ECON Final
Consider the following data about the economy: currency outstanding (C) = $1 trillion, total deposits (D) = $750 billion, total reserves (R) = $76 billion, and the required reserve ratio (RR ratio) = 10%. What is the currency ratio in this economy?
1.33
Which of the following qualifies as a liability to a bank?
Demand deposits
Federal government budget surpluses can lead to a "crowding out" effect, which pushes interest rates upward.
False
The Federal Reserve is part of the US Treasury.
False
The most powerful entity in the Federal Reserve is the board of governors.
False
When the US Treasury decides to reduce the value of the US dollar relative to the British pound, there will be a decline in the monetary base in the United States.
False
monetary policy
Government policy that attempts to manage the economy by controlling the money supply and thus interest rates.
Damon goes to the ATM machine and withdraws $500 in cash. How will this affect the monetary base?
The monetary base will remain unchanged with the increase in the currency in circulation being exactly offset by a decrease in bank reserves.
An increase in consumer income tends to cause an increase in the demand for money.
True
Bank reluctance to loan out excess reserves limited the effectiveness of the Federal Reserve's policy of quantitative easing in 2008.
True
Liquidity is a term that refers to the ease with which one asset can be converted into another.
True
One of the Federal Reserve's most used tools of monetary policy is the buying and selling of US government securities in the secondary market.
True
The primary responsibility of all central banks is monetary policy.
True
The rise of sweep accounts and the increasing popularity of ATMs have resulted in a decline in the potential effectiveness of the reserve requirement as a tool of monetary policy.
True
The business of banking solves the problem of
a liquidity mismatch with savers desiring liquidity and borrowers desiring illiquid loans
Liquidy trap
a situation where expansionary monetary policy fails to stimulate the overall economy because of a high level of savings and lack of borrowing n financial markets
Among the responsibilities of the Fed is
acting as the fiscal agent of the US Treasury.
A one-time deposit in a bank will result in
an expansion in the money supply that is larger than the size of the one-time deposit.
central bank
an independent national authority that conducts monetary policy, regulates banks, and provides financial services including economic research. Its goals are to stabilize the nation's currency, keep unemployment low, and prevent inflation.
Today in the Federal Reserve system, the power rests with the
chair of the Federal Reserve.
Federal Reserve System
collection of 12 independent regional banks whose purpose was o maintain the gold standard and be a "lender of last resort" to commercial banks.
Tevye owns a shoe store in the United States and wants to buy some shoes from Aldo, an Italian shoe manufacturer. Aldo is unsure of Tevye's ability to make payment and so is leery of selling the shoes to him. In order to make this transaction, Tevye might go to his bank to get a(n) __________ letter of credit.
commercial
When the Federal Reserve increases the reserve ratio, the impact will be to
decrease the size of the money multiplier.
The three governing bodies of the European Central Bank are the
governing council, general council, and executive board.
When the economy is caught in a liquidity trap, expansionary monetary policy will
have little impact on the economy.
When a central bank wants to pursue a contractionary monetary policy, it should
increase the required reserve ratio
If the goal of monetary policy is to keep interest rates stable, the Federal Reserve's response to increases in the demand for money will be to
increase the supply of money
Banking System Balance Sheet
it is an accounting too that lists assets and liabilities. loans and leases make up half of the bank's balance sheet
The biggest change in the Federal Reserve's balance sheet between May 2007 and March 2013 was the __________ on the __________ side of the balance sheet.
jump in depository institution deposits; liability
When borrowers are hesitant to borrow to finance purchases because of pessimism about the future and banks are hesitant to lend because of a fear that borrowers will default on their loans, the economy is said to be experiencing a(n) __________ trap
liquidity
A leveraged buyout is an example of a __________ loan.
long-term business
A mortgage loan is an example of a __________ loan
long-term consumer
A mortgage loan is an example of a __________ loan.
long-term consumer
When the Federal Reserve buys US Treasury securities on the open market, it is attempting to
lower interest rates
When the Federal Reserve was created in 1913, its two primary purposes were to
maintain the gold standard and be a "lender of last resort" to commercial banks.
Within an economy, money gets created when banks
make loans.
As a country's financial markets become more highly developed, we can expect monetary policy to be
more effective.
Mortgages that are pooled together and sold to investors are known as
mortgage-backed securities
The most often used of the Federal Reserve's monetary tools is
open market operations
Following the 2007 financial crisis, the Federal Reserve created the term auction facility (TAF) in order to
overcome the stigma banks experienced from borrowing from the Fed at the discount window in order to add liquidity to financial markets.
The Federal Reserve notices an increase in the public's desire to hold cash and fears that it may cause an increase in interest rates. To keep interest rates steady, the Federal Reserve would likely execute a
repurchase agreement to provide a short-term boost to the money supply.
Imagine that Roland goes to his bank and deposits $10,000 in cash into his savings account. The bank, wanting to use those funds to generate revenue for itself, will look to make a loan with this cash. An important determinant of how much of that $10,000 the bank can lend is the
required reserve ratio
Actual bank reserves are equal to
required reserves + excess reserves.
If a bank made a self-liquidating inventory loan, it would be making a __________ loan.
short-term business
An unsecured personal loan is an example of a __________ loan.
short-term consumer
Banks basically do two things: __________ and __________.
take deposits; make loans
Federal Reserve
the central bank and monetary authority of the United States. created in 1913 in response to the Panic of 1907.
When the currency ratio increases, the impact of changes in the monetary base on the money supply is
weakened
Banks must weigh the risk versus the return in deciding
what to hold in their portfolio of assets.
If the required reserve ratio is 5%, an initial demand deposit made in a bank of $100,000 can result in an expansion in the money supply of
$2,000,000.
At its inception, the power of the Federal Reserve rested in the
12 independent regional Federal Reserve banks.
Which of the following is the most liquid of a bank's assets?
Cash
Following the Great Depression, the power of the Fed shifted to the
Federal Open Market Committee.
One of the main reasons that banks exist is to deal with the issues of __________ and __________.
adverse selection; moral hazard
Liquidity is important to banks because it
allows them to meet the cash needs of their depositers.
When the parties to a transaction have different levels of knowledge about each other and/or the nature and implications of the transaction, it is said that there exists __________ information.
asymmetric
During the Great Recession, the price level in the United States
fell sharply
During a credit crunch, the excess reserve ratio will
increase.
Federal Reserve notes are considered to be
liabilities of the Federal Reserve
The responsibilities of the European Central Bank include
monetary policy, foreign exchange operations, and maintenance of the payments system.
Savings accounts and certificates of deposit are commonly referred to as __________ accounts.
nontransaction
Banks want to hold as little cash as possible because holding cash
offers a minimal rate of return.
The Dodd-Frank Act allowed banks, for the first time, to
pay interest on demand deposits.
Consider the figure above. The initial equilibrium in the loanable funds market in Etopia is at A when the banks in Etopia begin to see an upsurge in deposits. This upsurge in bank deposits will result in a new equilibrium at
point D with a decrease in the interest rate and an increase in the amount of loanable funds borrowed and lent
By far, the largest asset on the Federal Reserve's balance sheet is
securities.
Banks basically do two things: __________ and __________.
take deposits; make loans
Currency in circulation plus bank reserves plus US Treasury currency in circulation is referred to as
the monetary base
In its early days, the Fed's role as a lender of last resort was subject to
the real bills doctrine.