Money & Banking Exam 2
Government deficits can complicate monetary policy because government borrowing can lead to
"crowding out," which leads to higher interest rates.
How did most Savings & Loans begin?
Building & Loan associations
The banking legislation that requires that banks that want to merge or expand their branches must demonstrate that they are lending and providing financial services to people across their geographical area is called the __________ Act.
Community Reinvestment
The Federal Reserve is part of the US Treasury.
False
If the US Treasury engages in a foreign exchange intervention to lower the value of the dollar relative to the euro by having the Federal Reserve sell dollars and buy euros in the foreign market, how will this affect the monetary base?
The monetary base will increase.
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 individual who begins to participate in extreme sports after taking out a $1,000,000 life insurance policy is an example of the issue of moral hazard.
True
The business of banking solves the problem of
a liquidity mismatch with savers desiring liquidity and borrowers desiring illiquid loans.
Holly goes to her bank to take out a loan, and the bank agrees to the loan on the condition that Holly maintain a balance of $1,000 in her savings account with the bank. This is an example of a bank using a
compensating balance as a way to mitigate the problem of moral hazard.
Monetary policy has the best chance of influencing the level of __________ unemployment.
cyclical
When the Federal Reserve increases the reserve ratio, the impact will be to
decrease the size of the money multiplier.
Banks that have some financial difficulty and borrow from the Federal Reserve in what is known as secondary credit will pay an interest rate equal to the
discount rate plus a penalty.
When central banks were first created, their primary function was to
finance government spending.
An example of asymmetric information in financial markets is that, in equity markets, directors __________ than shareholders.
have a better sense of future profitability
Monetization of public debt can lead to a rapid increase in the money supply and hence to
inflation
Those who argue against the pursuit of the dual objectives of stable prices and high employment point to the __________ as evidence that the pursuit of dual objectives is misguided.
inflation of the 1970s
Regulation Q, part of the Banking Act of 1933, prohibited banks from paying
interest on checking accounts.
When there is a high degree of trust in a country's banking system, the currency ratio will be
low
When the Federal Reserve buys US Treasury securities on the open market, it is attempting to
lower interest rates.
A potentially important difference between NOW accounts and demand deposits is that NOW accounts
may reserve the right to require seven days' notice prior to making a withdrawal.
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.
Overnight bank borrowing from the Federal Reserve is known as
primary credit.
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.
If Claire were to sell a US Treasury security to the Federal Reserve in the secondary market, receiving a check from the Fed as payment, and then cash the check at her bank and hold onto the cash, then
the monetary base will increase but bank reserves will stay the same.
In Figure 9-1, the loanable funds market is in equilibrium at A with the interest rate IR1. In conducting monetary policy, the Federal Reserve engages in the buying of US Treasury securities on the open market, which causes
the supply of loanable funds to increase to S', causing the equilibrium interest rate to fall to IR3.
John Maynard Keynes argued that there were three reasons that people demand money. They are the
transactions motive, precautionary motive, and speculative motive.
When the currency ratio increases, the impact of changes in the monetary base on the money supply is
weakened
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.
The FDIC insures deposits up to
$250,000.
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 level of required reserves for this economy?
$75 billion
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
Suppose the current real federal funds rate in the economy is 2.0%, the current inflation rate is 1.0%, the Federal Reserve's target inflation rate is 2.0%, and the output gap is -2.0%. According to the Taylor Rule, the Federal Reserve's target federal funds rate should be
1.5%.
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 money multiplier for this economy?
1.63
At its inception, the power of the Federal Reserve rested in the
12 independent regional Federal Reserve banks.
Which of the following would be considered an asset on a bank's balance sheet?
A consumer loan
A loan with real estate used as collateral and where the terms of the contract allow the lender to change the interest rate is known as a(n)
ARM.
The __________ attempt to set international standards for bank capital.
Basel Accords
Which of the following qualifies as a liability to a bank?
Demand deposits
In 2010, the passage of the __________ Act removed the restriction on the paying of interest on demand deposits that had been established with Regulation Q.
Dodd-Frank Wall Street Reform and Consumer Protection
In order to be able to create mortgage pools with conventional loans as Fannie Mae did with FHA and VA loans, in 1970 Congress created the
Federal Home Loan Mortgage Corporation (Freddie Mac).
The federal agency created during the Great Depression to establish a secondary mortgage market by purchasing FHA-insured loans at par and accrued interest was the
Federal National Mortgage Association (FNMA).
Under which of the following banking acts were banks forbidden from underwriting almost all stocks and bonds and were banned from selling insurance?
Glass-Steagall Act
In the late 1960s and early 1970s, when inflation was driving up interest rates, the prohibition against banks paying interest on checking accounts became a real problem. In response to this prohibition, Ronald Haselton created
NOW accounts that were similar to checking accounts but paid interest.
The president of which district bank is a permanent member of the Federal Open Market Committee?
New York
The Federal Reserve was created largely in response to the
Panic of 1907.
For much of US history, banks have been limited in how much they could pay in interest on deposits by
Regulation Q.
What government agency was in charge of liquidating insolvent thrift institutions and selling off the assets of the failed institutions?
Resolution Trust Corporation
Who created the first finance companies?
Retailers
The securities that the Federal Reserve holds on its balance sheet include
US Treasury securities, federal agency debt, and privately issued mortgage-backed securities.
How did zombie institutions infect healthy institutions?
Zombie institutions had to pay high interest rates to attract savers, forcing healthy institutions to raise their rates as well.
The principal characteristic of a dual banking system is that
a bank charter may be obtained from either the national or the state/provincial government.
In Vance's homeowner's insurance policy, it states that he is required to pay out-of-pocket the first $5,000 for any homeowner's insurance claim that he submits before the insurance company will reimburse for any loss. This is an example of using
a deductible to try to mitigate the problem of moral hazard.
If the public's confidence in the banking system is shaken, it may cause
a run on banks.
A major challenge for banks with lots of mortgage loans is a lack of liquidity. The solution to this problem has been the emergence of
a secondary mortgage market.
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.
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.
The Federal Reserve operates as
an independent entity.
The chair of the Federal Reserve becomes the chair by being
appointed by the president of the United States and confirmed by the US Senate.
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
An example of asymmetric information in financial markets is that, in banking,
borrowers know more about their capacity to repay loans than lenders.
Among the assets on a bank's balance sheet are
consumer loans.
By far, the largest liability on the banking system's balance sheet is
deposits.
In the market for used cars, asymmetric information will tend to
drive the better used cars out of the market.
A limitation on US banks is the prohibition from holding __________ in their asset portfolios.
equities
Because a bank's depositors also suffer from asymmetric information in that it is difficult for them to know if a bank is being run well, the US government created
government-sponsored deposit insurance.
Banks will often use derivative contracts to
hedge exchange rate risk.
Term auction lending was introduced by the Fed in the early stages of the 2007 financial crisis in order to
increase the amount of liquidity in the financial system.
When the Federal Reserve makes a loan at the discount window to a bank, it will __________ the monetary base by __________ bank reserves.
increase; increasing
One of the biggest challenges the Federal Reserve faces in conducting monetary policy is the existence of __________ lags.
information and impact
For bank executives, the level of bank capital and the level of executive compensation are
inversely related.
An advantage of inflation rate targeting is
it reduces inflationary expectations.
The FDIC prefers to use the purchase and assume strategy to deal with a failed bank rather than the pay off and liquidate approach because it is typically
less expensive.
The purpose behind Regulation Q was to
limit competition between banks.
Within an economy, money gets created when banks
make loans.
Harmon opens a new restaurant, which he insures for twice its worth. Knowing his business is insured, Harmon becomes careless in his management of the restaurant, with the result being that he suffers a bad fire which burns down his restaurant. This is an example of
moral hazard.
Mortgages that are pooled together and sold to investors are known as
mortgage-backed securities.
One of the concerns about the Federal Reserve targeting high employment is that it might
neglect the goal of stable prices.
Mortgages for which lenders did not verify the income or assets of the borrowers were known as
no documentation home mortgages.
Banks want to hold as little cash as possible because holding cash
offers a minimal rate of return.
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.
The main responsibility of the Bank of Japan is to use monetary policy to
pursue price stability.
In the too big to fail policy, there is an inherent tension between __________ and __________.
reducing systemic risk; increasing moral hazard
Having multiple entities responsible for issuing bank charters in the United States has given rise to the problem of
regulator shopping.
When bankers are in control of the regulatory agencies to the point that regulations are enforced in ways favorable to the banks, it is known as
regulatory capture.
By far, the largest asset on the Federal Reserve's balance sheet is
securities.
Loans that are made to borrowers with substandard qualifications are referred to as __________ mortgage loans.
subprime
The idea that the failure of one megabank could result in the collapse of the entire financial system is known as __________ risk.
systemic
In a very basic sense, banks perform two functions in society: they __________ and __________.
take deposits; make loans
In the absence of banks and other lending institutions, when Sally is looking to borrow some money to buy a house, one of the biggest problems she faces is
the cost associated with searching for a suitable lender.
Currency in circulation plus bank reserves plus US Treasury currency in circulation is referred to as
the monetary base.
The board of governors of the Federal Reserve has three primary responsibilities, which are
the operations of the Fed, commercial bank regulation, and monetary policy.
Unemployment is not only terribly costly to people who are unemployed but also to society as a whole because
unemployment represents an underutilization of society's available resources.
When the price level falls, indebted persons will be __________ off because the real value of their debt will have __________.
worse; increased