ECO 202 HW 6
A central bank can "create money" by buying bonds because
by increasing the banks' reserves, banks can make loans which increase checking account balances, and these are part of the money supply.
The purchase of Treasury securities by the Federal Reserve will, in general,
increase the quantity of reserves held by banks
The financial firms of the shadow banking system were
more vulnerable than commercial banks to bank runs because they were more highly leveraged than commercial banks.
Firms in the shadow banking system were more vulnerable than commercial banks to "bank" runs because the shadow banking firms were ________ highly leveraged and held a ________ portion of mortgage-backed securities than commercial banks
more, higher
Firms in the shadow banking system were more vulnerable than commercial banks to "bank" runs because in the shadow banking system, unlike the commerical banking system, there was
no federal deposit insurance
Four of the monetary policy tools used by the Federal Reserve to manage the money supply include
open market operations, discount policy, reserve requirements, and interest on reserves.
If the central bank can act as a lender of last resort during a banking panic, banks can
satisfy customer withdrawal needs and eventually restore the public's faith in the banking system.
When the Federal Reserve sells Treasury securities in the open market,
the buyers of these securities pay for them with checks and bank reserves fall.
In response to the destructive bank panics of the Great Depression, future bank panics are designed to be prevented by
the establishment of the Federal Deposit Insurance Corporation.
When the Federal Reserve purchases Treasury securities in the open market,
the sellers of such securities deposit the funds in their banks and bank reserves increase.
The United States is divided into ___ Federal Reserve Districts. The Federal Reserve Bank's Board of Governors consists of ___ members appointed by the president of the U.S. to 14-year, non-renewable terms. One of the board members is appointed to a ___ year, renewable term as the chairman.
12 Federal Reserve Districts; 7 members; 4 years
An article in the Wall Street Journal in 2017 noted that: "China now has one of the highest [required reserve] ratios in the world, economists say, even though many businesses are starved of credit..." Source: Lingling Wei, "China's Trillion-Dollar Yuan Defense Puts Growth at Risk," Wall Street Journal, April 13, 2017. What does the article mean by Chinese businesses being starved for credit? Is there a connection between the Chinese central bank imposing a higher required reserve ratio on banks and Chinese businesses being starved for credit? Briefly explain.
Being starved for credit means Chinese businesses cannot get loans. Yes, higher required reserve ratios require banks to keep more capital as reserves instead of making loans.
Which of the following is NOT a policy tool the Federal Reserve uses to manage the money supply?
Changing Income tax rates.
What is the "shadow banking system"?
Financial firms that raise money from investors and provide it to borrowers.
By increasing the interest rate it pays on bank reserves, the Federal Reserve can ________ the level of reserves banks are willing to hold, thereby ________ bank lending.
Increase; decreasing
An article in the Wall Street Journal on the shadow banking system contained the following observation: "If investors rush to the exits en masse, acting as a herd, asset prices could plummet and markets could face funding problems." Source: Bylan Talley, "IMF Warns (Again) of Growing Shadow-Banking Risks," Wall Street Journal, April 8, 2015. Why might investors in a money market mutual fund, for example, be more likely to "rush to the exits" if they heard bad news about the fund's investments, than would bank depositors if they received bad news about their bank's investments?
Money market mutual funds are not protected by deposit insurance, as commercial banks' deposits are through the Federal Deposit Insurance Corporation (FDIC).
Open market operations refer to the purchase or sale of ________ to control the money supply.
U.S. Treasury securities by the Federal Reserve
An opinion column in the New York Times noted that "private borrowers cannot create money from thin air" as the Federal Reserve can. Source: Neil Irwin, "How America Learned to Stop Worrying and Love Deficits and Debt," New York Times, February 23, 2019. Does the government create money by printing currency?
Yes, but banks create the majority of the money supply by making loans.
In a speech delivered in June 2008, Timothy Geithner, then president of the Federal Reserve Bank of New York and later U.S. Treasury secretary, said: The structure of the financial system changed fundamentally during the boom. . . . [The] non-bank financial system grew to be very large. . . . [The] institutions in this parallel financial system [are] vulnerable to a classic type of run, but without the protections such as deposit insurance that the banking system has in place to reduce such risks. Source: Timothy F. Geithner, "Reducing Systemic Risk in a Dynamic Financial System," Remarks at the Economics Club of New York, June 9, 2008. a. What did Geithner mean by the "non-bank financial system"? b. What is a "classic type of run"? c. Why would deposit insurance provide the banking system with protection against runs?
a.) Money market mutual funds, hedge funds, and other financial firms that raise money from investors and provide it to firms and households. b.) Many depositors simultaneously decide to withdraw their money from a bank. c.) Since most depositors are insured, it is less likely that panicked buyers will simultaneously withdraw funds.