Money and Banking Exam 2

Government deficits can complicate monetary policy because government borrowing can lead to

"crowding out," which leads to higher interest rates

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

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 ti the Taylor Rule, the Federal Reserve's target federal funds rate should be

1.5%

Joe has a $1,000 debt with no interest. He is a plumber and earns $50 per hour. The real burden of Joe's debt is

20 hours of work

If the GDP is $16 trillion and the money supply is $4 trillion, then the velocity of money is

4

Which of the following would be considered an asset on a bank's balance sheet? A: Loans from other banks B: Demand deposits C: Savings accounts D: A consumer loan

A consumer loan

Which of the following qualifies as a liability to a bank? A: Business loan B: A mortgage C: Demand deposits D: A Treasury bond

C: Demand Deposits

Which of the following qualifies as a liability to a bank?

Demand deposits

A proposed alternative to the Taylor Rule that uses the consumer price index core inflation rate over the previous 12 months and the seasonally adjusted unemployment rate is known as the __________ Rule.

Mankiw

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

The president of which district bank is a permanent member of the Federal Open Market Committee?

New York

In 1968, Congress passed a key piece of legislation to protect consumers called the ___________ Act.

Truth in Lending

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

One of the main reasons that banks exist is to deal with the issues of _______ and ______.

adverse selection; moral hazard

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

In the 1990s, dot-com companies flourished and their valuations rose dramatically. This phenomenon has been referred to as a(n)

asset bubble

When the parties to a transaction have a different levels of knowledge about each other and/or the nature and implications of the transaction, it is said that there exists ________________ information.

asymmetric

Ridley goes for a job interview at Exeter Corporation. When she sits down with the human resources director, we might say that a situation of __________ exists.

asymmetric information

If bankers lose their confidence about the future, they may become very conservative about making loans, creating a credit card crunch which

can result on a significant decline in real output

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

Irving Fisher's equation of exchange led to the conclusion that the ______________ is a function of the level of ___________ income in the economy

demand for money; nominal

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

In the market for used cars, asymmetric information will tend to

drive the better used cars out of the market

When central banks were first created, their primary function was to

finance government spending

Open market operations in which the European Central Bank specifies an interest rate at which it will lend and then participating banks submit bids on the amount of money they wish to borrow at that rate are know as ______________ tenders.

fixed-rate standard

The two major roles of Canadian monetary policy are ________ and _________

flexible exchange rates; inflation control

The entity responsible for making the monetary policy decisions in the European Central Bank is the

governing council

The three governing bodies of the European Central Bank are the

governing council, general council, and executive board

An example of asymmetric information in financial markets is that, in the bond market, bond issuers

have better insight about their future profitability than bond buyers

During a credit crunch, the excess reserve ratio will

increase

Monetization of public debt can lead to a rapid increase in the money supply and hence to

inflation

An advantage of inflation rate targeting is

it reduces inflationary expectations

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 there is a high degree of trust in a country's banking system, the currency ration will be

low

In the face of credit crunch, the Federal Reserve will most likely attempt to

lower interest rates to inject liquidity into the financial system

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

The academic literature on central bank independence shows

mixed results with some studies showing a negative correlation between central bank independence and inflation and other studies showing a positive correlation

The responsibilities of the European Central Bank include

monetary policy, foreign exchange operations, and maintenance of the payments systems

Petra has an automobile accident and finds that as a result her auto insurance premium will increase by 25%. This is an example of an adjustable premium that insurance companies often use as a mechanism to combat

moral hazard

Of the policy tools available to the European Central Bank, the most frequently used are

open market operations (OMOs).

In the Taylor Rule formulation for setting a federal funds target rate, a negative output gap means that the

output in the economy is below the economy's potential output.

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.

A potential problem of a more politically controlled central bank is that

politicians may want to pursue monetary policies that are good in the short run but bad in the long run

If the European Central Bank is pursing a contractionary monetary policy, it will

raise the minimum reserve requirement

The Bank of Canada conducts monetary policy by setting a target for the

rate of inflation

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.

When the excess reserve ratio decrease, the impact of changes in the monetary base on the money supply is

strengthened

When the required reserve ratio decreases, the impact of changes in the monetary base on the money supply is

strengthened

When the link between M1, M2, and inflation broke down in the 1980s, many economists argued that the best policy approach was to has an explicit inflation target. The biggest problem with an explicit inflation target is

that it requires perfect foresight on the part of the Federal Reserve because of the lagged impact of monetary policy instruments

The Federal Reserve district banks are primarily responsible for

the check-clearing system, supervising and examining banks in their districts, and keeping track of the economy in their districts

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

In its early days, the Fed's role as a lender of last resort was subject to

the discount rate doctrine

Currency in circulation plus bank reserves plus US Treasury currency in circulation is referred to as

the monetary base

If Clem were to buy a US Treasury security from the Federal Reserve in the secondary market, paying cash, then

the monetary base will decrease but bank reserves will stay the same

In its early days, the Fed's role as a lender of last resort was subject to

the real bills doctrine

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 S', causing the equilibrium interest rate to fall to IR3

Prior to the 1980s, the Federal Reserve could use targets for M1 and M2 to conduct monetary policy because

there was a fairly good link between M1, M2, and inflation

Unemployment is not only a terribly costly to people who are unemployed but also to society as a whole because

unemployment represents an underutilized 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