ECON Test 2

If the money supply is​ $2 trillion and velocity is​ 5, then nominal GDP is

$10 trillion

How did competitive forces lead to the repeal of the Glass-Steagall Act's separation of the banking and securities industry? -The Fed allowed bank holding companies to enter the underwriting business -Banks were allowed to hold substantial equity stakes in commercial firms in order to keep them competitive -The Act's restrictions put American banks at a competitive disadvantage relative to foreign banks -Financial innovation motivated banks and other financial institutions to bypass the intent of the Glass-Steagall Act

-The Fed allowed bank holding companies to enter the underwriting business -The Act's restrictions put American banks at a competitive disadvantage relative to foreign banks -Financial innovation motivated banks and other financial institutions to bypass the intent of the Glass-Steagall Act

What are the 3 major parts of the FED?

1. FOMC 2. 12 district banks 3. Board of governors

What 3 parties play a role in determining the money multiplier and thus money supply?

1. banks 2. depositors 3. central banks

Order the dynamics of a Financial Crisis from 1 - 4 -Price deflation -debt deflation -banking crisis -credit and asset boom

1. credit and asset boom 2. banking crisis 3. debt deflation 4. price deflation

The Governing Council usually meets​ ________ times a year.

12

The US got it's first national currency around the

1860's

The Second Bank of the United States A. had its charter renewal vetoed in 1832. B. was disbanded in 1811 when its charter was not renewed. C. is considered to be the primary cause of the bank panic of 1907. D. None of the above.

A. had its charter renewal vetoed in 1832.

Disintermediation resulted from A. interest rate ceilings combined with inflation−driven increases in interest rates. B. reserve requirements. C. elimination of Regulation Q​ (the regulation imposing interest rate ceilings on bank​ deposits). D. increases in federal income taxes.

A. interest rate ceilings combined with inflation−driven increases in interest rates.

The theory of bureaucratic behavior when applied to the Fed helps to explain why the Fed A. is so secretive about the conduct of future monetary policy. B. sought less control over banks in the 1980s. C. is supportive of congressional attempts to limit the central​ bank's autonomy. D. is willing to take on powerful groups that may threaten its autonomy.

A. is so secretive about the conduct of future monetary policy.

One of the concerns of increased bank consolidation is the reduction in community banks which could result in A. less lending to small businesses. B. more bank regulation. C. loss of cultural identity. D. higher interest rates.

A. less lending to small businesses.

The portfolio theories of money demand state that when income​ (and therefore,​ wealth) is​ higher, the demand for the money asset will​ ________ and the demand for real money balances will be​ ________. A. ​rise; higher B. ​fall; higher C. ​fall; lower D. ​rise; lower

A. ​rise; higher

Who was the first Treasury Secretary of the United States?

Alexander Hamilton

Reasons for holding Eurodollars include A. the fact that Eurodollar deposits are heavily regulated. B. the fact that dollars are widely used to conduct international transactions. C. the fact that Eurodollar deposits are insured by the FDIC. D. the fact that minimum transaction sizes are very​ low, making Eurodollars an attractive savings instrument for consumers.

B. the fact that dollars are widely used to conduct international transactions.

In the model of the money supply​ process, the Federal​ Reserve's role in influencing the money supply is represented by A. only nonborrowed reserves. B. the required reserve​ ratio, nonborrowed​ reserves, and borrowed reserves. C. only borrowed reserves. D. both the required reserve ratio and the market interest rate.

B. the required reserve​ ratio, nonborrowed​ reserves, and borrowed reserves.

The Federal Reserve was created after the crisis surrounding

Banking panics of the early 1900's

A financial innovation that developed as a result of banks avoidance of bank branching restrictions was​ ________. A. money market mutual funds B. junk bonds C. bank holding companies D. commercial paper

C. bank holding companies

Open market sales shrink​ ________ thereby lowering​ ________. A. the money​ multiplier; the money supply B. the money​ multiplier; reserves and the monetary base C. reserves and the monetary​ base; the money supply D. the money​ base; the money multiplier

C. reserves and the monetary​ base; the money supply

An increase in​ ________ reduces the money supply since it causes the​ ________ to fall. A. reserve​ requirements; monetary base B. margin​ requirements; monetary base C. reserve​ requirements; money multiplier D. margin​ requirements; money multiplier

C. reserve​ requirements; money multiplier

An increase in the nonborrowed monetary​ base, everything else held​ constant, will cause A. no change in the money supply. B. demand deposits to fall. C. the money supply to rise. D. the money supply to fall.

C. the money supply to rise.

​________ are the only depository institutions that are tax−exempt.

Credit Unions

The business term for economies of scope is A) economies of scale. B) diversification. C) cooperation. D) synergies.

D) synergies.

A major difference between the United States and Japanese banking systems is that A. bank holding companies are illegal in the United States. B. American banks are allowed to hold substantial equity stakes in commercial​ firms, whereas Japanese banks cannot. C. Japanese banks are usually organized as bank holding companies. D. Japanese banks are allowed to hold substantial equity stakes in commercial​ firms, whereas American banks cannot.

D. Japanese banks are allowed to hold substantial equity stakes in commercial​ firms, whereas American banks cannot.

Which of the following is a duty of the Board of Governors of the Federal Reserve​ System? A. All governors advise the president of the United States on economics policy. B. Setting the maximum interest rates payable on certain types of time deposits under Regulation Q. C. Regulating credit with the approval of the president under the Credit Control Act of 1969. D. Setting margin​ requirements, the fraction of the purchase price of the securities that has to be paid for with cash.

D. Setting margin​ requirements, the fraction of the purchase price of the securities that has to be paid for with cash.

The theory of portfolio choice indicates that factors affecting the demand for money include A. nominal interest rate. B. riskiness of money. C. income. D. all the above.

D. all the above.

The Keynesian theory of money demand predicts that people will increase their money holdings if they believe that A. expected inflation is about to fall. B. interest rates are about to fall. C. bond prices are about to rise. D. bond prices are about to fall.

D. bond prices are about to fall.

When the Fed buys​ $100 worth of bonds from a primary​ dealer, reserves in the banking system A. increase by more than​ $100. B. decrease by more than​ $100. C. decrease by​ $100. D. increase by​ $100.

D. increase by​ $100.

The monetary base declines when A. float increases. B. Treasury deposits at the Fed decrease. C. the Fed extends discount loans. D. the Fed sells securities.

D. the Fed sells securities.

The driving force behind the securitization of mortgages and automobile loans has been A.the rising regulatory constraints on substitute financial instruments. B.the relaxation of regulatory restrictions on credit card operations. C.the desire of mortgage and auto lenders to exit this field of lending. D.the improvement in information technology.

D.the improvement in information technology.

______ is the relative ease and speed with which as asset can be converted into a medium of exchange

Liquidity

The legislation that effectively prohibited banks from branching across state lines and forced all national banks to conform to the branching regulations in the state in which they reside is the

McFadden Act.

The greatest period of financial regulation in the US occurred in the

Mid 1900's

To eliminate the abuses of the state−chartered ​banks, the​ ________ created a new banking system of federally chartered​ banks, supervised by the​ ________.

National Bank Act of​ 1863; Office of the Comptroller of the Currency

​________ is a process of bundling together smaller loans​ (like mortgages) into standard debt securities.

Securitization

Describe the process of securitization

Securitization is the process of taking an illiquid asset or group of assets and, through financial engineering, transforming it (or them) into a security. loan origination⇒servicing⇒bundling⇒distribution groups of such illiquid assets (usually debts) are packaged, bought, securitized and sold to investors.

Which regulatory body charters national​ banks?

The Comptroller of the Currency

As a result of the global financial crisis several of the​ large, free−standing investment banking firms chose to become bank holding companies. This means that they will now be regulated by

The Federal Reserve

What role did the global pool of money play in the housing bubble

The idea was that a newly rich China and others from emerging markets had gone looking for a place to stash their excess cash. What they found was the U.S. housing market, which offered a seemingly high-reward, low-risk investment. And perhaps it was, before it was overwhelmed by all this foreign cash. That led to lower borrowing rates, easy access to credit, lots of questionable derivatives, and, eventually, a crash.

The financial panic of 1907 resulted in such widespread bank failures and substantial losses to depositors that the American public finally became convinced that

a central bank was needed to prevent future panics.

Which of the following factors apart from securitization was responsible for the Great Recession of 2007-2009 a. An increase in funds lent to subprime borrowers b. A sudden rise in equity prices c. a decrease in the federal funds rate

a. An increase in funds lent to subprime borrowers

A well-functioning financial system: a. solves asymmetric information problems b. creates unpredictable marker disruptions c. acts as a barrier to efficient allocation of capital d. causes financial frictions to increase in an economy

a. solves asymmetric information problems

The Federal Reserve rescued the investment bank Bear Sterns because of a. systemic risk b. moral hazard c. legal regulatory obligation d. asymmetric information

a. systemic risk

Which of the following entities in the Federal Reserve System sets reserve requirements? a. the board of governors b. the federal advisory council c. member commercial banks d. the FDIC

a. the board of governors

A possible sequence for the three stages of a financial crisis might be​ ________ leads to​ ________ leads to​ ________.

asset price​ declines; banking​ crises; unanticipated decline in price level

Why do bank runs occur? a. moral hazard b. asymmetric information c. financial dis-imediation d. capital requirements

b. asymmetric information

Which of the following is NOT true of securitization? a. it is a process that converts high-risk financial instruments into default free financial instruments b. it is a process that converts a series of financial instruments into marketable securities c. a process that drives the prices of financial instruments above their fundamental values

b. it is a process that converts a series of financial instruments into marketable securities c. a process that drives the prices of financial instruments above their fundamental values

As a result of strict banking​ regulations, the United States​ has: a. banks that are quite large relative to those in other industrialized countries b. many more smaller banks when compared to other industrialized countries c. too few banks when compared to other industrialized countries d. a few dominant banks that hold most of the assets in the banking industry

b. many more smaller banks when compared to other industrialized countries

The Federal Reserve did not rescue the investment bank Lehman Brothers because of a. systemic risk b. moral hazard c. presidential objection d. asymmetric information

b. moral hazard

Open market operations refer to the Fed doing what?

buying/selling securities

The Troubled Asset Relief Program (TARP) authorized the treasury to a. take over commercial banks b. merge troubled financial institutions c. purchase subprime mortgage assets from troubled financial institutions d. regulate financial institutions e. all of the above

c. purchase subprime mortgage assets from troubled financial institutions

The FED usually conducts open market operations using a. mortgage backed securities b. corporate bonds c. short term treasury debt d. foreign bonds e. all of the above f. none of the above

c. short term treasury debt

What happens to money demand if Price Level Falls

decrease

What happens to money demand if RGDP falls

decrease

What happens to money demand if Transaction costs fall

decrease

Everything else held​ constant, an increase in the required reserve ratio on checkable deposits causes the M1 money multiplier to​ ________ and the money supply to​ ________.

decrease, decrease

A ______ is bought at a price below it's face value, & the ______ value is repaid at the maturity date

discount bond, face

When banks borrow money from the Federal​ Reserve, these funds are called

discount loans

A major disruption in financial markets characterized by sharp declines in asset prices and firm failures is called a

financial crisis

​________ are asymmetric information problems that act as a barrier to efficient allocation of capital.

financial frictions

What is the global pool of money?

huge pool of money out there, which is basically all the money the world is saving now. Insurance companies saving for a catastrophe, pension funds saving money for retirement, the central bank of England saving for whatever central banks save for. All the world's savings.

What happens to money demand if Inflation falls

increase

What happens to money demand if Real Interest rates Fall

increase

The ability of a central bank to set monetary policy instruments is

instrument independence

The theory of bureaucratic behavior suggests that the objective of a bureaucracy is to maximize

its own welfare

What makes QE QE2 and QE3 different from normal federal reserve activity?

large scalle and long term asset purchases ( quantitative easing)

In the bond market, the bond demanders are the ________ and the bond suppliers are the ________.

lenders, borrowers

To lower​ long-term interest​ rates, in 2010 the Fed started its new open market operation program to purchase

long-term treasuries

Kevin purchasing concert tickers with $100 bill is an example of the _______ function of money

medium of exchange

the yield-to-maturity for a discount bond is ________ related to the current bond price

negatively

Evidence suggests that a liquidity trap is possible when​ ________.

nominal interest rates are at zero

What gives the Federal Reserve the ability to be so independent?

own source of funding, needs to be isolated from political pressures

The Federal Reserve Banks are​ ________ institutions since they are owned by the​ ________.

quasi−​public; private commercial banks in the district where the Reserve Bank is located

The 1980's is not known for banking

regulation

Like the dual banking system for commercial​ banks, thrifts can have either​ ________ or​ ________ charters.

state or federal

Which of the following entities in the Federal Reserve system directs open market operations?

the FOMC

Of the three players in the money supply​ process, most observers agree that the most important player is

the Federal Reserve System.