CH 15 HW/ Quiz
HW
20
quizzzz
20qs
Bad drivers are more likely to purchase auto insurance than good drivers. this is an example of
Adverse selection
What backs up the value of U.S. dollars?
Faith that the dollars represent command over goods and services.
Which of the following would reduce the money multiplier?
Increases in the required reserve ratio
M2 money
M1 plus savings accounts, money market accounts, and other near monies
Paul needs to decide between buying a big screen TV for $1,800 or being able to go on a Canadian vacation for $1,000 and still having enough left over to buy a small screen TV for $800. Paul opts for the small screen TV and the Canadian vacation. Paul has used money in what ways in making his decision?
Medium of exchange and a standard unit of account.
Which of the following events caused Congress to begin seriously looking at setting up the Federal Reserve system?
Some severe banking crises at the end of the 19th century and early 20th century.
The reserve requirement is 10%. Suppose that the Fed purchases $200,000 worth of U.S. government securities from a bond dealer, electronically crediting the dealer's deposit account at Reliable Bank. Which of the following correctly describes the immediate effect of this transaction on the money supply?
The money supply increases by $200,000.
Total Assets
Total reserves + loans + securities + other assets -$ ____ Thus, the sum of total liabilities and net worth equals $____million.
Which of the following assets is the least liquid?
a house A house is the least liquid since it takes a longer time to convert into money, and there are larger transaction costs in selling a house compared to the other listed assets.
The potential for a financial breakdown at large institutions to spread throughout the financial system is called
a systemic risk.
The Fed acts like a government agency when it
acts as a lender of the last resort
An individual with several children who has just learned that she has lung cancer applies for life insurance but fails to report this recent medical diagnosis. This situation poses
an adverse selection problem
Which of the following is NOT a reason that people tend to deposit their funds with banks rather than lend their funds directly to other individuals?
asset aversion problems
The financial intermediary with liabilities of shares and checkable deposits and assets that include consumer debt and long term mortgage loans is a
credit union These are the liabilities and assets of a credit union.
The Fed acts like a private banking institution when it
holds depository institutions reserves
Savings banks review loan applications to determine which of the potential borrowers carry high risk of default. This is an attempt to
limit adverse selection
The Fed acts like a private banking institution when it
provides payment - clearing services to depository institutions.
Which of the following is NOT a function of the Federal Reserve System?
regulating the money supply?
All of the following are examples of financial intermediaries EXCEPT
stock exchanges?
total liabilities and net worth
total liabilities/net worth
liabilities
what a company owes
Consider a bank balance sheet, with "Assets" on the left and "Liabilities" on the right side. Identify where the following items belong. I. U.S. Treasury bonds. II. Small minus denomination time deposits.
I: liabilities; II: assets.
ex problem
A bank has $269 million in total reserves, of which $11 million are excess reserves. The bank currently has $3 ,590 million in loans, $ 988 million in securities, and $150 million in other assets. The required reserve ratio for transactions deposits is 9%. In a bank's balance sheet, total assets equals total liabilities and net worth. In this case, we know how to calculate the bank's total assets. total assets = total reserves + loans + securities + other assets= $___ (269+ 3,590+ 988+ 150 = 4,997) Thus, the sum of total liabilities(what a company owes) and net worth(Assets - Liabilities) = $____million (4,997)
The U.S. currency is WHAT of the Federal Reserve System
A liability
During the 1945-1946 Hungarian hyperinflation, when the rate of inflation reached 41.9 quadrillion percent per month, the Hungarian government discovered that the real value of its tax receipts was falling dramatically. To keep real tax revenues more stable, it created a good called a "tax pengö", in which all bank deposits were denominated for purposes of taxation. Nevertheless, payments for goods and services were made only in terms of the regular Hungarian currency, whose value tended to fall rapidly even though the value of a tax pengö remained stable. Prices were also quoted only in terms of the regular currency. Lenders, however, began denominating loan payments in terms of tax pengös. The tax pengö functioned as money in Hungary in 1945 and 1946
A store of value
A credit card is not considered money because
All of the above: it is not a unit of accounting, it simply defers rather than completes transactions that ultimately involve the use of money, and it is not a store of value The use of a credit card initiates a new loan and creates a new debt. It does not decrease one's debt. The card itself is not exchanged, therefore credit cards are not a medium of exchange. Finally, a credit card is a piece of plastic that facilitates the loan process, it is not an asset. It has no possibility of increasing in value.
asset
Anything of value that is owned
Net Worth Formula
Assets - Liabilities = Net Worth
pt 2
The additional amount of loans this bank can make is equal to its excess reserves. In this case, the bank is holding its legally required reserves and some excess reserves. When a bank holds excess reserves, it does so because it enables them to make quick loans. A bank usually lends out all its excess reserves to earn interest income. total reserves - required reserves= excess reserve (269-258=11) Thus, the additional loans equal $11 million, the amount of the excess reserves. Transaction deposits = fraction in phone pictures
Which of the following is a major reason why financial intermediaries, such as banks, exist?
The existence of asymmetric information makes financial intermediaries more efficient in channelling money to its most efficient use. The bank has better information than what an individual possesses when dealing with loans to other firms. This reduces the risk to the household or individual.
A corporation that recently obtained a loan from several banks to finance installation of a new computer network instead directs some of the funds to executive bonuses. This situation poses
a moral hazard problem
Consider each of the following events in the financial markets:
...
A manager of a savings and loan association responds to reports of a likely increase in federal deposit insurance coverage. She directs loan officers to extend mortgage loans to less creditworthy borrowers. This situation poses a moral hazard problem. A loan applicant does not mention that a legal judgment in his divorce case will require him to make alimony payments to his ex-wife. This situation poses an adverse selection problem. An individual who was recently approved for a loan to start a new business decides to use some of the funds to take a Hawaiian vacation. This situation poses a moral hazard problem.
....
A $1,000 balance in a transactions deposit at a mutual savings bank. This item is counted in both M1 and M2 . A $100,000 certificate of deposit issued by a New York bank. This item is counted in neither M1 nor M2 . A $10,000 time deposit an elderly widow holds at her credit union. This item is counted in M2 only . A $50 traveler's check. This item is counted in both M1 and M2 . A $50,000 money market deposit account balance. This item is counted in M2 only
....
Consider each of the following events in the financial markets: A manager of a savings and loan association responds to reports of a likely increase in federal deposit insurance coverage. She directs loan officers to extend mortgage loans to less creditworthy borrowers. This situation poses a moral hazard problem . A loan applicant does not mention that a legal judgment in his divorce case will require him to make alimony payments to his ex-wife. This situation poses an adverse selection problem . An individual who was recently approved for a loan to start a new business decides to use some of the funds to take a Hawaiian vacation. This situation poses a moral hazard problem
.....
The Federal Reserve purchases $8 million in U.S. Treasury bonds from a bond dealer, and the dealer's bank credits the dealer's account. The required reserve ratio is 19 percent, and the bank typically lends any excess reserves immediately. Assuming that no currency leakage occurs, calculate how much will the bank be able to lend to its customers following the Fed's purchase. $
.19 X $8= 1.52 $8- 1.52= $6.48
As of 2017, the FDIC insured deposit accounts up to which of the following amounts?
100,000
A bank has $118 million in total assets, which are composed of legal reserves, loans, and securities. Its only liabilities are $118 million in transactions deposits. The bank exactly satisfies its reserve requirement, and its total legal reserves equal $5 million. Calculate the required reserve ratio.
5/118 X 100=4%
M1
M1 = currency + transaction deposits + travelers checks outside banks and thrifts =687 +10 +1,000
The initial impact of the Fed's open market sale of government securities by the Federal Reserve is
a reduction of the commercial banking system's reserve deposits at the Fed.
A state-chartered financial institution exempt from laws requiring it to have federal deposit insurance decides to apply for deposit insurance after experiencing severe financial problems that may bankrupt the institution. This situation poses
an adverse selection problem
M1 formula
currency + checkable deposits
reserves
deposits that banks have received but have not loaned out
Obviously financial intermediaries need to collect money from a variety of sources so they can redirect it where it can be used efficiently. The primary source of funds for a financial intermediary are known as its
liabilities Liabilities are the funds that financial intermediaries collect. They owe this money back to the households and businesses that place their money in the institution.
Consider the following events: Insurance companies offer safe driver discounts to encourage insured individuals to drive safely. This is an attempt to
limit moral hazard
The ability to quickly convert an asset into cash is
liquidity
Pension funds tend to combine the retirement funds of many future retirees to
lower management costs
Until 1946, residents of the island of Yap used large doughnut-shaped stones as financial assets. Although prices of goods and services were not quoted in terms of the stones, the stones were often used in exchange for particularly large purchases, such as payments for livestock. To make the transaction, several individuals would place a large stick through a stone's center and carry it to its new owner. A stone was difficult for any one person to steal, so an owner typically would lean it against the side of his or her home as a sign to others of accumulated purchasing power that would hold value for later use in exchange. Loans would often be repaid using the stones. These stones performed the following functions of money
medium of exchange, store of value, and standard of deferred payment functions of money.
Thrift institutions include
receive most of their funds from the public's savings deposits. savings and loan associations, mutual savings banks, and credit unions
excess reserves
reserves that banks hold over and above the legal requirement
During the 1945-1946 Hungarian hyperinflation, when the rate of inflation reached 41.9 quadrillion percent per month, the Hungarian government discovered that the real value of its tax receipts was falling dramatically. To keep real tax revenues more stable, it created a good called a "tax pengö", in which all bank deposits were denominated for purposes of taxation. Nevertheless, payments for goods and services were made only in terms of the regular Hungarian currency, whose value tended to fall rapidly even though the value of a tax pengö remained stable. Prices were also quoted only in terms of the regular currency. Lenders, however, began denominating loan payments in terms of tax pengös. The tax pengö functioned as money in Hungary in 1945 and 1946
standard of deferred payment
The Federal Reserve System is divided into 12 districts, each served by one of the Federal Reserve district banks, located in the following cities: Boston, MA; New York, N.Y.; Philadelphia, PA; Washington, D.C.; Richmond, VA; Atlanta, GA; St. Louis, MO; Dallas, TX; Cleveland, OH; Chicago, IL; Minneapolis, MN; Kansas City, MO; and San Francisco, CA. Today, the U.S. population is centered just west of the Mississippi River long dash that is, about half of the population is either to the west or the east of a line running roughly just west of this river. The current locations of Fed districts and banks are structured this way because
the Fed districts were designed in 1913 to best serve the population at that time; these have remained the same.
The opportunity cost of money holdings is
the alternative interest income foregone from not holding some other asset The opportunity cost of holding money is the lost interest that could have been earned if an interest bearing asset were held instead of money.
The Federal Reserve purchases $10 million in U.S. Treasury bonds from a bond dealer, and the dealer's bank credits the dealer's account. The required reserve ratio is 11 percent, and the bank typically lends any excess reserves immediately. Assuming that no currency leakage occurs, calculate how much will the bank be able to lend to its customers following the Fed's purchase. $ ______million.
total reserves - required reserves = excess reserves = loans to its customers
The price tag on an under Armour shirt illustrates how money performs the function of a
unit of accounting.