ECON 2010 Ch.34

Since 2008, excess reserves have increased from:

$2 billion to almost $3 trillion.

What is a liquidity trap?

When nominal interest rates cannot be lowered any further.

What is something that the Federal Reserve does?

issue money

The Federal Reserve acquires its unique powers through its ability to:

issue money.

The problem of moral hazard exists when:

people or institutions, who are insured, tend to take on too much risk.

Which is NOT one of the services that the Federal Reserve performs for the U.S. government?

printing money to finance government spending

Of these assets, which is the LEAST liquid?

savings deposits

If the Fed wants to increase interest rates, it should:

sell bonds in open market operations.

The bank account of the U.S. Treasury is maintained by:

the Federal Reserve.

The Federal Reserve's customers are:

the government and private banks.

What does a bank do with the money that you deposit?

Banks lend most of the money to people who want to borrow.

Which of the following might lead banks to hold more reserves?

Fear that customers will want to withdraw most of their deposits

Which of these statements about liquidity traps is false?

Firms are unlikely to undertake investment during liquidity traps because interest rates are prohibitively high.

Which of the following did NOT happen during the 2008-09 financial crisis?

The Fed quickly raised interest rates to stop the flow of easy credit.

If the Fed wants to increase the money supply, it will _____ Treasury securities.

buy

If the Fed wishes to lower interest rates, it should:

conduct an open market purchase.

Paying a higher interest rate on reserves held at the Fed will tend to:

decrease the money supply.

Deposit insurance guarantees that:

depositors will get their deposits back, even if the bank is insolvent.

A reverse repurchase agreement will accomplish all of the following to banks and other financial intermediaries EXCEPT:

ensure their solvency.

For the most part, prior to 2008, banks typically held:

excess reserves equal to less than 1% of deposits.

In conducting quantitative easing, the Fed may decide to purchase mortgage securities to do all of the following EXCEPT:

influence average home prices.

An insolvent bank is one whose:

liabilities are greater than its assets.

When banks take on too much risk with the hope that the Fed will eventually bail them out, a condition of _____ exists.

moral hazard

The Federal Funds rate is the:

overnight lending rate on loans from one major bank to another.

As a result of an increase in the growth rate of the money supply:

real GDP growth increases only in the short run, and the inflation rate increases in both the short run and the long run.

Open market operations refer to:

the buying and selling of primarily government bonds by the Fed.

Systemic risk is:

the risk of contagion that occurs when a failing financial institution owes significant sums of money to other financial institutions.

During the financial crisis of 2007-2008, the Fed engaged in lending to certain large non-bank financial firms in the private sector. Which of the statements describes the reasoning behind the Fed's decision to engage in this type of nontraditional lending?

The Fed wanted to limit the systemic risk inherent among financial institutions.

An account that you can access with a debit card is called a:

checkable deposit.

The Fed acts as lender of last resort:

when deposit insurance isn't enough or when an institution isn't covered by deposit insurance.

What is NOT one of the reasons that banks keep their accounts at the Federal Reserve?

Interest paid by the Federal Reserve exceeds the returns from any other type of investment.

Could the Fed push the Federal Funds rate below zero?

It is possible but difficult to push the Federal Funds rate below zero.

liquid asset

an asset that can be used for payments or, quickly and without loss of value, be converted into an asset that can be used for payments

Money is best defined as:

anything that is a widely accepted means of payment.

In normal times, the actual money multiplier in the United States is:

approximately equal to 3.

The reserve ratio is the ratio of bank reserves to:

bank deposits.

Why didn't the huge increase in the money supply that resulted from quantitative easing lead to increases in inflation?

because quantitative easing increased the monetary base, but not broader definitions of money like M1 and M2

quantitative easing

situation that occurs when the Fed buys longerterm government bonds or other securities

Traditionally, the Fed lends to:

solvent but illiquid banks.

When the Federal Reserve conducts open market operations, it

buys or sells government bonds.

What are the three main tools the Federal Reserve (Fed) has at its disposal to carry out monetary policy?

conducting open market operations, setting the discount rate, and paying interest on reserves

The tools of monetary policy:

continue to evolve as the economy changes.

monetary policy

currency + bank deposits held at the fed

When banks use the money they receive from deposits to make loans, they:

increase the money supply through the money multiplier.

The discount rate sets the _____ of the reserves that the Fed will lend. The term auction facility sets the _____ of the reserves that the Fed will lend.

interest rate; quantity

Prior to 2008, a bank might have borrowed reserves from another bank because:

it kept its reserves too low and could not meet Fed requirements.

Quantitative easing involves the Fed swapping:

money for assets other than T-bills.

money

a widely accepted means of payment

Which event would occur first as a part of the Fed using monetary policy to increase aggregate demand?

The Fed buys bonds in an open market operation.

What happens if unemployment spikes back up? Could it pursue the same policy in part a?

The Fed could not easily pursue the policy it implemented in part a.

To increase the money supply in the economy, the Fed would:

carry out open market purchases and/or decrease the interest rate paid on reserves.

The monetary base (MB) refers to:

currency plus total reserves held at the Fed.

Are checking accounts money?

Yes, because checking accounts can be used to buy goods and services.

Are saving accounts money?

Yes, even though they technically can't be used to buy goods and services.

fractional reserve banking

a system in which banks hold only a portion of deposits in reserve, lending the rest

Economists typically define money as:

a widely accepted means of payment.

The Fed may also lend to insolvent banks, rather than winding them down, in order to:

address the problem of systemic risk.

The Federal Reserve is powerful because it can influence _______ through its control over _______.

aggregate demand; the money supply

Which of the institutions has influence over the United States Federal Reserve (the Fed)?

the Federal Reserve Board of Governors, the President of the United States, & the United States Senate

Which of the people or institutions listed exercises the most power over the quantity of money in the United States economy?

the United States Federal Reserve

money multiplier

the amount the money supply expands with each dollar increase in reserves; MM = 1/RR where RR is the reserve ratio

For a bank, "reserves" refers to:

the cash it keeps on hand to meet withdrawal requests.

The Fed has direct control over:

the monetary base only.

When the Fed buys T-bills from banks:

the supply of bank reserves rises.

Banking panics are especially dangerous because:

they can start easily and spread quickly.

How does the Federal Reserve inject reserves into the banking system?

By creating new money it uses to buy financial assets

What moral hazard problem results from action by the Federal Reserve (the Fed)?

Large banks make risky decisions, understanding that the Fed will insulate them from bad choices.

Which of the following asset would be considered money?

an asset that can be easily converted into a widely-used means of payment with little loss in value

Which asset would you classify as being most liquid?

small-time deposits

If people hold onto some money as cash, rather than depositing it into banks:

the money multiplier will be smaller.

Federal Funds rate

the overnight lending rate from one major bank to another

The Fed's communication:

is itself an important tool of monetary policy

An illiquid asset is one that is _______ but _______.

worth a lot in the future; can only be sold today at a low price

reserve ratio

the ratio of reserves to deposits

Economists have:

several different measures of the supply of money.

open market operation

the buying and selling of government bonds by the Fed

Suppose the Federal Reserve (Fed) decides the current money supply of $2.1 trillion is too low, and that an increase of $300 billion is necessary. What tool can the Fed use to accomplish this increase? Assume the current reserve ratio is 0.05

Buy government securities.

The interest rate that the Federal Reserve Bank (the Fed) charges member banks for loans is known as the ________. The Fed can ________ the money supply by lowering this rate..

Discount rate; increase

Suppose that a bank has loaned money to two businesses: a trustworthy computer manufacturer and a risky mining venture. Unfortunately, the mining venture fails, and the mining firm goes bankrupt. The bank has no insurance for this situation. Now, on its balance sheet, the bank has more liabilities than assets. What is this situation called, and what is the result of this situation?

Insolvency. The bank cannot pay back depositors.

In order to impact aggregate demand and the economy, the Fed needs to be able to influence:

M1 and M2.

Which of the following is true about M1 and M2?

M2 includes saving deposits and money market mutual funds, but M1 does not.

How much additional money will be created if you deposit a $200 check into your bank, which holds a 10% reserve ratio?

No money will be created since the $200 check does not represent an increase in reserves.

Are comic books money?

No, because selling a comic book takes work and provides an uncertain amount of funds.

How long does it take for the rate to adjust when the Fed announces a change to its target for the federal funds rate?

Sometimes it adjusts before the Fed even takes any action.

Which of the following summarizes the limitations of monetary policy?

The Fed has a lot of control over just one interest rate, and interest rates influence economic activity in the short run only.

How did the Fed respond to rising unemployment during the Great Recession?

The Fed lowered the Federal Funds rate.

Why did the Federal Reserve purchase these securities?

The Fed purchased these securities to protect against systemic risk. The risk associated with mortgage debt was so significant that lenders of all kinds were hesitant to extend credit to borrowers.

The Fed conducts reverse repurchase agreements with:

banks and financial institutions other than banks.

If the Fed wanted to use open market operations to reduce interest rates, it would:

buy T-bills from banks.

If the Fed wants to increase aggregate demand, it should:

buy bonds in an open market operation.

An increase in the rate of interest paid on reserves would be an example of:

contractionary policy that increases the demand for reserves and raises short-term interest rates.

The Federal Reserve is the:

federal government's bank, central bank, and banker's bank in the United States.

In the "old days" (prior to 2008), the Fed typically conducted monetary policy by:

targeting the federal funds rate with open market operations

An insolvent institution has:

liabilities that exceed its assets.

High-value, long-term projects benefit from:

long-term relationships between lenders and borrowers.

Which is one of the services that the Federal Reserve performs for the U.S. government?

maintaining the U.S. Treasury's bank account

What is something that the Federal Reserve does?

manage the nation's check payment system

The _______ tells us how many additional dollars of deposits are created with each additional dollar of reserves.

money multiplier, calculated as 1 divided by the reserve ratio,

The limiting of systemic risk in the economy by the Fed, creates ________ in the banking profession.

moral hazard

Large banks in the United States:

must keep at least 10% of deposits in reserve.

quantitative tightening

occurs when the Fed sells longer-term government bonds or other securities

During the Great Recession, the Fed relied on each of the following tools to influence the economy EXCEPT:

open market operations.

What is something that the Federal Reserve does?

protect consumers with disclosure regulations

What is included in MB that is not included in either M1 or M2?

reserve deposits

What does RR stand for?

reserve ratio

The Fed has the most influence over:

short-term real interest rates.

liquidity trap

situation in which interest rates are close to the zero lower bound, so pushing them lower is not possible or not effective at increasing aggregate demand

zero lower bound

situation in which the Federal Funds rate is close to zero

In a "reverse repurchase agreement," the Fed:

takes on reserves in exchange for T-Bills.