ECON FINAL
What two institutions did Congress create in order to increase the availability of mortgages in a secondary market?
"Fannie Mae" and "Freddie Mac"
Which of the following were important developments in the mortgage market that took place during the 1970s?
- Banks began to resell mortgages on the secondary market rather than holding them in their portfolios. - Fannie Mae and Freddie Mac began to act as intermediaries between investors and home buyers.
Which of the following is a monetary policy tool used by the Federal Reserve Bank?
- Buying $500 million worth of government securities, such as Treasury bills. - Decreasing the rate at which banks can borrow money from the Federal Reserve. - Increasing the reserve requirement from 10 percent to 12.5 percent.
The introduction of Fannie Mae and Freddie Mac into the mortgage-backed securities market by the government
- assisted in separating mortgage loans from credit-worthiness standards because banks could sell the loans to Fannie Mae and Freddie Mac instead of keeping them on their balance sheets. - allowed the secondary mortgage market to expand greatly by getting funds from investors and using them to purchase mortgages from banks. - created additional moral hazard problems as banks could make riskier loans because they could simply sell loans to Fannie Mae and Freddie Mac as soon as the loans were made.
The (FOMC) Federal Open Market Committee The Federal Reserve Bank of New York is always a voting member of the FOMC because
- includes the Board of Governors and the presidents of the 12 Federal Reserve regional banks (though not all are voting members). - determines the target federal funds rate and the direction of open market operation policies. - makes decisions that are voted on by all 7 members of the Board of Governors but only 5 of the 12 regional bank presidents. it carries out the policy directives of the FOMC
The simple deposit multiplier equals A higher required reserve ratio _________ the value of the simple deposit multiplier.
- the formula used to calculate the total increase in checking account deposits from an increase in bank reserves. - the ratio of the amount of deposits created by banks to the amount of new reserves. - the inverse, or reciprocal, of the required reserve ratio. decreases
The formula for the simple deposit multiplier is
1/RR
If the required reserve ratio is 0.20, the maximum increase in checking account deposits that will result from an increase in bank reserves of $20,000 is $
100,000
When the Federal Reserve increases the discount rate as a part of a contractionary monetary policy, there is:
A decrease in the money supply and an increase in the interest rate.
What is a banking panic? Which of the following best explains how the Federal Reserve acts to help prevent banking panics?
A situation in which many banks experience runs at the same time. The Fed acts as a lender of last resort, making loans to banks so that they can pay off depositors.
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.
While serving as the president of the Federal Reserve Bank of St. Louis, William Poole stated, "Although my own preference is for zero inflation properly managed, I believe that a central bank consensus on some other numerical goal of reasonably low inflation is more important than the exact number." Which of the following are benefits that the economy might gain from an explicit inflation targetLOADING... even if the target chosen is not a zero rate of inflation?
Better communication between the Fed and the public Improved accountability for the Fed More accurate expectations of future inflation
Which of the following is not a policy tool the Federal Reserve uses to manage the money supply?
Changing Income tax rates. Reserve requirements. Discount policy. Open market operations.
Why did the Fed help JP Morgan Chase buy Bear Stearns?
Commercial banks would be reluctant to lend to investment banks. Failure of Bear Stearns would lead to a larger investment bank failure.
What is inflation targeting?
Committing the central bank to achieve an announced level of inflation.
For more than 20 years, the Fed has used the federal funds rate as its monetary policy target. It has not targeted money supply at the same time because the
Fed cannot target both at the same time: It has to choose between targeting an interest rate and targeting the money supply.
What rate was the headline likely referring to? Who is able to borrow and lend at that rate? Why does the Fed's actions to increase or decrease the rate you identified above attract so much attention?
Federal funds rate. Banks are able to borrow and lend from each other at that rate This rate ultimately has a substantial effect on many other interest rates.
What is the "shadow banking system"? The financial firms of the shadow banking system were
Financial firms that raise money from investors and provide it to borrowers. more vulnerable than commercial banks to bank runs because they were more highly leveraged than commercial banks
Which of the following is a monetary policy target used by the Fed? The Fed uses policy targets of interest rate and/or money supply because
Interest rate. it can affect the interest rate and the money supply directly and these in turn can affect unemployment, GDP growth, and the price level.
How do investment banks differ from commercial banks?
Investment banks do not take deposits. Investment banks generally do not lend to households.
What is the Taylor rule? The Taylor rule is used to
It is a rule that links the Fed's target for the federal funds rate to the current inflation rate, real equilibrium federal funds rate, inflation gap and output gap. analyze and predict how the Fed targets the federal funds rate.
What do economists mean by the demand for money? What is the advantage of holding money? What is the disadvantage of holding money?
It is the amount of money—currency and checking account deposits—that individuals hold. Money can be used to buy goods, services, or financial assets. Money, in the form of currency or checking account deposits, earns either no interest or a very low rate of interest
What is a "subprime mortgage," and would a subprime borrower be likely to pay a higher or a lower interest rate than a borrower with a better credit history? Why would securitization give mortgage borrowers access to a deeper pool of capital?
Loans granted to borrowers with flawed credithistories; a higher interest rate. Since banks could resell mortgages to investors, they had access to more funds than just their own deposits.
Which of the following is one of the unprecedented actions of the Fed?
Making loans to primary dealers and holders of mortgage-backed securities.
What did Geithner mean by the "non-bank financial system"? What is a "classic type of run"? Why would deposit insurance provide the banking system with protection against runs?
Money market mutualfunds, hedgefunds, and other financial firms that raise money from investors and provide it to firms and households. Many depositors simultaneously decide to withdraw their money from a bank. Since most depositors are insured, it is less likely that panicked buyers will simultaneously withdraw funds.
Which one of the following is not one of the policy tools the Fed uses to control the money supply? Which tool is the most important?
Moral suasion. The Fed conducts monetary policy principally through open market operations.
Which one of the following is not the formula for the quantity theory of money? How does the quantity theory provide an explanation about the cause of inflation?
M×Y=P×V. V=P×YM. M×V=P×Y. .M=(1/V)×P×Y. The quantity equation shows that if the money supply grows at a faster rate than real GDP, then there will be inflation.
Which of the following is true with respect to Irving Fisher's quantity equation, M×V=P×Y?
M = M1 definition of the money supply V = Average number of times a dollar is spent on goods and services P = the GDP deflator V=(P×Y)/M
What did President Trump mean by other currencies being "devalued against the dollar"? Is there an economic connection between the president's desire for lower interest rates in the United States and his desire to avoid having other currencies devalued against the dollar? Briefly explain. In what sense do other currencies being devalued against the dollar "[put] the U.S. at a big disadvantage"?
Other currencies being "devalued against the dollar" means it takes more units of a foreign currency to buy a dollar. Yes, when the Federal Reserve keeps interest rates low, it makes the dollar weaker because investing in the United States is less attractive. A strong dollar raises the cost of U.S. goods to buyers in foreign countries
The economy of country Rumblen was hit by a banking crisis which has led to a recession. Jason Wallace, a real estate agent, says that the economy will recover soon because the government is taking various measures to counter the recession. According to him, the flow of credit will soon return to pre-crisis levels. His wife Anna Wallace disagrees with him. She says that the situation may not improve soon, given the substantial increase in unemployment. Which of the following, if true, would strengthen Anna's view?
Recent reports indicate that firms in most industries are putting investment plans on hold.
Which one of the following is not one of the monetary policy goals of the Fed? The Fed is said to have a" dual mandate" because
Reduce income inequality. maintaining price stability and high employment are the two most important goals of the Fed.
Which of the following gave the Fed a dual mandate? By suggesting that the Fed needs to "read the labor market correctly," Kashkari means that the Fed needs to be able to gauge how much more employment can expand without causing Does the Fed's dual mandate require it to attain a zero percent unemployment rate? Briefly explain.
The Employment Act of 1946. inflation to accelerate. No, because even when the economy is at full employment, there is still a natural rate of unemployment.
In the graph of the money market, what could cause the money supply curve to shift from MS1 to MS2? In the graph of the money market, what could cause the money demand curve to shift from MD1 to MD2?
The Fed decreases the money supply by deciding to sell U.S. Treasury securities. An increase in real GDP. An increase in the price level
Which of the following is a monetary policy response to the economic recession of 2007-2009 and the accompanying financial crisis?
The Fed purchased large amounts of mortgage-backed securities. The Fed provided loans directly to corporations by purchasing commercial paper. The Fed expanded the eligibility for discount loans to firms other than commercial banks.
Nobel laureate Milton Friedman and his followers belong to a school of thought known as monetarism. What do the monetarists argue the Fed should target?
The Fed should target the money supply, not the interest rate, and that it should adopt the monetary growth rule.
Monetary policy is defined as:
The actions the Federal Reserve takes to manage the money supply and interest rates.
What are the Fed's main monetary policy targets?
The money supply and interest rates
Based on the quantity theory of money, if velocity is constant, inflation is likely to occur when:
The money supply grows at a faster rate than real GDP.
According to the quantity theory of money, inflation results from which of the following? There is a strong link between changes in the money supply and inflation ________ is caused by central banks increasing the money supply at a rate far in excess of the growth rate of real GDP.
The money supply grows faster than real GDP. in the long run. Hyperinflation
When the Federal Reserve decreases the discount rate,
The money supply will increase.
What is the relationship between the federal funds rate falling and the money supply increasing? How does lowering the target for the federal funds rate "pour money" into the banking system?
To decrease the federal funds rate, the Fed must increase the money supply. To increase the money supply, the Fed buys bonds on the open market, which increases bank reserves.
During the German hyperinflation of the 1920s, many households and firms in Germany were hurt economically; however, people with debt actually benefited some from the hyperinflation.
True
How do the banks "create money"?
When there is an increase in checking account deposits, banks gain reserves and make new loans, and the money supply expands.
Are small businesses more likely to rely on banks for funding than would large corporations? Why might a small business have more success obtaining a loan from a local community bank than from a national bank?
Yes, because small businesses lack the ability to sell stocks and bonds on financial markets. Community banks have a better understanding of the circumstances that affect local firms than national banks do. Community banks typically have long-term relationships with local businesses and can more easily assess their creditworthiness
Which of the following is not one of the monetary policy goals of the Federal Reserve ("the Fed")?
a high foreign exchange rate of the U.S. dollar relative to other currencies
The government would want the economy to contract when real GDP is
above potential GDP and the price level is rising.
In the quote, when the official says "the money stays in banks," he is referring to ____ in the reserves in banks. But the real problem was that banks were not ____ the reserves. The reason for this may have been a lack of ____
an increase lending borrowers
Excess reserves
are reserves banks keep above the legal requirement.
In the securitization process,
banks grant loans to households and bundle the loans into securities that are then sold to investors.
To increase the money supply, the FOMC directs the trading desk, located at the Federal Reserve Bank of New York, to By raising the discount rate, the Fed leads banks to make _________ loans to households and firms, which will _________ checking account deposits and the money supply.
buy U.S. Treasury securities from the public fewer; decrease
If the Federal Open Market Committee (FOMC) decides to increase the money supply, it orders the trading desk at the Federal Reserve Bank of New York to If the FOMC orders the trading desk to sell Treasury securities,
buy U.S. Treasury securities. the money supply curve will shift to the left, and the equilibrium interest rate will rise.
Quantitative easing involved the Fed's "Operation Twist" refers to Which of the following was the Fed's objective in using "quantitative easing" and "Operation Twist"?
buying longer term Treasury securities that are not usually involved in open market operations. the Fed's program to purchase $400 billion in long-term Treasury securities while selling an equal amount of shorter-term Treasury securities. To keep interest rates on mortgages low. To keep interest rates on 10-year Treasury notes low. To increase aggregate demand.
When the Federal Open Market Committee (FOMC) decides to increase the money supply, it ____ U.S. Treasury securities. If the FOMC wishes to decrease the money supply, it ___ U.S. Treasury securities.
buys; sells
When he said "to remove the punchbowl," he meant to engage in _____ policy. In terms of the economy, "just as the party gets going" refers to a situation in which real GDP potential GDP, which will result in _____ the inflation rate.
contractionary is greater than an increase in
An increase in the amount of excess reserves that banks keep _________ the value of the real-world deposit multiplier. Whenever banks gain reserves and make new loans, the money supply ___________; and whenever banks lose reserves, and reduce their loans, the money supply __________.
decreases expands;contracts
Which of the following is the largest liability of a typical bank? Which of the following refers to the minimum fraction of deposits banks that are required by law to keep as reserves?
deposits the required reserve ratio
Congress passed legislation to create the Federal Reserve System in 1913 in order to The most important role of the Federal Reserve in today's U.S. economy is
end the instability created by bank panics by acting as a lender of last resort. controlling the money supply to pursue economic objectives.
During 2005, the FOMC was concerned that the inflation rate would begin to accelerate due to the continued boom in the housing market, so the Fed started decreasing the target for the federal funds rate.
false
Since 1950, the annual inflation rate in the U.S.
has typically been positive, but it has also varied substantially, peaking around 1980, and becoming negative for several months in early 2009 due to the effects of the Great Recession.
Very high rates of inflation are called Governments sometimes allow hyperinflation to occur because
hyperinflation when governments want to spend more than they collect in taxes, central banks increase the money supply at a rate higher than GDP growth, often resulting in hyperinflation.
When the central bank commits to conducting policy in a manner that achieves the goal of holding inflation to a publicly announced level, it is using
inflation targeting.
The federal funds rate
is the rate that banks charge each other for short-term loans of excess reserves
If the economy moves into recession, monetarists argue that the Fed should
keep the money supply growing at a constant rate.
By "lender-specific relationships," the author is referring to Why is it difficult for a small business to find another source of credit if the local bank branch closes? Can't a small business just receive a loan from a different bank? Doesn't it have other ways of obtaining credit besides taking out a loan from a bank?
local banks' practice of extending loans to borrowers based on the history of the borrower with the bank Other banks will not have as much information as local banks do regarding the creditworthiness of the business Not necessarily, small businesses rely on loans from banks because they are unable to obtain funds in financial markets.
Which of the following policy tools is the Federal Reserve least likely to use in order to actively change the money supply? Reserve requirements are changed infrequently because
reserve requirements banks set long-term policy decisions, loan decisions, and deposit decisions based on the reserve requirement.
Imagine a graph shows equilibrium in the money market. The equilibrium interest rate is determined at point E where the downward-sloping money demand and vertical money supply curves intersect. Suppose the Fed wants to lower the equilibrium interest rate. To lower the equilibrium interest rate, the Fed will take actions that will The new equilibrium will be
shift the money supply curve to the right. where the new money supply curve intersects the original money demand curve.
An increase in interest rates affects aggregate demand by As the interest rate increases,
shifting the aggregate demand curve to the left, reducing real GDP and lowering the price level. consumption, investment, and net exports decrease; aggregate demand decreases.
A former Federal Reserve official argued that at the Fed, "the objectives of price stability and low long-term interest rates are essentially the same objective." This is true because
stable prices make it easier to plan for the future, so expectations can be stable, which makes it less costly to make loans.
Which of the following events was an important cause of the 2007-2009recession?
the collapse of a housing bubble
This change in mortgage finance was most likely caused by This greater competition among financial institutions has ____ the interest rates that borrowers pay on mortgages.
the development of a secondary market in mortgages to stimulate the housing market and increase home ownership. reduced
An article in a Federal Reserve publication observes that "20 or 30 years ago, local financial institutions were the only option for some borrowers. Today, borrowers have access to national (and even international) sources of mortgage finance." The primary reason for this change in the sources of mortgage finance was _____; the consequence of this change was also _____ in mortgage rates.
the development of a secondary mortgage market; a decrease
The federal funds rate is Additionally, the federal funds rate is
the interest rate that banks charge each other for overnight loans. very important for the Fed's monetary policy because the Fed uses the federal funds rate as a monetary policy target since it can control the rate through open market operations.
When the Federal Reserve purchases Treasury securities in the open market, When the Federal Reserve sells Treasury securities in the open market,
the sellers of such securities deposit the funds in their banks and bank reserves increase. the buyers of these securities pay for them with checks and bank reserves fall.
The average number of times each dollar in the money supply is used to purchase goods and services is called Evidence shows that the quantity equation is correct over the long run, which implies that the
the velocity of money. growth rate of the money supply determines the rate of inflation.
Investment banks can be subject to liquidity problems because
they often borrow short term, sometimes as short as overnight, and invest the funds in longer-term investments.
The quantity theory of money is better able
to explain the inflation rate in the long run.
When Congress established the Federal Reserve in 1913, its main responsibility was Congress broadened the Fed's responsibility since
to make discount loans to banks suffering from large withdrawals by depositors. the 1930s as a result of the Great Depression.
Two government-sponsored enterprises that stand between investors and banks that grant mortgages are the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation.
true
If the Fed believes the economy is about to fall into recession, it should If the Fed believes the inflation rate is about to increase, it should
use an expansionary monetary policy to lower the interest rate and shift AD to the right. use a contractionary monetary policy to increase the interest rate and shift AD to the left.
The decline in housing prices that began in 2006 led to rising defaults among which borrowers?
- alt-A and subprime borrowers - borrowers who had made only small down payments - borrowers with adjustable-rate mortgages
Is avoiding volatility part of the Fed's dual mandate? Is such volatility a concern for the Fed? Briefly explain.
No, this is not part of the Fed's dual mandate of price stability and high employment. Yes, stock market volatility could be a concern for the Fed because it has a goal of stable financial markets.
If the Taylor rule was changed to have a higher coefficient on the output gap, then during a recession the federal funds rate would be Economists and policymakers might disagree over the best rule to guide monetary policy because
lower, because more weight would be given to the output gap. of differing views about the significance of inflation and unemployment.