements.

If the Fed increases the discount rate, then

reserves will decrease in the banking system.

Which of the following scenarios would be MOST profitable for a bank?

Kim and Micah decide to move most of their money from a checking account into a savings account.

Moral hazard is associated with which of the following Federal Reserve bank functions?

Lender of last resort

A critical function of the private banking system is ________?

Linking savers and borrowers.

Which of the following aptly describes the mission of the Federal Reserve Bank?

To provide banking services to commercial banks.

In the scenario where the Central Bank creates policies which increase the money supply, it is following what type of monetary policy?

An expansionary policy.

Financial contagion may result in lost integrity in the entire financial system. To prevent this from happening, the Fed may

act as the lender of last resort to make short-term emergency loans to member banks, as needed.

If the Fed lowers the reserve requirement, then the results will be

an increase the availability of credit.

Banks USA consistently makes risky loans to small businesses. When a recession hits, Banks USA faces

an increased probability of facing a bank run by depositors.

The banking system enhances the workings of the economy because without a banking system,

businesses would find it more difficult to acquire the financial resources necessary to purchase economic capital.

In the 1980s the Federal Reserve had the goal of increasing the interest rate and decreasing the money supply. To implement its goal the Fed used a ________ monetary policy.

contractionary

During the latter half of the 20th century, the Federal Reserve typically reacted to higher inflation with a/an

contractionary monetary policy and a higher interest rate.

An open market purchase of U.S. Treasury bonds by the central bank will ________ credit conditions for private firms.

ease

When the interest rate in an economy decreases, it is likely the result of either a/an ________ or a/an ________.

expansionary policy; open market purchase of securities by the Fed.

Which of the following is NOT an important role of the Federal Reserve Bank?

generating profits

Quantitative easing can be described as a means of

improving credit conditions for private firms and encouraging them to commit to capital expansion projects.

In order to ________ the money supply, the Federal Reserve should ________ bonds in open market operations.

increase; buy

Bank regulation requires that banks

maintain a minimum net worth in order to protect depositors and creditors.

A bank is more likely to face bank runs by depositors if it

makes risky loans to investors.

The Fed's efforts to manage interest rates and thus the availability of credit is known as

monetary policy

When the supply of loanable funds shifts its position to the left, interest rates will ________ because loanable funds will be ________.

rise; more scarce

If the Fed wants to decrease the quantity of money in the economy, it can

sell bonds.

An open market operation decreases the money supply when the Federal Reserve

sells bonds to banks, which decreases bank reserves.

Quantitative easing undertaken after 2008 was deemed to be necessary because ________.

short-term interest rates had already been driven down to zero and could not go lower.

If the Fed ultimately wants to lower interest rates in the economy, then it should

lower the discount rate.

Which of the following is an inaccurate statement about the banking system?

Competition between private banks and the central bank is what limits interest rates

If the central bank raises the reserve requirement on deposits

the money supply decreases and interest rates increase.

When the central bank decides it will buy bonds using open market operations

the money supply increases.

Ultimately, the Federal Reserve ensures that ________.

there will always be sufficient loanable funds for investors to tap for economic growth generating activities

If the reserve requirement is 10 percent and a monetary expansion increases reserves by $5 million, the total change in the money supply after all rounds of lending are completed is:

$50 million

How many regional Federal Reserve banks are there in the U.S. who primarily support banks and the economy within their respective districts?

12

Which of the following accurately describes the banking system?

Banks put a fraction of their deposits in reserves and then loan out or invest the rest.

What tool might the Fed use to boost the economy during a recession?

Buying U.S. Treasury securities

Ceteris paribus, a reduction in the federal funds rate affects car loan rates in the following manner

Car loan rates will decrease.

Why are banks susceptible to potential bank runs?

Since banks keep only a fraction of their deposits on hand as reserves, a much higher customer demand to withdraw funds in a short period of time may be impossible to manage.

The ________ is responsible for monitoring the money supply, credit conditions, and the general stability and safety of the U.S. banking system.

The Federal Reserve

What would economic conditions potentially be like in the U.S if the Federal Reserve did not regulate monetary policy, monitor banks, and provide services for banks?

The economy would be less efficient and transactions would most likely be more costly.

What is the reasoning behind having the seven Fed Board of Governors remain for 14 years on the Federal Reserve?

The longer terms are to insulate the members from immediate political pressures and have them focus solely on economic solutions for the nation.

Say that Fed policy requires all banks to hold 8% of deposits in reserves. If banks currently hold no excess reserves and the Fed increases the reserve requirement to 10%, what will be the result?

The money supply in the economy decreases.

What happens to the money supply if the Fed lowers the discount rate?

The money supply increases

What will happen to the money supply if the Fed increases the reserve requirement?

The money supply will decrease.

Which of the following actions by the Fed will increase the money supply?

decreasing the reserve requirement or buying Treasury bonds.

The interest rate charged by the central bank when it makes loans to commercial banks is called the

discount rate

A bank holding just over the minimum level of cash reserves with a high volume of loans made to developing countries and a large share of assets in the form of loans to more stable domestic industries and households should receive________.

increased scrutiny by bank regulators

The main risk of quantitative easing is ________.

inflation

When a Central Bank such as the Fed decides to make a policy intervention it must be mindful of the trade off between

inflation and unemployment.

The Federal Reserve's monetary policy tools include all the following EXCEPT

printing money.

Quantitative easing undertaken after 2008 is different from traditional central bank intervention in that it focused on

purchasing long-term government securities to encourage long-term capital projects and ease mortgage conditions.

Which of the following is NOT an important role of the Federal Reserve?

supervising macroeconomic policies outside the U.S.

Since the 1930s, bank runs have not been problematic in the United States because

the FDIC provides deposit insurance and guarantees that depositors will receive their money up to a maximum of $250,000.

If a macroeconomy experiences an increase in the money supply and an increase in aggregate demand, what monetary policy is the Central Bank following?

An expansionary monetary policy.

In the scenario where the Central Bank conducts an open market purchase of government securities, it is following what type of monetary policy?

An expansionary policy.

Read through the following scenarios and select the one that would most likely compel the Fed to lower the discount rate.

For the last three months there has been a decline in the federal funds market which triggered interest rates dipping below the discount rate.

How does a person get to become a member of the Fed's Board of Governors?

They are appointed by the president and approved by the Senate.

During the early 1980s, the economy was coming out of a recession and unemployment was high. In an effort to fix this, the Fed followed a path of

expansionary monetary policy and lowered interest rates.

If the Central Bank observes aggregate demand weakening it will undertake

expansionary monetary policy.

If the Fed wants to increase the quantity of money in the economy, it can

lower the reserve requirement.

A decision by the Federal Reserve to change reserve requirements for banks is an example of:

monetary policy.

If the Fed raises reserves requirements, then interest rates will ________ and the money supply will ________.

rise; fall

Bank supervision consists mostly of

setting minimum reserve requirements, ensuring bank net worth remains positive, and setting restrictions on investments.