Money & Banking Exam 2 Review (Ch.10 - 13)

The​ debt-deflation process is the process of _____________________________________ that can increase the severity of an economic downturn. Part 2 The​ debt-deflation process contributed to the severity of the Great Depression by ____________ the real interest rate and the real value of​ debts, which _________ the burden on borrowers and led to ________ loan defaults.

increasing bankruptcies and defaults, increasing, increased, more

Suppose that National Bank of Guerneville has ​$35 million in checkable​ deposits, Commonwealth Bank has ​$45 million in checkable​ deposits, and the required reserve ratio for checkable deposits is​ 10%. If National Bank of Guerneville has​ $4 million in reserves and Commonwealth has​ $5 million in​ reserves, how much in excess reserves does each bank​ have? ​(Enter your answers rounded to one decimal​ place.) Part 2 National Bank of Guerneville has ​$_____ million in excess reserves. Part 3 Commonwealth Bank has ​$_____ million in excess reserves. Part 4 Now suppose that a customer of National Bank of Guerneville writes a check for ​$2 million to a real estate broker who deposits the check at Commonwealth. After the check​ clears, how much in excess reserves does each bank​ have? Part 5 National Bank of Guerneville has ​$_____ million in excess reserves. Part 6 Commonwealth Bank has ​$_____ million in excess reserves.

$0.50 $0.50 $−1.3 $2.3

Suppose that National Bank of Guerneville has ​$33 million in checkable​ deposits, Commonwealth Bank has ​$43 million in checkable​ deposits, and the required reserve ratio for checkable deposits is​ 10%. If National Bank of Guerneville has​ $4 million in reserves and Commonwealth has​ $5 million in​ reserves, how much in excess reserves does each bank​ have? ​(Enter your answers rounded to one decimal​ place.) Part 2 National Bank of Guerneville has ​$____ million in excess reserves. Part 3 Commonwealth Bank has ​$____ million in excess reserves. Part 4 Now suppose that a customer of National Bank of Guerneville writes a check for ​$2 million to a real estate broker who deposits the check at Commonwealth. After the check​ clears, how much in excess reserves does each bank​ have? Part 5 National Bank of Guerneville has ​$−1.1 million in excess reserves. Part 6 Commonwealth Bank has ​$2.5 million in excess reserves.

$0.7 $0.7 $-1.1 $2.5

​[Related to Solved Problem 13.1​] Suppose that Bank of America pays a 2​% annual interest rate on checking account balances while having to meet a reserve requirement of​ 10%. Assume that the Fed pays Bank of America an interest rate of 0.25​% on its holdings of reserves and that Bank of America can earn 7​% on its loans and other investments. How do reserve requirements affect the amount that Bank of America can earn on​ $1,000 in checking account​ deposits? Ignore any costs Bank of America incurs on the deposits other than the interest it pays to depositors. The​ 10% reserve requirement reduces the amount Bank of America can earn on​ $1,000 by ​$________ ​(Enter your answer rounded to two decimal places.​) Part 2 Is the opportunity cost to banks of reserve requirements likely to be higher during a period of high inflation or during a period of low​ inflation? A. The opportunity cost to banks of reserve requirements would likely be higher during a period of high inflation when nominal interest rates on loans are high. B. The opportunity cost to banks of reserve requirements would likely be higher during a period of high inflation when nominal interest rates on loans are lower. C. The opportunity cost to banks of reserve requirements would likely be higher during a period of lower inflation when nominal interest rates on loans are lower. D. The opportunity cost to banks of reserve requirements would likely be higher during a period of lower inflation when nominal interest rates on loans are high.

$6.75 A. The opportunity cost to banks of reserve requirements would likely be higher during a period of high inflation when nominal interest rates on loans are high.

Suppose First National Bank has ​$260 million in assets and ​$26 million in equity capital. Part 2 If First National has a 2​% ​ROA, what is its​ ROE? ​(Enter your answer rounded to two decimal places​). ROE=____​% Part 3 Now suppose First​ National's equity capital declines to ​$13 ​million, while its assets and ROA are unchanged. What is First​ National's ROE​ now?​ (Enter your answer rounded to two decimal places​) ​ROE=____%

20% 4

Suppose First National Bank has ​$200 million in assets and ​$20 million in equity capital. Part 2 If First National has a 2​% ​ROA, what is its​ ROE? ​(Enter your answer rounded to two decimal places​). ROE=____% Part 3 Now suppose First​ National's equity capital declines to ​$10 ​million, while its assets and ROA are unchanged. What is First​ National's ROE​ now?​ (Enter your answer rounded to two decimal places​) ​ROE=____%

20% 40%

The following entries​ (in millions of​ dollars) are from the balance sheet of Rivendell National Bank​ (RNB): U.S. Treasury bills $22 Demand deposits ​ $41 ​Mortgage-backed securities $35 Loans from other banks $8 ​C&I loans $53 Discount loans $9 NOW accounts $37 Savings accounts $11 Reserve deposits with Federal Reserve $10 Cash items in the process of collection ​$9 Municipal bonds $6 Bank building $3 Part 2 If​ RNB's assets have an average duration of three years and its liabilities have an average duration of two ​years, what is​ RNB's duration​ gap? Duration gap​ = _________

3-2 =1

When was TARP​ created? A. 2008 B. 2020 C. 1913 D. 1934 Part 2 Why was TARP​ created? A. TARP was established after a series of bank failures during the Great Depression. B. TARP was established to ameliorate bank runs by the public. C. TARP was created to restore the market for​ mortgage-backed securities and other toxic assets to provide relief to financial firms that held these assets on their balance sheets. D. TARP was established in 1913 in conjunction with the Fed. Part 3 Did the federal government lose money from​ TARP? Briefly explain. A. Yes, TARP spending was focused on households who had lost wealth during the​ crisis, which provided no direct financial return to the government. B. Yes, TARP spending was focused on bailing out​ banks, which helped bank managers without providing any financial return to the government. C. ​No, TARP was designed to exactly break even by employing equal amounts of consumer payouts and bank bailouts. D. No, TARP funds were invested heavily into bank stocks to increase bank capital. These holdings eventually made the government a profit.

A. 2008 C. TARP was created to restore the market for​ mortgage-backed securities and other toxic assets to provide relief to financial firms that held these assets on their balance sheets. D. No, TARP funds were invested heavily into bank stocks to increase bank capital. These holdings eventually made the government a profit.

An article in the Wall Street Journal notes​ that: "Higher capital requirements effectively limit how much SIFIs can​ borrow, and can crimp profitability." ​Source: Ryan​ Tracy, "What You Need to Know about ​SIFIs," Wall Street Journal​, March​ 30, 2016. Part 2 What is a​ SIFI? A. A firm whose failure would potentially cause a financial crisis. B. A firm whose failure would have some impact on the economy. C. A firm whose failure would have little impact on the economy. D. A firm whose failure would have no impact on the economy. Part 3 All of the following are reasons why the​ Dodd-Frank Act required SIFIs to hold more​ capital, except: A. to ensure that the​ firms' assets can be sold off in a way that will not destabilize financial markets. B. to give bank owners a greater incentive to avoid risky investments. C. because the FDIC was prohibited from intervening when SIFIs experienced economic distress. D. to increase the ability of the bank to remain solvent after incurring losses. Part 4 Why would holding more capital limit how much a financial firm can borrow and reduce the​ firm's profitability? A. It increases their capital​ base, lowering the calculated return on their investment. B. It increases future potential liabilities which firms must take as an expense in the current period. C. It does not reduce the amount a firm can borrow and has no impact on profitability. D. It decreases the amount of funds available to invest in​ riskier, potentially​ higher-yielding assets.

A. A firm whose failure would potentially cause a financial crisis. C. because the FDIC was prohibited from intervening when SIFIs experienced economic distress. D. It decreases the amount of funds available to invest in​ riskier, potentially​ higher-yielding assets.

​[Related to the Making the ConnectionLOADING...​] In their book This Time Is Different​, Carmen Reinhart and Kenneth Rogoff​ conclude: ​"An examination of the aftermath of severe postwar financial crises shows that they have had a deep and lasting effect on asset​ prices, output, and​ employment." Source​: Carmen M. Reinhart and Kenneth S.​ Rogoff, This Time Is​ Different: Eight Centuries of Financial Folly​, ​Princeton, NJ: Princeton University​ Press, 2009, p. 248. Part 2 Why should a recession connected with a financial crisis be more severe than a recession that did not involve a financial​ crisis? A. A recession that includes a financial crisis is generally more complex and has more severe consequences, such as decreasing asset prices and lending, which affects the economy for a longer time period than a traditional recession. B. When financial institutions fail, credit markets can be damaged, and the amount of borrowing, and hence economic activity, can increase, further affecting real output. C. Both A and B are correct. D. None of the above. A recession connected with a financial crisis will be less severe than a recession that did not involve a financial crisis.

A. A recession that includes a financial crisis is generally more complex and has more severe consequences, such as decreasing asset prices and lending, which affects the economy for a longer time period than a traditional recession.

​"A bank that expects interest rates to increase in the future will want to hold more​ rate-sensitive assets and fewer​ rate-sensitive liabilities." Do you agree with this​ statement? A. Agree.​ Rate-sensitive assets will increase in value thus holding more of them as​ assets, while reducing them as​ liabilities, will increase bank profits. B. Agree.​ Rate-sensitive assets will increase in value thus holding more of them as​ assets, while reducing them as​ liabilities, will decrease​ interest-rate risk. C. Disagree.​ Rate-sensitive assets will increase in value thus holding more of them as​ assets, while reducing them as​ liabilities, will decrease bank profits. D. Disagree. In any​ case, it is more profitable for banks to reduce the number of​ rate-sensitive assets and​ liabilities, and increase assets and liabilities with fixed interest. Part 2 ​"A bank that expects interest rates to fall will want the duration of its assets to be greater than the duration of its liabilities​ - a positive duration​ gap." Do you agree with this​ statement? A. Agree. A fall in interest rates with a positive duration gap will increase the number of deposits. B. Disagree. A fall in interest rates with a positive duration gap will decrease profits. C. Disagree. The bank does not care about the duration gap during interest movements. D. Agree. A fall in interest rates with a positive duration gap will increase a​ bank's capital. Part 3 ​"If a bank manager expects interest rates to fall in the​ future, he should increase the duration of his​ bank's liabilities." Do you agree with this​ statement? A. Disagree. Higher duration of its liabilities will reduce the value of the​ bank's capital. B. Agree. The manager should increase the duration of his​ bank's liabilities. C. Disagree. The manager should not change the duration of his​ bank's liabilities. D. There is not enough information to evaluate the​ manager's actions.

A. Agree.​ Rate-sensitive assets will increase in value thus holding more of them as​ assets, while reducing them as​ liabilities, will increase bank profits. D. Agree. A fall in interest rates with a positive duration gap will increase a​ bank's capital. A. Disagree. Higher duration of its liabilities will reduce the value of the​ bank's capital.

What are the main arguments for the​ Fed's independence? ​(Check all that apply​.) A. An independent Fed makes a political business cycle less likely. B. Only an independent central bank can deal with a financial crisis without causing an increase in unemployment and inflation. C. It would be less democratic for elected officials to control monetary policy. D. Monetary policy is too important to be left to​ politicians, who are not economists and have their own political interests at stake. Part 2 What are the main arguments against the​ Fed's independence? ​(Check all that apply​.) A. Monetary policy is too important to be left to​ politicians, who are not economists and have their own political interests at stake. B. The public is unable to hold Fed officials accountable for their​ policies, unlike elected officials. C. Only an independent central bank can deal with a financial crisis without causing an increase in unemployment and inflation. D. It would be more democratic for elected officials to control monetary policy.

A. An independent Fed makes a political business cycle less likely. & D. Monetary policy is too important to be left to​ politicians, who are not economists and have their own political interests at stake. B. The public is unable to hold Fed officials accountable for their​ policies, unlike elected officials. & D. It would be more democratic for elected officials to control monetary policy.

The key accounting equation on which balance sheets are based is given by A. Assets​ = Liabilities​ + Shareholders' Equity. B. Assets​ + Shareholders' Equity​ = Liabilities. C. Assets​ = Liabilities − ​Shareholders' Equity. D. Assets​ = Liabilities. Part 2 The most important bank assets are A. Reserves and Real estate loans. B. Real estate loans and U.S.​ government/agency securities. C. Consumer loans and Reserves. D. Real estate loans and​ Commercial/industrial loans. Part 3 The most important bank liabilities are A. Small-denomination time deposits and Checkable deposits. B. Checkable deposits and Bank capital. C. ​Large-denomination time deposits and Checkable deposits. D. Borrowings and​ Small-denomination time deposits.

A. Assets​ = Liabilities​ + Shareholders' Equity. B. Real estate loans and U.S.​ government/agency securities. A. Small-denomination time deposits and Checkable deposits.

In academic research published before he entered​ government, Fed Chairman Ben Bernanke​ wrote: ​[In] a system without deposit​ insurance, depositor runs and withdrawals deprive banks of funds for​ lending; to the extent that bank lending is specialized or information​ sensitive, these loans are not easily replaced by nonbank forms of credit. Source​: Ben S.​ Bernanke, Essays on the Great Depression​, ​Princeton, NJ: Princeton University​ Press, 2000, p. 26. What does it mean to say that bank lending is​ "information sensitive"? A. Banks acquire information to decide if borrowers are creditworthy. B. Savers can easily withdraw their deposits based on the information about the yield. C. Banks' lending is highly sensitive to the information about the interest rate. D. None of the above. Part 2 Nonbank forms of credit A. refer to credit from providers other than banks. B. are credits issued by the Fed. C. refer to credits issued by one commercial bank to another commercial bank. D. are credits issued by the U.S. Treasury. Part 3 Why would bank lending being​ "information sensitive" make it difficult to replace with nonbank forms of​ credit? A. Providers of credit are able to provide risk assessment just as well as banks. B. Nonbanks have economies of scale or some other advantage in evaluating the riskiness of loans. C. Banks have economies of scale or some other advantage in evaluating the riskiness of loans. D. Both B and C are correct. Part 4 Does​ Bernanke's observation help to explain the role bank panics played in the severity of the Great​ Depression? A. ​Yes, Bernanke's observation helps to explain the role bank panics played in the severity of the Great Depression. B. No, Bernanke's observation​ doesn't help to explain the role bank panics played in the severity of the Great Depression. C. When thousands of banks​ failed, it became difficult for their customers to obtain​ credit, thus exacerbating the severity of the Great Depression. D. Both A and C are correct.

A. Banks acquire information to decide if borrowers are creditworthy. A. refer to credit from providers other than banks. C. Banks have economies of scale or some other advantage in evaluating the riskiness of loans. D. Both A and C are correct.

How do banks manage liquidity​ risk? ​(Check all that apply.​) A. Banks manage this risk by keeping some funds very​ liquid, such as a reverse repurchase agreement. Your answer is correct. B. Banks manage this risk by keeping some funds very​ liquid, such as in the federal funds market. C. Banks can increase their assets to cover liquidity risk. D. Banks can increase their borrowings to cover liquidity risk. Part 2 How do banks manage credit​ risk? A. Banks can manage credit risk by performing credit risk​ analysis, requiring borrowers to put up​ collateral, and using credit rationing. B. Banks can manage risk by creating​ long-term business relationships by which the bank could acquire information about the creditor. C. Banks can manage credit risk by diversifying their assets. D. All of the above are correct. Part 3 How do banks manage​ interest-rate risk? ​(Check all that apply.​) A. Banks can manage​ interest-rate risk by keeping some funds as repurchase agreements. B. Interest-rate swaps can reduce​ interest-rate risk exposure. C. Banks can reduce​ interest-rate risk by making more floating rate​ loans, or ARMs. D. Banks can increase their borrowings to manage​ interest-rate risk.

A. Banks manage this risk by keeping some funds very​ liquid, such as a reverse repurchase agreement. & B. Banks manage this risk by keeping some funds very​ liquid, such as in the federal funds market. & D. Banks can increase their borrowings to cover liquidity risk. D. All of the above are correct. B. Interest-rate swaps can reduce​ interest-rate risk exposure. & C. Banks can reduce​ interest-rate risk by making more floating rate​ loans, or ARMs.

How is the European Central Bank​ (ECB) organized? ​(Check all that apply.​) A. Board members are appointed by member​ countries' governments, based on the recommendation of the council of Ministers of Economics and​ Finance, after consulting the European Parliament and the Governing Council of the ECB. Your answer is correct. B. Policy decisions made by the ECB must be unanimously approved by the governments of member countries. C. The governance of the ECB includes the governors of each of the member national central banks. D. The ECB has an executive board of six​ members, with one of its members serving as president. Part 2 What special problems does the ECB​ confront? A. The decentralized organization of the​ ECB, with the governors of the national central banks holding a majority of the​ votes, makes it harder to achieve a consensus during a crisis. B. The ECB must coordinate the use of multiple currencies. C.The ECB is required to employ separate interest rate policies for each of the member nations. D. The ECB must function with a highly centralized structure. Part 3 What difficulties did the ECB encounter during the financial crisis of 2007-​2009? A. The ECB encountered difficulty conducting a common monetary policy for countries experiencing different economic conditions. B. The ECB had trouble accepting policy directions from the U.S. Federal Reserve. C. New members joined the​ EMU, requiring the ECB to harmonize old​ members' monetary policies with new​ members' monetary policies. D. The ECB encountered the same difficulties as every other central bank—​namely, the combination of higher inflation coupled with higher unemployment. Part 4 What difficulties did the ECB encounter during the 2020​ Covid-19 pandemic? A. The ECB dropped its​ 2% inflation target in order to increase​ employment, causing inflation rates to increase exponentially. B. The ECB realized the effectiveness of monetary policy was limited and urged member countries to employ more expansionary fiscal policy. C. The ECB was unwilling to employ any monetary policy since inflation was already at its​ 2% target rate. D. The ECB encouraged member countries to stop implementing expansionary fiscal policy because it limited the effectiveness of monetary policy.

A. Board members are appointed by member​ countries' governments, based on the recommendation of the council of Ministers of Economics and​ Finance, after consulting the European Parliament and the Governing Council of the ECB. & C. The governance of the ECB includes the governors of each of the member national central banks. & D. The ECB has an executive board of six​ members, with one of its members serving as president. Your answer is correct. A. The decentralized organization of the​ ECB, with the governors of the national central banks holding a majority of the​ votes, makes it harder to achieve a consensus during a crisis. A. The ECB encountered difficulty conducting a common monetary policy for countries experiencing different economic conditions. B. The ECB realized the effectiveness of monetary policy was limited and urged member countries to employ more expansionary fiscal policy.

What is the length of a term for the Chairman of the Board of​ Governors? Question content area bottom Part 1 A. Four years B. 14 years C. 28 years D. One year

A. Four years

The classic account of bank panics was published in 1879 by Walter​ Bagehot, editor of the Economist​, in his book Lombard Street​: "In wild periods of​ alarm, one failure makes​ many, and the best way to prevent the derivative failures is to arrest the primary failure which causes them." ​Source: Walter​ Bagehot, Lombard​ Street: A Description of the Money Market​, New​ York: John​ Wiley, 1999​ (first published​ 1873), p. 51. Part 2 All of the following are reasons why one bank failure might lead to many bank​ failures, except: A. If multiple banks have to sell the same​ assets, the prices of those assets are likely to rise. B. Depositors have an incentive to withdraw their money from their banks to avoid losing it should their banks be forced to close. C. Banks will be forced to sell loans and securities to raise money to pay off depositors. D. Depositors of other banks may become concerned that their banks might also have problems. Part 3 What are the two main ways in which the government can keep one bank failure from leading to a bank​ panic? A. A central bank can act as a borrower of last resort and insure deposits. B. A central bank can act as a borrower of last​ resort, and the government can insure deposits. C. A central bank can act as a lender of last resort and insure deposits. D. A central bank can act as a lender of last​ resort, and the government can insure deposits.

A. If multiple banks have to sell the same​ assets, the prices of those assets are likely to rise. D. A central bank can act as a lender of last​ resort, and the government can insure deposits.

In his​ memoirs, Herbert Hoover described the reaction of his Treasury Secretary to the Great​ Depression: First was the​ "leave it alone​ liquidationists" headed by Secretary of the Treasury​ Mellon, who felt that government must keep its hands off and let the slump liquidate itself. Mr. Mellon had only one​ formula: "Liquidate​ labor, liquidate​ stocks, liquidate the​ farmers, liquidate real​ estate." Source​: Herbert​ Hoover, The Memoirs of Herbert​ Hoover: Volume​ 3: The Great​ Depression, ​1929-1941​, New​ York: Macmillan,​ 1952, p. 30. What does​ "liquidate" mean in this​ context? A. Liquidate means to let prices fall to their equilibrium level. B. Liquidate means to encourage struggling firms to expand. C. Liquidate means to redistribute the assets and property of a business. D. Both A and B are correct. Part 2 Can these views help to explain the actions by the Fed during the early years of the Great​ Depression? A. Yes. The Fed and the government did absolutely nothing to help the economy during the Great Depression. B. Yes, to an​ extent, because the Federal Reserve was acting on the predominant economic model of the​ time, which said that the economy will​ self-adjust and any attempt to intervene will either do nothing or create negative consequences. C. No, these views​ don't help to explain the actions by the Fed. The Federal Reserve was acting on the predominant economic model of the​ time, which said that the economy needed government intervention in order to recover. D. There is not enough information to answer the question.

A. Liquidate means to let prices fall to their equilibrium level. Your answer is correct. B. Yes, to an​ extent, because the Federal Reserve was acting on the predominant economic model of the​ time, which said that the economy will​ self-adjust and any attempt to intervene will either do nothing or create negative consequences.

What are the changes to the Fed under the​ Dodd-Frank Act? ​(Check all that apply.​) A. Making the Fed a member of the new Financial Stability Oversight Council. B. Requiring class A directors of the Federal Reserve banks to participate in the election of bank presidents. C. Designating a Fed vice chairman for regulatory supervision. D. Ordering the Government Accountability Office to audit the emergency lending programs the Fed carried out during the financial crisis. E. Requiring the Fed to be more transparent about its monetary policy targets.

A. Making the Fed a member of the new Financial Stability Oversight Council. & C. Designating a Fed vice chairman for regulatory supervision. & D. Ordering the Government Accountability Office to audit the emergency lending programs the Fed carried out during the financial crisis.

Suppose that​ Lena, who has an account at SunTrust​ Bank, writes a check for ​$150 to​ Jose, who has an account at National City Bank. Part 2 Use following the​ T-account for SunTrust Bank to show how it is affected after the check clears. Assets Liabilities Reserves _____ Checkable deposits _____ Part 3 Use following the​ T-account for National City Bank to show how it is affected after the check clears. Assets Liabilities Reserves _____ Checkable deposits _____

Assets Liabilities Reserves (150) Checkable deposits (150) Part 3 Use following the​ T-account for National City Bank to show how it is affected after the check clears. Assets Liabilities Reserves 150 Checkable deposits 150

According to economist Alan Meltzer of Carnegie Mellon​ University, who has written about the history of the Federal​ Reserve: Tension between the​ [Federal Reserve] Board and the reserve banks began before the System opened for business. . . .​ [Paul] Warburg described the problem. Dominance by the Board would allow political considerations to dominate decisions about interest rates. Dominance by the reserve banks​ "would . . . reduce the Board to a position of​ impotence." Paul Warburg was one of President​ Wilson's initial appointments when the Federal Reserve Board began operations in 1914. Source​: Allan H.​ Meltzer, A History of the Federal​ Reserve, Volume I​: 1913−1951​, ​Chicago: University of Chicago​ Press, 2003, p. 75. Why did Congress set up a system that had this tension between the Reserve Banks and the Federal Reserve​ Board? ​(Check all that apply.​) A. Tension was created to ensure that various interests would have input into the conduct of monetary policy. B. Tension was necessary to improve the competitiveness of the U.S. banking system. C. Tension was created in order to make the Fed more centralized. D. This was all part of the organizational plan to prevent one faction of the banking system from having too much power. Part 2 Has the tension been resolved in the modern​ Fed? A. The tension has been resolved by the FOMC. B. The tension has been resolved by the Consumer Protection Act. C. The tension has been resolved by the​ Dodd-Frank Act. D. The board has much more power​ today, but the tension remains.

A. Tension was created to ensure that various interests would have input into the conduct of monetary policy. & D. This was all part of the organizational plan to prevent one faction of the banking system from having too much power. D. The board has much more power​ today, but the tension remains.

In the first volume of his history of the Federal Reserve​ System, Allan Meltzer titled one of his chapters​ "Under Treasury​ Control, 1942-1951." ​Source: Allan H.​ Meltzer, A History of the Federal​ Reserve, Volume​ I: ​1913-1951​, ​Chicago: University of Chicago​ Press, 2003, Ch. 7. Which of the following statements are true and help explain why Meltzer considered the Fed to have been under Treasury control during those years ​(Select all that apply​) Part 2 A. The Treasury encouraged the Fed to actively buy bonds that private investors would not. B.The Treasury did not agree with the Fed's decision to fix interest rates during this period. The Treasury did not agree with the Fed's decision to fix interest rates during this period. C. The Treasury acted on the behalf of Presidents Roosevelt and Truman. The Treasury acted on the behalf of Presidents Roosevelt and Truman. Your answer is correct. D. The Treasury assumed some control over the Fed to help finance wartime deficits.

A. The Treasury encouraged the Fed to actively buy bonds that private investors would not. & C.The Treasury acted on the behalf of Presidents Roosevelt and Truman. The Treasury acted on the behalf of Presidents Roosevelt and Truman. & D.The Treasury assumed some control over the Fed to help finance wartime deficits.

Question content area Part 1 ​[Related to the Making the ConnectionLOADING...​] In their book This Time Is Different​, Carmen Reinhart and Kenneth Rogoff​ conclude: ​"An examination of the aftermath of severe postwar financial crises shows that they have had a deep and lasting effect on asset​ prices, output, and​ employment." Source​: Carmen M. Reinhart and Kenneth S.​ Rogoff, This Time Is​ Different: Eight Centuries of Financial Folly​, ​Princeton, NJ: Princeton University​ Press, 2009, p. 248. Part 2 Why should a recession connected with a financial crisis be more severe than a recession that did not involve a financial​ crisis? A. When financial institutions fail, credit markets can be damaged, and the amount of borrowing, and hence economic activity, can decrease, further affecting real output. B. A recession that includes a financial crisis is generally more complex and has more severe consequences, such as increasing asset prices and lending, which affects the economy for a longer time period than a traditional recession. C. Both A and B are correct. D. None of the above. A recession connected with a financial crisis will be less severe than a recession that did not involve a financial crisis.

A. When financial institutions fail, credit markets can be damaged, and the amount of borrowing, and hence economic activity, can decrease, further affecting real output.

Members of the Board of Governors are Part 1 A. appointed by the President of the United​ States, subject to confirmation by the Senate. B. appointed by the National Monetary Commission. C. elected by the district bank presidents. D. appointed by the Securities and Exchange​ Commission, subject to congressional veto.

A. appointed by the President of the United​ States, subject to confirmation by the Senate.

The sensitivity of bank capital to market interest rates is measured by Part 1 A. duration analysis. B. capital analysis. C. gap analysis. D. leverage ratio.

A. duration analysis.

A representative of the British​ government's Treasury Department is present at every meeting of the Bank of​ England's Monetary Policy Committee. The representative can participate in the discussion but is not allowed to vote. In the United​ States, since Congress revised the Federal Reserve Act in​ 1935, no member of the Treasury Department is present during meetings of the Federal Open Market Committee. What are the advantages and disadvantages of the British approach compared with the U.S.​ approach? Compared to the United​ States, an advantage of the British approach is​ ________. A disadvantage is​ ________. A. greater coordination of economic policy between the government and central​ bank; less central bank independence in conducting monetary policy B. more central bank independence in conducting monetary​ policy; less coordination of economic policy between the government and central bank C. it gives the appearance of greater independence from political​ pressure; the Treasury has no direct​ decision-making authority D. joint control of monetary policy between the government and central​ bank; the central bank is subject to more political pressure

A. greater coordination of economic policy between the government and central​ bank; less central bank independence in conducting monetary policy

Which of the following can be described as when a bank buys securities owned by a business while agreeing to sell them back at a later​ date? Part 2 A. reverse repurchase agreement B. discount loans C. repurchase agreement D. federal funds

A. reverse repurchase agreement

Banks have a maturity mismatch since Question content area bottom Part 1 A. they borrow short​ term, but lend long term. B. some of their borrowings are short term while others are long term. C. some of their loans are short term while others are long term. D. they borrow long​ term, but lend short term.

A. they borrow short​ term, but lend long term.

Banks face liquidity risk because Part 1 A. they can have difficulty meeting their​ depositor's demands to withdraw money. B. they are unable to borrow from the Federal Reserve. C. households and businesses may seek to borrow a large amount of funds in a short period of time. D. governments tend to run high budget deficits.

A. they can have difficulty meeting their​ depositor's demands to withdraw money.

An economist makes the following​ statement: "There is a principal-agent problem with respect to the relationship between the president and the Fed. But​ that's a good thing—​it's how we can avoid a political business​ cycle." In​ general, what do economists mean by a ​"principal-agent ​problem"? By a ​"principal-agent ​problem," economists mean​ ________. A. when the goals and priorities of those in charge do not match the goals and priorities of the people they oversee B. when a person with the final say in all decisions is not employed by the organization that those decisions impact C. when everyone in the organization focuses on profit without considering potential externalities D. when there is no individual in charge of making​ decisions, since everyone is treated equally in the organization Part 2 Evaluate the​ economist's statement. The economist is thinking that​ ________. A. since political business cycles are the result of consumer behavior and not the​ Fed, they are unrelated to the principal-agent problem. B. the president may want the Fed to lower interest rates during​ elections, but the Fed will focus on the​ long-term health of the economy. C. the president may want the Fed to raise interest rates during​ elections, but the Fed will focus on the​ long-term health of the economy. D. since the president nominates the members of the Board of​ Governors, there is no possibility of a principal-agent problem.

A. when the goals and priorities of those in charge do not match the goals and priorities of the people they oversee B. the president may want the Fed to lower interest rates during​ elections, but the Fed will focus on the​ long-term health of the economy.

What is the public interest view of the​ Fed's motivation? A. A theory of central bank decision making that holds that officials act in the best interests of the shareholders. B. A theory of central bank decision making that holds that officials act in the best interests of the public. C. A theory of central banking that holds that officials maximize the​ public's interest in​ (and attitude​ toward) the affairs of the monetary authority. D. A theory of central banking that holds that officials maximize their personal​ well-being rather than that of the general public. Part 2 What is the​ principal-agent view? A. A theory of central banking that holds that officials maximize their personal​ well-being rather than that of the general public. B. A theory of central bank decision making that holds that officials act in the best interest of the shareholders. C. A theory of central bank decision making that holds that officials act in the best interest of the public. D. A theory of central banking that holds that officials maximize the general​ public's well-being rather than their personal​ well-being. Part 3 How are the​ principal-agent view and the public interest view connected to the theory of the political business​ cycle? A. The political business cycle would be more likely with the​ principal-agent view where the Fed lowers interest rates to stimulate the economy before an election to avoid conflict with groups that could limit its power and influence. B. Under the both views the Fed lowers interest rates to stimulate the economy before an election to avoid conflict with groups that could limit its power and influence. C. The political business cycle would be more likely with the public interest view where the Fed lowers interest rates to stimulate the economy before an election to avoid conflict with groups that could limit its power and influence. D. These views are unrelated to the theory of the political business cycle.

B. A theory of central bank decision making that holds that officials act in the best interests of the public. A. A theory of central banking that holds that officials maximize their personal​ well-being rather than that of the general public. A. The political business cycle would be more likely with the​ principal-agent view where the Fed lowers interest rates to stimulate the economy before an election to avoid conflict with groups that could limit its power and influence.

Which of the following is NOT considered one of the four groups in the Federal Reserve​ System? Question content area bottom Part 1 A. Federal Reserve banks B. Federal Deposit Insurance Corporation C. Board of Governors D. Federal Open Market Committee

B. Federal Deposit Insurance Corporation

[Related to the Chapter Opener​] In a paper written in April​ 2010, looking back at the financial​ crisis, former Fed Chair Alan Greenspan​ argued: At least partly responsible​ [for the severity of the financial​ collapse] may have been the failure of risk managers to fully understand the impact of the emergence of shadow banking that increased financial​ innovation, but as a​ consequence, also increased the level of risk. The added risk had not been compensated by higher capital. Source​: Alan​ Greenspan, "The​ Crisis," April​ 15, 2010, p. 21. How did the emergence of shadow banking increase the risk to the financial​ system? ​(Check all that apply.​) A. Nonbank financial institutions are not required to maintain the equivalent of reserve requirements even​ though, like traditional​ banks, they borrow long and lend short. B. In the event of a nonbank financial institution​ run, there is no equivalent of the FDIC. C. Nonbank financial institutions are not required to maintain the equivalent of reserve requirements even​ though, like traditional​ banks, they borrow short and lend long. This is the correct answer. D. Nonbank financial institutions are required to maintain the equivalent of reserve requirements. Part 2 What does Greenspan mean that​ "the added risk had not been compensated by higher​ capital"? In order to compensate for the​ risk, Greenspan believes that nonbank financial institutions should have voluntarily A. decreased their debt. B. decreased excess reserves. C. increased the interest rate. D. increased their capital.

B. In the event of a nonbank financial institution​ run, there is no equivalent of the FDIC. & C. Nonbank financial institutions are not required to maintain the equivalent of reserve requirements even​ though, like traditional​ banks, they borrow short and lend long. D. increased their capital.

Is it easier for a central bank to be independent in a​ high-income country or in a​ low-income country? A. The independence of a central bank does not depend on the level of a​ country's income. B. It is often difficult for a central bank to act independently in a​ low-income country. C. It is often difficult for a central bank to act independently in a​ high-income country. D. Low-income countries rarely have central banks. Part 2 What implications does your answer have for what the average inflation rate is likely to be in​ high-income countries as opposed to​ low-income countries? A. The average inflation rate will be higher in​ low-income countries, but only because of the limited ability of the economy to expand production. B. Research has shown that the more independent a central bank​ is, the lower the inflation rate will be.​ Thus, one would expect the average inflation rate in​ less-developed countries to be lower than in industrial countries. C. Research has shown that the more independent a central bank​ is, the lower the inflation rate will be.​ Thus, one would expect the average inflation rate in​ less-developed countries to be higher than in industrial countries. D. Research has shown that the rate of inflation does not depend on the level of the central​ bank's independence.

B. It is often difficult for a central bank to act independently in a​ low-income country. C. Research has shown that the more independent a central bank​ is, the lower the inflation rate will be.​ Thus, one would expect the average inflation rate in​ less-developed countries to be higher than in industrial countries.

A columnist writing in the Wall Street Journal​ observed: "Franklin D.​ Roosevelt's March 1933 inaugural line​ 'that the only thing we have to fear is fear​ itself' was​ inspiring, but wrong. There was plenty to​ fear, not least the deflation that then gripped the​ nation." Prices fall when a country experiences​ deflation, so​ isn't deflation good for​ consumers? A. Yes, allowing the price level to fall is necessary before an economic recovery can begin. B. No, borrowers would be hurt by the higher real interest rates and higher real value of debts that deflation causes. C. ​Yes, deflation decreases​ prices, so when prices are​ falling, the purchasing power of money increases. D. It depends. The lower price level is always good for consumers as long as it​ doesn't lead to bank runs. Part 2 If nominal interest rates remain unchanged during a period of​ deflation, then when inflation rates are __________​, the real interest rate in the economy will __________. Part 3 Was deflation during the early 1930s good or bad for​ firms? A. It was good for firms because the lower price level effectively increased consumer spending. B. It was bad for firms that were borrowers because it effectively raised interest rates. C. It was good for firms that were borrowers because it effectively lowered interest rates. D. Uncertain, as the outcome depends on how consumers responded to the lower prices of the firms.

B. No, borrowers would be hurt by the higher real interest rates and higher real value of debts that deflation causes. decreasing, increase B. It was bad for firms that were borrowers because it effectively raised interest rates.

​[Related to the Chapter Opener​] In a paper written in April​ 2010, looking back at the financial​ crisis, former Fed Chair Alan Greenspan​ argued: At least partly responsible​ [for the severity of the financial​ collapse] may have been the failure of risk managers to fully understand the impact of the emergence of shadow banking that increased financial​ innovation, but as a​ consequence, also increased the level of risk. The added risk had not been compensated by higher capital. Source​: Alan​ Greenspan, "The​ Crisis," April​ 15, 2010, p. 21. How did the emergence of shadow banking increase the risk to the financial​ system? ​(Check all that apply.​) A. Nonbank financial institutions are required to maintain the equivalent of reserve requirements. B. Nonbank financial institutions are not required to maintain the equivalent of reserve requirements even​ though, like traditional​ banks, they borrow short and lend long. C. Nonbank financial institutions are not required to maintain the equivalent of reserve requirements even​ though, like traditional​ banks, they borrow long and lend short. D. In the event of a nonbank financial institution​ run, there is no equivalent of the FDIC. Part 2 What does Greenspan mean that​ "the added risk had not been compensated by higher​ capital"? In order to compensate for the​ risk, Greenspan believes that nonbank financial institutions should have voluntarily A. decreased excess reserves. B. decreased their debt. C. increased the interest rate. D. increased their capital.

B. Nonbank financial institutions are not required to maintain the equivalent of reserve requirements even​ though, like traditional​ banks, they borrow short and lend long. & D. In the event of a nonbank financial institution​ run, there is no equivalent of the FDIC. D. increased their capital.

At the beginning of the 2020​ recession, real GDP declined by even more than it had over a comparable period at the beginning of the Great Depression. An article on barrons.com quoted economist Price Fishback of the University of Arizona as​ saying, "I understand why people are thinking about the Depression. But​ it's not similar in the following sense—we know why this is happening. In the Great​ Depression, we really​ didn't know what was going​ on." Why were people less likely to understand what was causing the Great Depression while it was happening than were able to understand what was causing the recession of 2020 while it was​ happening? A. While the Great Depression and the 2020 recession were both caused by​ pandemics, the Great Depression was more​ complex, since world economies were more interconnected then than they are now. B. The Great Depression was caused by a variety of factors that were difficult to​ disentangle, while the 2020 recession was the result of lockdowns due to the​ Covid-19 pandemic. C. The Great Depression was caused by events in foreign​ countries, while the 2020 recession was the result of domestic events. D. The Great Depression was caused by the onset of World War​ II, which impacted economies in numerous​ ways, while the 2020 recession was the result of the​ Covid-19 pandemic. Part 2 Why might people knowing what was causing an economic downturn affect the length and severity of the​ downturn? A. Knowing the cause may help savers to better assess when they should withdraw their money from their​ banks, thus decreasing the severity of an economic downturn. B. Knowing the cause may help reduce the uncertainty that households and firms have about their future​ incomes, thus decreasing the severity of an economic downturn. C. Knowing the cause would likely have no impact on the length or severity of an economic​ downturn, as most people understand that recessions are just part of the business cycle. D. Knowing the cause would only cause people to panic more and lose trust in the financial​ system, thus increasing the severity of an economic downturn.

B. The Great Depression was caused by a variety of factors that were difficult to​ disentangle, while the 2020 recession was the result of lockdowns due to the​ Covid-19 pandemic. B. Knowing the cause may help reduce the uncertainty that households and firms have about their future​ incomes, thus decreasing the severity of an economic downturn.

[Related to the Making the ConnectionLOADING...​] Suppose that the U.S. Constitution were amended to include the​ following: "Congress shall establish a central bank that will be responsible for conducting the monetary policy of the United​ States." What effect would such an amendment be likely to have on the​ Fed? ​(Check all that apply.​) A. The amendment would cause the making of monetary policy to be transferred from a private organization to a public agency. B. The amendment would likely have little effect on the Fed and would simply quiet dissenters who​ don't believe the Fed is constitutional. C. If such an amendment were​ enacted, the U.S. dollar would likely undergo a large depreciation. D. The Fed already serves the role described in the hypothetical amendment.

B. The amendment would likely have little effect on the Fed and would simply quiet dissenters who​ don't believe the Fed is constitutional. D. The Fed already serves the role described in the hypothetical amendment.

​[Related to the Chapter​ Opener] Defending the presence of bankers on the boards of directors of the Federal Reserve​ Banks, Jeffrey​ Lacker, president of the Federal Reserve Bank of Richmond argued​ that: "This hybrid governance model has come to play an important role in the independence of monetary policy. ... Political independence allows monetary policy to place greater weight on the​ long-term benefits of low and stable inflation." ​Source: Jeffrey M.​ Lacker, "The ​Fed-Bank Relationship Under ​Scrutiny," Federal Reserve Bank of Richmond Econ Focus​, Fourth Quarter​ 2015, p. 1. Part 2 What does Lacker mean by a "hybrid governance model"​? A. The Federal Reserve System operates like a private corporation but also like an industry group. B. The economic power within the Federal Reserve System is divided between bankers and business​ interests, states and​ regions, and between the government and the private sector. C. Power within the Federal Reserve System is divided in three ways. D. The Federal Reserve System is a​ near-government organization. Part 3 Why might a politically independent Fed give a greater weight to low and stable inflation than Congress and the president would if they controlled monetary policy​ directly? A. An independent Fed is more focused on​ long-run costs than​ short-term gains. B. An independent Fed is more focused on​ short-run gains than​ long-run costs. C. Elected officials care less about​ short-term gains than​ long-run costs. D. Elected officials are more interested in​ long-run costs than​ short-term gains.

B. The economic power within the Federal Reserve System is divided between bankers and business​ interests, states and​ regions, and between the government and the private sector. A. An independent Fed is more focused on​ long-run costs than​ short-term gains.

Before​ 1933, there was no federal deposit insurance. Was the liquidity risk faced by banks during those years likely to have been larger or smaller than it is​ today? A. The liquidity risk faced by banks during those years was the same that it is today. B. The liquidity risk would have been larger because the absence of deposit insurance created the incentive for depositors to withdraw funds whenever they became concerned about the​ bank's viability, thus putting that viability at risk. C. The liquidity risk faced by banks during those years was smaller than it is today because banks did not have reserve requirements. D. The liquidity risk faced by banks during those years was larger than​ today, but only because depositors back then tended to act irrationally. E. There is not enough information to answer the question.

B. The liquidity risk would have been larger because the absence of deposit insurance created the incentive for depositors to withdraw funds whenever they became concerned about the​ bank's viability, thus putting that viability at risk.

An article on forbes.com during the​ Covid-19 pandemic noted​ that: "In the days and weeks after the pandemic​ hit, U.S. corporations drew on over​ $500 billion in​ credit, much of it from​ America's four biggest​ banks." The article also noted the​ "banks' strong capital and liquidity heading into the​ pandemic." Are the loans the banks made to corporations an asset or a liability to the banks doing the​ lending? Are they an asset or a liability to the firms borrowing the​ funds? A. The loans are assets to both the banks and corporations since it is the​ bank's money, but the corporations have control over it. B. The loans are assets to the banks and liabilities to the corporations since the money must be paid back to the bank in the future. C. The loans are liabilities to the banks and assets to the corporations since the money is no longer in the​ bank, but is controlled by the corporations. D. The loans are liabilities to both the banks and corporations since it is the​ bank's money, but the corporations have control over it. Part 2 When a​ bank's capital​ improves, what must have happened to the value of the​ bank's assets relative to the value of its​ liabilities? A​ bank's capital is defined as the value of a​ bank's assets ____________ the value of its liabilities. ​Therefore, if a​ bank's capital​ improves, we know that the​ bank's assets must have ______________________ the value of its liabilities. Part 3 Which of the following is the most highly liquid asset found on a​ bank's balance​ sheet? A. NOW accounts B. Demand deposits C. U.S. Treasury securities D. Loans

B. The loans are assets to the banks and liabilities to the corporations since the money must be paid back to the bank in the future. minus, risen relative to C. U.S. Treasury securities

​[Related to the Making the ConnectionLOADING...​] In their book This Time Is Different​, Carmen Reinhart and Kenneth Rogoff​ conclude: ​"An examination of the aftermath of severe postwar financial crises shows that they have had a deep and lasting effect on asset​ prices, output, and​ employment." Source​: Carmen M. Reinhart and Kenneth S.​ Rogoff, This Time Is​ Different: Eight Centuries of Financial Folly​, ​Princeton, NJ: Princeton University​ Press, 2009, p. 248. Part 2 Why should a recession connected with a financial crisis be more severe than a recession that did not involve a financial​ crisis? A. A recession that includes a financial crisis is generally more complex and has more severe consequences, such as increasing asset prices and lending, which affects the economy for a longer time period than a traditional recession. B. When financial institutions fail, credit markets can be damaged, and the amount of borrowing, and hence economic activity, can decrease, further affecting real output. C. Both A and B are correct. D. None of the above. A recession connected with a financial crisis will be less severe than a recession that did not involve a financial crisis.

B. When financial institutions fail, credit markets can be damaged, and the amount of borrowing, and hence economic activity, can decrease, further affecting real output.

Off-balance-sheet activities are A. activities that take place outside the​ bank, such as operations with​ ATMs, electronic banking and so on. B. activities that do not affect a​ bank's balance sheet because they do not change either the​ bank's assets or its liabilities. C. activities that do not affect a​ bank's balance sheet because they do not increase a​ bank's profit. D. activities that are illegal and cannot be reflected in a​ bank's balance sheet. Part 2 Which from the following are​ off-balance-sheet activities? ​(Check all that​ apply.) A. Increase in reserve requirements. B. Issuing credits. C. Trading activities. D. Loan commitment. E. Loan sales. F. Standby letters of credit. Part 3 Standby letters of credit are A. a​ bank's consent to provide a borrower with a stated amount of funds during some specified time. B. activities that include trading in the​ futures, options, or swaps market. C. a promise by a bank to lend​ funds, if​ necessary, to the seller of commercial paper at the time that the commercial paper matures. D. a financial contract in which a bank agrees to sell the expected future returns from an underlying bank loan to a third party. Part 4 Loan commitment is A. activities that include trading in the​ futures, options, or swaps market. B. a​ bank's consent to provide a borrower with a stated amount of funds during some specified time. C. a promise by a bank to lend​ funds, if​ necessary, to the seller of commercial paper at the time that the commercial paper matures. D. a financial contract in which a bank agrees to sell the expected future returns from an underlying bank loan to a third party. Part 5 Loan sales is A. a​ bank's consent to provide a borrower with a stated amount of funds during some specified time. B. a promise by a bank to lend​ funds, if​ necessary, to the seller of commercial paper at the time that the commercial paper matures. C. a financial contract in which a bank agrees to sell the expected future returns from an underlying bank loan to a third party. D. activities that include trading in the​ futures, options, or swaps market. Part 6 Trading activities are A. a​ bank's consent to provide a borrower with a stated amount of funds during some specified time. B. a promise by a bank to lend​ funds, if​ necessary, to the seller of commercial paper at the time that the commercial paper matures. C. activities that include trading in the​ futures, options, or swaps market. D. a financial contract in which a bank agrees to sell the expected future returns from an underlying bank loan to a third party.

B. activities that do not affect a​ bank's balance sheet because they do not change either the​ bank's assets or its liabilities. C. Trading activities. & D. Loan commitment. & E. Loan sales. & F. Standby letters of credit. C. a promise by a bank to lend​ funds, if​ necessary, to the seller of commercial paper at the time that the commercial paper matures. B. a​ bank's consent to provide a borrower with a stated amount of funds during some specified time. C. a financial contract in which a bank agrees to sell the expected future returns from an underlying bank loan to a third party. C. activities that include trading in the​ futures, options, or swaps market.

In his history of the Federal​ Reserve, Allan Meltzer of Carnegie Mellon University describes the views of Federal Reserve officials in the fall of​ 1930: Most of the policymakers regarded the substantial decline in​ short-term market interest rates ... as the main ... indicators of the current position of the monetary system....​ [Policy] was​ "easy" and had never been easier in the experience of the policymakers of the Federal Reserve System. Source​: Alan H.​ Meltzer, A History of the Federal​ Reserve: Volume​ 1: ​1913-1951​, ​Chicago: University of Chicago​ Press, 2003, p. 315. What does it mean to say that Fed policy is​ "easy"? An​ "easy" Fed policy suggests A.an increasing money supply and rising interest rates. B. an increasing money supply and falling interest rates. C. a decreasing money supply and falling interest rates. D. a decreasing money supply and rising interest rates. Part 2 In the context of the early​ 1930s, were low nominal interest rates a good indicator that policy was​ easy? A. Yes. Because of​ deflation, real rates were low. B. No. Because of​ inflation, real rates were high. C. Yes. Because of​ inflation, real rates were low. D.No. Because of​ deflation, real rates were high. This is the correct answer. Part 3 Why might Fed officials have believed that low nominal interest rates were a good indicator that policy was​ easy? A. In the Fed's view, low nominal interest rates indicated that there was an adequate supply of excess reserves to be used for losses or loans. B.Low nominal interest rates would indicate to the Federal Reserve that it needed to intervene in the banking system. C. Both A and B are correct. D. None of the above is correct.

B. an increasing money supply and falling interest rates. D. No. Because of​ deflation, real rates were high. A.In the Fed's view, low nominal interest rates indicated that there was an adequate supply of excess reserves to be used for losses or loans.

An article in the New York Times published just after the Fed helped to save Bear Stearns from bankruptcy​ noted: If Bear Stearns​ failed, for​ example, it would result in a wholesale dumping of mortgage securities and other assets onto a market that is frozen and where buyers are in hiding. This fire sale would force surviving institutions carrying the same types of securities on their books to mark down their positions. Source​: Gretchen​ Morgenson, "Rescue​ Me: A Fed Bailout Crosses a​ Line," New York Times​, March​ 18, 2008. Why did Bear Stearns almost​ fail? ​(Check all that​ apply.) A. because Bear liquidated assets in order to pay back​ long-term loans B. because Bear liquidated assets in order to pay back​ short-term loans C. because lenders declined to renew​ Bear's short-term loans D. because lenders lost faith in​ Bear's ability to pay back​ long-term loans E. because lenders lost faith in​ Bear's ability to pay back​ short-term loans Part 2 How did the Federal Reserve rescue Bear​ Stearns? The Federal Reserve arranged a buyout of Bear Stearns by A. JP Morgan Chase. B. Bank of America. C. Lehman Brothers. D. Citibank. Part 3 The​ debt-deflation process is the process of _________________________ that can increase the severity of an economic downturn. Part 4 Does this process provide any insight into why the Federal Reserve rescued Bear​ Stearns? ​(Check all that apply.​) A​ debt-deflation process A. does not provide any insight into why the Federal Reserve rescued Bear Stearns. B. pushes up the price of those assets which other investment banks​ hold, thus worsening their balance sheets. C. would occur if Bear Stearns goes bankrupt and has to sell its assets. D. pushes down the price of those assets which other investment banks​ hold, thus worsening their balance​ sheets, which in turn can accelerate bankruptcies.

B. because Bear liquidated assets in order to pay back​ short-term loans & C. because lenders declined to renew​ Bear's short-term loans & E. because lenders lost faith in​ Bear's ability to pay back​ short- A. JP Morgan Chase. falling asset prices / falling prices of goods and services C. would occur if Bear Stearns goes bankrupt and has to sell its assets. & D. pushes down the price of those assets which other investment banks​ hold, thus worsening their balance​ sheets, which in turn can accelerate bankruptcies.

In a paper written in April​ 2010, looking back at the financial​ crisis, former Fed Chairman Alan Greenspan​ wrote: Some bubbles burst without severe economic​ consequences, the dotcom boom and the rapid​ run-up of stock prices in the spring of​ 1987, for example. Others burst with severe deflationary consequences. That class of bubbles ... appears to be a function of the degree of debt leverage in the financial​ sector, particularly when the maturity of debt is less than the maturity of the assets it funds. Source​: Alan​ Greenspan, "The​ Crisis," April​ 15, 2010, p. 10. What does Greenspan mean by​ "debt leverage"? A. purchasing assets with personal funds B. borrowing and purchasing assets with borrowed funds C. financing investments by issuing stocks D. purchasing other​ firms' derivatives Part 2 Which of the following could be a negative implication if​ "the maturity of the debt is less than the maturity of the assets it​ funds"? A. If the debt is not​ renewed, or rolled​ over, the asset side of the balance sheet becomes unsustainable. B. A debt could be renewed on very bad​ conditions: lower​ costs, longer​ terms, etc. C. It is possible that a company will face a situation when it has to pay the debt after it will get profit from the investments. D. All of the above. Part 3 Does​ Greenspan's analysis provide insight into why the Fed during his tenure may have been reluctant to take action against asset​ bubbles? A. Greenspan's analysis​ doesn't provide insight into why the Fed during his tenure may have been reluctant to take action against asset bubbles. B. Bubbles always cause severe economic consequences.​ So, Greenspan's analysis is unsustainable. C. If the Fed followed​ Greenspan's analysis, their actions should have been sharply different. D. If Greenspan believes that most bubbles burst without severe economic​ consequences, then,​ yes, it would explain the​ Fed's actions.

B. borrowing and purchasing assets with borrowed funds A. If the debt is not​ renewed, or rolled​ over, the asset side of the balance sheet becomes unsustainable. D. If Greenspan believes that most bubbles burst without severe economic​ consequences, then,​ yes, it would explain the​ Fed's actions.

How does the Fed reach its target for the federal funds​ rate? Part 2 A. by directly setting the federal funds rate B. by buying and selling Treasury securities C. by changing reserve requirements D. by changing the discount rate

B. by buying and selling Treasury securities

Federal Reserve districts Question content area bottom Part 1 A. group together economically similar states. B. cut across state and economic boundaries. C. have equal populations. D. conform to state boundaries.

B. cut across state and economic boundaries.

he financial writer Sebastian Mallaby observed about hedge funds​ that: ... leverage also made hedge funds vulnerable to​ shocks: If their trades moved against​ them, they would burn through thin cushions of capital at lightning​ speed, obliging them to dump positions fast—destabilizing prices. Source​: Sebastian​ Mallaby, More Money Than God​, New​ York: Penguin​ Press, 2010, p. 10. What does a hedge​ fund's trades​ "moving against​ it" mean? ​"Moving against​ it" means that A. traders insist on decreasing the leverage of the funds. B. if a hedge fund bets one way and the price moves another​ away, it has to exit the position fast. C. traders are leaving the hedge fund. D. None of the above.​ "Moving against​ it" in the passage has no special meaning. Part 2 Why would a​ fund's trade moving against it cause it to burn through its​ capital? A. Hedge funds are highly​ leveraged, and a margin is generally required for their trades. B. Capital serves as​ margin, so capital is used as a cushion between losses. C. Both A and B are correct. D. None of the above. A​ fund's trade moving against it does not cause it to burn through its capital because the leverage of hedge funds is low. Part 3 What is the connection between a​ fund's being highly leveraged and its having a​ "thin cushion of​ capital"? Leverage __________ a trading​ position, __________the ratio of capital to assets. This __________ both gains and losses and ________ the capital​ "cushion" for losses. Part 4 What does a​ fund's "dumping its​ positions" mean? ​(Check all that apply.​) A. Selling after capital runs out. B. Selling before capital runs out. Your answer is correct. C. Selling after a margin call. D. Selling before a margin call. Part 5 Why might a​ fund's dumping its positions cause prices to be​ destabilized? Prices of​ what? Because such large positions are being​ sold, it _________ the prices of _____________________.

B. if a hedge fund bets one way and the price moves another​ away, it has to exit the position fast. C. Both A and B are correct. magnifies, reducing, magnifies, reduces B. Selling before capital runs out. decreases, assets the fund holds

The original intent of the Federal Reserve Act of 1913 was to provide the Fed with what​ role? Question content area bottom Part 1 A. maintain a balanced budget B. lender of last resort C. regulator of the banking system D. manage the exchange rate

B. lender of last resort

The FDIC stands for A. the Federal Debt Insurance Corporation. B. the Federal Deposit Insurance Corporation. C. the Foreign Direct Investment Corporation. D. the Federal Deposit Investment Corporation. Part 2 Why was it​ established? A. The FDIC was established to ameliorate bank runs. B. The FDIC was established in 1913 together with Fed C. The FDIC was established in 1934 after a series of bank failures. D. A and C are correct.

B. the Federal Deposit Insurance Corporation. D. A and C are correct.

Congress created the Federal Reserve System A. to regulate the value of the U.S dollar against foreign currencies B. to serve as a lender of last resort C. to process the receipt of taxes received by the Internal Revenue Service D. to provide a source of mortage loans to the residential housing market

B. to serve as a lender of last resort

An opinion column on​ barrons.com, discussing the conflict between President Trump and Fed Chair Jerome​ Powell, observed:​ "Leave aside the arguments over policy for a moment. Consider instead the Constitutional question of an unelected agency of government officials working to thwart the policies of elected​ officials." Is it correct to describe the Fed as​ "an unelected agency of government​ officials"? A. No, similar to members of​ Congress, members of the Fed are elected at the state level—they just serve longer terms. B. ​Yes, it is true that Fed officials are not​ elected, so in some sense the quote is correct. C. No, similar to the​ president, members of the Fed are elected at the national level—they just serve longer terms. D. Yes, since members of the Fed are appointed by member banks and serve​ life-long terms, the quote is correct. Part 2 What is the​ "Constitutional question" involved​ here? Is the existence of the Fed​ constitutional? A. The Constitution explicitly calls for the establishment of a central​ bank; however, there is still a debate whether the Federal Reserve System is a central bank or not. B. The Constitution allows for the creation of a central banking system only if it remains fully independent of the government. The Supreme Court has upheld that the Fed meets this criteria. C. The Constitution does not directly discuss a central banking​ system; however, the​ Fed's constitutionality was confirmed by the Supreme Court. D. The Constitution explicitly forbids establishing a central​ bank; however, there is still a debate whether the Federal Reserve System is a central bank or not. Part 3 If Congress agreed that the Fed was acting to​ "thwart the policies of elected​ officials," what actions could Congress​ take? A. Congress has no direct influence over the​ Fed, but it could influence the Fed by approving or rejecting new nominees to the Board of Governors. B. Congress could amend the Federal Reserve Act to change how the Fed operates or it could even abolish the Fed. C. Only the president has direct control over the​ Fed, so Congress must petition the president regarding any proposed changes. D. Congress could exert considerable control over the Fed by limiting the funds sent to the Fed from the federal budget.

B. ​Yes, it is true that Fed officials are not​ elected, so in some sense the quote is correct. C. The Constitution does not directly discuss a central banking​ system; however, the​ Fed's constitutionality was confirmed by the Supreme Court. B. Congress could amend the Federal Reserve Act to change how the Fed operates or it could even abolish the Fed.

Suppose that Bank of America sells ​$10 million in Treasury bills to PNC Bank. Use​ T-accounts to show the effect of this transaction on the balance sheet of each bank. Part 2 Bank of America Assets Liabilities Reserves $____ mil Securities $____ mil Part 3 PNC Bank Assets Liabilities Reserves ​ $____ mil Securities $____ mil

Bank of America Assets Liabilities Reserves $ 10 mil Securities $−10 mil Part 3 PNC Bank Assets Liabilities Reserves ​ $−10 mil Securities $ 10 mil

When was TARP​ created? A. 1913 B. 1934 C. 2008 D. 2020 Part 2 Why was TARP​ created? A. TARP was created to restore the market for​ mortgage-backed securities and other toxic assets to provide relief to financial firms that held these assets on their balance sheets. B. TARP was established in 1913 in conjunction with the Fed. C. TARP was established after a series of bank failures during the Great Depression. D. TARP was established to ameliorate bank runs by the public. Part 3 Did the federal government lose money from​ TARP? Briefly explain. A. Yes, TARP spending was focused on bailing out​ banks, which helped bank managers without providing any financial return to the government. B. No, TARP funds were invested heavily into bank stocks to increase bank capital. These holdings eventually made the government a profit. C. Yes, TARP spending was focused on households who had lost wealth during the​ crisis, which provided no direct financial return to the government. D. No, TARP was designed to exactly break even by employing equal amounts of consumer payouts and bank bailouts.

C. 2008 A. TARP was created to restore the market for​ mortgage-backed securities and other toxic assets to provide relief to financial firms that held these assets on their balance sheets. B. No, TARP funds were invested heavily into bank stocks to increase bank capital. These holdings eventually made the government a profit.

​"A bank that expects interest rates to increase in the future will want to hold more​ rate-sensitive assets and fewer​ rate-sensitive liabilities." Do you agree with this​ statement? A. Agree.​ Rate-sensitive assets will increase in value thus holding more of them as​ assets, while reducing them as​ liabilities, will decrease​ interest-rate risk. B. Disagree.​ Rate-sensitive assets will increase in value thus holding more of them as​ assets, while reducing them as​ liabilities, will decrease bank profits. C. Agree.​ Rate-sensitive assets will increase in value thus holding more of them as​ assets, while reducing them as​ liabilities, will increase bank profits. D. Disagree. In any​ case, it is more profitable for banks to reduce the number of​ rate-sensitive assets and​ liabilities, and increase assets and liabilities with fixed interest. Part 2 ​"A bank that expects interest rates to fall will want the duration of its assets to be greater than the duration of its liabilities​ - a positive duration​ gap." Do you agree with this​ statement? A. Disagree. A fall in interest rates with a positive duration gap will decrease profits. B. Agree. A fall in interest rates with a positive duration gap will increase a​ bank's capital. C. Agree. A fall in interest rates with a positive duration gap will increase the number of deposits. D. Disagree. The bank does not care about the duration gap during interest movements. Part 3 ​"If a bank manager expects interest rates to fall in the​ future, he should increase the duration of his​ bank's liabilities." Do you agree with this​ statement? A. Disagree. Higher duration of its liabilities will reduce the value of the​ bank's capital. B. Agree. The manager should increase the duration of his​ bank's liabilities. C. Disagree. The manager should not change the duration of his​ bank's liabilities. D. There is not enough information to evaluate the​ manager's actions.

C. Agree.​ Rate-sensitive assets will increase in value thus holding more of them as​ assets, while reducing them as​ liabilities, will increase bank profits. B. Agree. A fall in interest rates with a positive duration gap will increase a​ bank's capital. A. Disagree. Higher duration of its liabilities will reduce the value of the​ bank's capital.

Which president failed to renew the charter of the Second Bank of the United​ States? Question content area bottom Part 1 A. Franklin Roosevelt B. Lyndon Johnson C. Andrew Jackson D. George Washington

C. Andrew Jackson

In July​ 2010, Congress was considering having the federal government set up a​ "lending fund" for small banks. The U.S. Treasury would lend the funds to banks. The more of the funds the banks loaned to small​ businesses, the lower the interest rate the Treasury would charge the banks on the loans. Congressman Walt Minnick of Idaho was asked to comment on whether the bill would be helpful to small businesses. Here is part of his​ response: ​"The bank​ that's struggling to write down their commercial real estate assets is having to take a hit to​ capital, and this provides replacement capital on​ very, very favorable terms. So it deals with the left side of the balance​ sheet..." Source​: Robb​ Mandelbaum, "Can Government Help Small​ Businesses?" New York Times​, July​ 29, 2010. Part 2 a. Would a loan from the Treasury be counted as part of a​ bank's capital? A. Yes, any kind of loan is counted as bank capital. B. Yes, a loan from the treasury would be counted as bank capital. C. No, a loan from the treasury would not be counted as bank capital. D. No. A​ bank's capital excludes loans from government entities. Part 3 b. Does a​ bank's capital appear on the left side of the​ bank's balance​ sheet? A. Bank capital appears on the left side of the balance sheet because it is the difference between assets and liabilities. B. Bank capital appears on the right side of the balance​ sheet, because it is the difference between assets and liabilities. C. Bank capital appears on the left side of the balance​ sheet, because it is the difference between liabilities and assets. D. Bank's capital does not appear in the balance sheet.

C. No, a loan from the treasury would not be counted as bank capital. B. Bank capital appears on the right side of the balance​ sheet, because it is the difference between assets and liabilities.

[Related to Solved Problem 13.1​] Suppose that Bank of America pays a 4​% annual interest rate on checking account balances while having to meet a reserve requirement of​ 10%. Assume that the Fed pays Bank of America an interest rate of 0.3​% on its holdings of reserves and that Bank of America can earn 6​% on its loans and other investments. How do reserve requirements affect the amount that Bank of America can earn on​ $1,000 in checking account​ deposits? Ignore any costs Bank of America incurs on the deposits other than the interest it pays to depositors. The​ 10% reserve requirement reduces the amount Bank of America can earn on​ $1,000 by ​$_______________. ​(Enter your answer rounded to two decimal places.​) Part 2 Is the opportunity cost to banks of reserve requirements likely to be higher during a period of high inflation or during a period of low​ inflation? A. The opportunity cost to banks of reserve requirements would likely be higher during a period of high inflation when nominal interest rates on loans are lower. B. The opportunity cost to banks of reserve requirements would likely be higher during a period of lower inflation when nominal interest rates on loans are high. C. The opportunity cost to banks of reserve requirements would likely be higher during a period of high inflation when nominal interest rates on loans are high. D. The opportunity cost to banks of reserve requirements would likely be higher during a period of lower inflation when nominal interest rates on loans are lower.

C. The opportunity cost to banks of reserve requirements would likely be higher during a period of high inflation when nominal interest rates on loans are high.

Former Federal Reserve Chair Ben Bernanke has observed​ that; "Even a bank that is solvent under normal conditions can rarely survive a sustained run." ​Source: Ben S.​ Bernanke, The Courage to​ Act: The Financial Crisis and Its Aftermath​, New​ York: W.W.​ Norton, 2015, p. 45. Part 2 What does Bernanke mean by "solvent under normal conditions"​? A. The value of a​ bank's assets is less than the value of its​ liabilities, so its net​ worth, or​ capital, is negative. B. The value of a​ bank's assets is less than the value of its​ liabilities, so its net​ worth, or​ capital, is positive. C. The value of a​ bank's assets is more than the value of its​ liabilities, so its net​ worth, or​ capital, is positive. D. The value of a​ bank's assets is more than the value of its​ liabilities, so its net​ worth, or​ capital, is negative. Part 3 What does he mean by a "sustained run"​? Why​ can't a bank by itself survive a sustained​ run? A. By​ "sustained run," Bernanke means a bank run that lasts for a significant period of time. A bank cannot by itself survive a sustained run because it does not have enough reserves to match the deposit withdrawals and its assets are long term and not easily liquidated. B. By​ "sustained run," Bernanke means a bank run that lasts for a short period of time. A bank cannot by itself survive a sustained run because it does not have enough reserves to match the deposit withdrawals and its assets are short term and easily liquidated. C. By​ "sustained run," Bernanke means a process by which simultaneous deposits result in a bank closing. A bank cannot by itself survive a sustained run because it does not have enough reserves to match the deposits and its assets are long term and not easily liquidated. D. By​ "sustained run," Bernanke means a process by which simultaneous devaluation of assets result in a bank closing. A bank cannot by itself survive a sustained run because it does not have enough reserves to match the deposit withdrawals and its assets are short term and easily liquidated.

C. The value of a​ bank's assets is more than the value of its​ liabilities, so its net​ worth, or​ capital, is positive. A. By​ "sustained run," Bernanke means a bank run that lasts for a significant period of time. A bank cannot by itself survive a sustained run because it does not have enough reserves to match the deposit withdrawals and its assets are long term and not easily liquidated.

What is meant by the​ "fragility" of commercial​ banking? The​ "fragility" of commercial banking means that​ ________. A. banks borrow long to lend short and are relatively liquid on any given day B. commercial banks tend to be smaller banks that could be forced to shut down at any moment C. banks borrow short to lend long and are relatively illiquid on any given day D. commercial banks tend to be larger banks that could be forced to shut down at any moment Part 2 Does a bank have to be insolvent to experience a​ run? A. No, bank runs usually occur when banks lend out more money than they have in reserves. B. No, bank runs are caused by bank​ panics, which can occur whether a bank is insolvent or not. C. Yes, banks runs are caused by​ illiquidity, which can occur only if the bank is insolvent. D. Yes, since this is the only time that depositors lose enough confidence in their banks and withdraw all their funds.

C. banks borrow short to lend long and are relatively illiquid on any given day B. No, bank runs are caused by bank​ panics, which can occur whether a bank is insolvent or not.

Which of the following is NOT a responsibility of the Board of Governors? A. setting the salaries of the presidents and officers of district banks B. approving bank mergers C. carrying out open market operations D. determining permissible activities for bank holding companies

C. carrying out open market operations

The Depository Instituions Deregulation and Monetary Control Act of 1980 A. eliminated the requirement that banks hold reserve deposits with the Fed. B. prohibited nonmemeber banks from receiveing discount loans. C. required all state banks to join the Federal Reserve System. D. required all banks to maintain reserve deposits with the Fed.

C. required all state banks to join the Federal Reserve System.

What is the difference between a​ bank's return on assets​ (ROA) and its return on equity​ (ROE)? A. A​ bank's return on assets​ (ROA) is the ratio of a​ bank's after-tax profit to the value of its assets. Return on equity​ (ROE) is the ratio of the value of a​ bank's gross profit to the value of its capital. B. A​ bank's return on assets​ (ROA) is the ratio of a​ bank's gross profit to the value of its assets. Return on equity​ (ROE) is the ratio of the value of a​ bank's after-tax profit to the value of its capital. C. A​ bank's return on assets​ (ROA) is the ratio of a​ bank's after-tax profit to the value of its assets. Return on equity​ (ROE) is the ratio of the value of a​ bank's after-tax profit to the value of its capital. D. A​ bank's return on assets​ (ROA) is the ratio of a​ bank's gross profit to the value of its assets. Return on equity​ (ROE) is the ratio of the value of a​ bank's gross profit to the value of its capital. Part 2 How are they​ related? A. ROA is equal to ROE multiplied by the ratio of bank assets to bank capital. B. ROA is equal to ROE divided by the ratio of bank capital to bank assets. C. ROE is equal to ROA multiplied by the ratio of bank assets to bank capital. D. ROE is equal to ROA multiplied by the ratio of bank capital to bank assets.

C.A​ bank's return on assets​ (ROA) is the ratio of a​ bank's after-tax profit to the value of its assets. Return on equity​ (ROE) is the ratio of the value of a​ bank's after-tax profit to the value of its capital. C. ROE is equal to ROA multiplied by the ratio of bank assets to bank capital.

Thomas​ Hoenig, former president of the Federal Reserve Bank of Kansas​ City, remarked about the Federal Reserve System​ that: "​[I]t was designed as a​ public-private partnership, accountable​ to, and yet independent​ of, the government." ​Source: Thomas M.​ Hoenig, "Twelve ​Banks: The Strength of the Federal Reserve ​System," speech delivered at Copper​ Mountain, Colorado, September​ 15, 2006. Part 2 In what sense is the Federal Reserve System a "​public-private partnership"​? A. While owned by the​ government, private banks have a legal claim on the profits of the District banks. B. While formed by private​ banks, it is owned by the government. C. It is a partnership made up of both government and private entities. D While authorized by the​ government, it is owned by private banks. Part 3 In what sense is the Federal Reserve System both accountable to the government and independent of​ it? A. The Board of Governors is a federal government​ agency, while the Federal Reserve Banks are legally the equivalent of private corporations. B. Regulatory requirements are set by the federal and state​ governments, but banks are owned by private shareholders. C. Member banks have to complete annual government reporting requirements but are owned by private shareholders. D. The Board of Governors is the legal equivalent of a private corporation while the Federal Reserve Banks are government agencies.

D While authorized by the​ government, it is owned by private banks. A. The Board of Governors is a federal government​ agency, while the Federal Reserve Banks are legally the equivalent of private corporations.

David Wheelock of the Federal Reserve Bank of St. Louis describes the following episode at the beginning of the Great​ Depression: Following the stock market crash​ [of October​ 1929], the Federal Reserve Bank of New York used open market purchases​ [of Treasury​ securities] and liberal discount window lending​ [to commercial​ banks] to inject reserves into the banking system. . . . The Federal Reserve Board reluctantly approved the New York​ Fed's actions ex​ post, but many members expressed displeasure that the New York Fed had acted independently. ​Source: David​ C.Wheelock, "Lessons​ Learned? Comparing the Federal​ Reserve's Responses to the Crises of 1929-1933 and 2007-​2009," Federal Reserve Bank of St. Louis Review​, Vol.​ 92, No.​ 2, March/April​ 2010, pp. 97-98. What are the arguments for a Federal Reserve Bank operating​ independently? A. A regional Federal Reserve Bank acting independently can increase the stability of the entire banking system. B. A regional Federal Reserve​ Bank's actions might exacerbate a crisis. C. A regional Federal Reserve Bank would be circumventing the checks and balances built into the system. D. A regional Federal Reserve Bank acting independently can act quickly to address regional issues. Part 2 What are the arguments against a Federal Reserve Bank operating​ independently? ​(Check all that apply.​) A. A regional Federal Reserve Bank acting independently can act quickly to address regional issues. B. A regional Federal Reserve Bank acting independently can increase the stability of the entire banking system. C. A regional Federal Reserve​ Bank's actions might exacerbate a crisis. D. A regional Federal Reserve Bank would be circumventing the checks and balances built into the system. Part 3 In the modern​ Fed, would it be possible for a Reserve Bank to act as the New York Fed did in​ 1929? A. Yes. In the modern Fed a Reserve Bank can act independently in case of a severe crisis in order to improve the economic situation. B. Yes. In the modern Fed a Reserve Bank can use open market purchases and liberal discount window lending independently. C. No. In the modern Fed a Reserve Bank is not able to use open market purchases and liberal discount window lending at all. D. No. In the modern Fed a Reserve Bank cannot conduct monetary policy independent from the FOMC and the Board of Governors.

D. A regional Federal Reserve Bank acting independently can act quickly to address regional issues. C. A regional Federal Reserve​ Bank's actions might exacerbate a crisis. & D. A regional Federal Reserve Bank would be circumventing the checks and balances built into the system. D. No. In the modern Fed a Reserve Bank cannot conduct monetary policy independent from the FOMC and the Board of Governors.

Adam​ Posen, a member of the Bank of​ England's Monetary Policy​ Committee, was quoted as arguing in a speech​ that: Central​ banks' purchases of government debt . . . far from undermining their independence . . . should enhance their credibility. . . . Mr. Posen​ said, . . .​ "What matters for our independence is our ability to say no and to mean​ it, and to be responsible about when we choose to say​ yes." ​Source: Natasha​ Brereton, "BOE's Posen Defends​ ECB's Actions," Wall Street Journal​, June​ 15, 2010. Why might purchasing government debt be seen as undermining a central​ bank's independence? A. If the Bank of England starts purchasing government​ debt, it may be interpreted as a sign that the government is forcing the Bank of England to monetize the debt. B. Purchasing government debt is almost like printing money. C. When the central bank purchases government​ debt, it serves as a way for the government to spend money without having to pay for it. D. All answers are correct. Part 2 What actions does a central bank need to have the independence to say​ "no" to? A central bank needs to be able to say no to actions that would harm the​ economy, like excessive inflation from buying government bonds. The statement above is A. true. B.false. Part 3 Why might a central bank sometimes want to say​ "yes" to the above​ actions? A. All answers are correct. B. These actions may be positive in times of extreme economic circumstances. For​ instance, in the fall of 2010 the Federal Reserve undertook​ "quantitative easing," which was the purchase of government debt. The action flooded banks with excess liquidity. C. When these actions can lower the cost of government borrowing in bad economic times. D. When these actions can put downward pressure on exchange​ rates, increasing exports to spur recovery.

D. All answers are correct. A. true. A. All answers are correct.

What is a lender of last​ resort? A. A lender of last resort is an institution that serves as an ultimate source of credit to which banks can turn during a panic. B. The Federal Reserve acts as a lender of last resort. C. Is an entity that seeks to stop a bank failure from turning into a bank panic by making sure solvent institutions can meet their​ depositors' withdrawal demands. D. All of the above. Part 2 How is being a lender of last resort connected to the​ too-big-to-fail policy? ​(Check all that apply.​) A. The​ too-big-to-fail policy and the lender of last resort have to provide liquidity to banks during bank panics. B. The​ too-big-to-fail policy and the lender of last resort strive to prevent systemic​ risk, where the failure of a few firms leads to the widespread failure of solvent banks. C. The​ too-big-to-fail policy and the lender of last resort strive to promote​ "moral hazard" in the banking system. D. A lender of last resort is not connected to the​ too-big-to-fail policy.

D. All of the above. A. The​ too-big-to-fail policy and the lender of last resort have to provide liquidity to banks during bank panics. & B. The​ too-big-to-fail policy and the lender of last resort strive to prevent systemic​ risk, where the failure of a few firms leads to the widespread failure of solvent banks.

​[Related to the Making the ConnectionLOADING...​] In​ 1960, federal regulations prohibited banks from paying interest on checking accounts.​ Today, banks are legally allowed to pay interest on checking​ accounts, yet the value of checking accounts has shrunk from more than​ 50% of commercial bank liabilities in 1960 to less than​ 12%. Because checking accounts now pay​ interest, shouldn't they have become more popular with households rather than less​ popular? A. All else​ constant, this would increase the popularity of checking accounts.​ However, at the same time that interest became payable on checking​ accounts, banks were creating several new savings​ instruments, including certificates of deposit and money market deposit accounts. B. As wealth increases over​ time, households hold less money in checking accounts relative to other financial assets. C. Only A is correct. D. Both A and B are correct.

D. Both A and B are correct.

The classic account of bank panics was published in 1879 by Walter​ Bagehot, editor of the Economist​, in his book Lombard Street​: "In wild periods of​ alarm, one failure makes​ many, and the best way to prevent the derivative failures is to arrest the primary failure which causes them." ​Source: Walter​ Bagehot, Lombard​ Street: A Description of the Money Market​, New​ York: John​ Wiley, 1999​ (first published​ 1873), p. 51. Part 2 All of the following are reasons why one bank failure might lead to many bank​ failures, except: A. Banks will be forced to sell loans and securities to raise money to pay off depositors. B. Depositors of other banks may become concerned that their banks might also have problems. C. Depositors have an incentive to withdraw their money from their banks to avoid losing it should their banks be forced to close. D. If multiple banks have to sell the same​ assets, the prices of those assets are likely to rise. Part 3 What are the two main ways in which the government can keep one bank failure from leading to a bank​ panic? A. A central bank can act as a borrower of last​ resort, and the government can insure deposits. B. A central bank can act as a lender of last resort and insure deposits. C. A central bank can act as a lender of last​ resort, and the government can insure deposits. D. A central bank can act as a borrower of last resort and insure deposits.

D. If multiple banks have to sell the same​ assets, the prices of those assets are likely to rise. C. A central bank can act as a lender of last​ resort, and the government can insure deposits.

What is the main problem with having a central bank that is not independent of the rest of the​ government? A. Less independent central banks tend to lead to lower interest rates. B. Less independent central banks tend to lead to higher unemployment. C. Research studies have shown that the most independent central banks had the highest average rates of inflation during the 1970s and 1980s. D. Less independent central banks tend to lead to higher inflation. An independent central bank can more freely focus on keeping inflation low.

D. Less independent central banks tend to lead to higher inflation. An independent central bank can more freely focus on keeping inflation low.

​[Related to the Making the ConnectionLOADING...​] What is the purpose of the Government in the Sunshine​ Act? A. The Government in the Sunshine​ Act, which required the FMOC to make all monetary policy meetings open to the​ public, was created to make monetary policy more transparent. B. The Government in the Sunshine​ Act, which required Congress to make all monetary policy meetings open to the​ public, was created to make monetary policy more transparent. C. The Government in the Sunshine​ Act, which required the Fed to make all monetary policy meetings open to the​ public, was created to make monetary policy more transparent. D. The Government in the Sunshine​ Act, which required government agencies to post meetings before they​ happened, was created to promote public awareness. Part 2 Was Fed Chairman Bernanke justified in evading the requirements of this act during the financial crisis of​ 2007-2009? A. Because the financial crisis was unfolding so​ quickly, one could argue that Bernanke was justified in evading the Sunshine Act. B. Because of the impact of the financial crisis on the​ public, it is not possible to justify in evading the Sunshine Act. C. Fed Chairman Bernanke was justified in evading the requirements of this act because secrecy was essential for stabilizing the financial crisis. D. Given the importance of FOMC​ meetings, he was not justified in evading the Sunshine Act.

D. The Government in the Sunshine​ Act, which required government agencies to post meetings before they​ happened, was created to promote public awareness. A. Because the financial crisis was unfolding so​ quickly, one could argue that Bernanke was justified in evading the Sunshine Act.

Since most banks have negative gaps and positive duration​ gaps, an increase in market interest rates will Part 2 A. increase bank profits and increase bank capital. B. increase bank profits and decrease bank capital. C. decrease bank profits and increase bank capital. D. decrease bank profits and decrease bank capital.

D. decrease bank profits and decrease bank capital.

Bank capital will decline following an increase in interest rates if the value of its Question content area bottom Part 1 A. fixed−rate liabilities is greater than the value of its variable−rate liabilities. B. fixed−rate assets is greater than the value of its variable−rate assets. C. fixed−rate assets is less than the value of its fixed−rate liabilities. D. fixed−rate assets is greater than the value of its fixed−rate liabilities.

D. fixed−rate assets is greater than the value of its fixed−rate liabilities.

The era of bank panics in the United States was effectively ended by Question content area bottom Part 1 A. implementing the gold standard. B. establishing the Fed as lender of last resort. C. abandoning the gold standard. D. introducing deposit insurance.

D. introducing deposit insurance.

Given that most banks have positive gap and negative​ durations, banks prefer Question content area bottom Part 1 A. higher market fixed rates but lower market floating rates. B. higher market interest rates. C. either higher or lower market interest rates since interest rates have little effect on bank profits. D. lower market interest rates.

D. lower market interest rates.

The creation of a lender of last resort in the United States Part 1 A. has been recommended by the Treasury in its report of late 1992. B. occurred in response to the​ S&L crisis of the 1980s. C. was mandated in the U.S. Constitution. D. occurred in response to banking panics.

D. occurred in response to banking panics.

An article in the New York Times quoted former Fed Chairman Alan Greenspan as arguing in​ 2010: ​"The global house price bubble was a consequence of lower interest​ rates, but it was​ long-term interest rates that galvanized home asset​ prices, not the overnight rates of central​ banks, as has become the seemingly conventional​ wisdom." Source​: Sewell​ Chan, "Greenspan Concedes That the Fed Failed to Gauge the​ Bubble," New York Times​, March​ 18, 2010. A house price bubble A. means that the decline in the housing market caused a decrease not only in spending on residential​ construction, but also affected markets for furniture and appliances. B. means that asset prices have increased beyond the point that could be justified by property appraisers. C. means that asset prices have decreased below the point that could be justified by fundamental evaluation. D. occurs when house prices move beyond their fundamental values. Part 2 Why would​ long-term interest rates have a closer connection to house prices than overnight interest​ rates? A. The Fed can control and change​ long-term interest rates more easily than​ short-term interest rates. B. Mortgage companies generally markup mortgages 2−3% above the 10−year Treasury bond yield. C. Housing purchases are typically​ short-term investments. D.The average holding of a house is 30 years. The average holding of a house is 30 years. Part 3 Why would it matter to Greenspan whether low​ long-term interest rates were more responsible for the housing bubble than low​ short-term interest​ rates? A. Buying a house is linked with​ short-term borrowings, which were insured by​ mortgage-backed securities. B. Mortgage-backed securities are usually​ short-term loans. C. To lessen the Federal​ Reserve's responsibility under​ Greenspan's watch as Chairman for​ causing, at least​ partially, the housing bubble with low interest rates. D. All of the above.

D. occurs when house prices move beyond their fundamental values. B. Mortgage companies generally markup mortgages 2−3% above the 10−year Treasury bond yield. C. To lessen the Federal​ Reserve's responsibility under​ Greenspan's watch as Chairman for​ causing, at least​ partially, the housing bubble with low interest rates.

Members of the Board of Governors Question content area bottom Part 1 A. must resign when the President who has appointed them leaves office. B. may serve no more than three consecutive four−year terms. C. serve for life or good behavior. D. serve one nonrenewable fourteen−year term.

D. serve one nonrenewable fourteen−year term.

What is​ "contagion"? What role does it play in bank​ panics? Contagion is when​ ________. A. one bank lends excess reserves to another bank. If there are not enough banks participating in the​ sytem, it can cause a bank panic. B. a bank is only able to stabilize its balance sheet by buying securities. This can help prevent a bank panic. C. the failure of one bank causes the failure of another bank it does business with. It is unrelated to a bank panic. D. the failure of one bank causes runs on other banks. If multiple banks experience bank​ runs, the result is a bank panic.

D. the failure of one bank causes runs on other banks. If multiple banks experience bank​ runs, the result is a bank panic.

What is the difference between gap analysis and duration​ analysis? Gap analysis looks at the difference between the dollar value of a​ bank's variable-rate assets and the dollar value of its​ variable-rate liabilities. Duration analysis is an analysis of how sensitive a​ bank's capital is to changes in market interest rates. Part 2 What is the purpose of gap analysis and duration​ analysis? A. The purpose of gap analysis is to determine the​ bank's sensitivity to the liquidity​ risk, whereas the purpose of duration analysis is to determine the​ bank's sensitivity to interest rate movements. B. The purpose of both analysis is to determine the​ bank's sensitivity to interest rate movements. C. The purpose of gap analysis is to determine the​ bank's sensitivity to interest rate​ movements, whereas the purpose of duration analysis is to determine the​ bank's sensitivity to the liquidity risk. D. The purpose of both analysis is to determine the​ bank's sensitivity to the liquidity risk.

Gap Analysis, Duration Analysis B. The purpose of both analysis is to determine the​ bank's sensitivity to interest rate movements.

A history of deposit insurance on the Web site of the FDIC notes​ that: "Some have argued at different points in time that there have been too few bank failures because of deposit​ insurance, that it undermines market​ discipline, ... and that it amounts to a federal subsidy for banking companies." ​Source: FDIC Bureau of Research and​ Statistics, "A Brief History of Deposit Insurance in the United ​States," https://www.fdic.gov/bank/historical/brief/brhist.pdfopens in a new tab. Part 2 What does it mean to describe deposit insurance as undermining "market discipline"​? Because ________ depositors are fully​ insured, they have ________ incentive to withdraw their money and cause their bank to fail. This encourages _____________ by bank managers as depositors are protected _______________ how the bank actually performs. Part 3 From this​ perspective, why might there be too few bank failures as the result of deposit​ insurance? A. Banks are prevented from taking on risks that might cause them to fail. B. Conservative money management on the part of bank managers reduces the risk of failing. C. Rather than let banks​ fail, the FDIC steps in to minimize the amount of money it will have to pay out. Your answer is correct. D. Banks are so large now that they are too big to fail. Part 4 In what sense might deposit insurance be considered a federal subsidy for​ banks? A. FDIC insurance protects every dollar deposited in a bank. B. FDIC insurance provides cash subsidies to banks in times of trouble. C. FDIC insurance is backed by the full faith and credit of the United States government. D. FDIC insurance is paid for with federal tax dollars. Part 5 Despite these potential​ drawbacks, economists and members of Congress overwhelmingly support deposit insurance for all of the following​ reasons, except: A. FDIC limits the effect on the economy when a bank fails. B. FDIC protects every dollar a customer has in a bank. C. FDIC promotes public confidence in the U.S. financial system. D. FDIC monitors and addresses risks to deposit insurance funds.

most, little, risk-taking, regardless C. Rather than let banks​ fail, the FDIC steps in to minimize the amount of money it will have to pay out. C. FDIC insurance is backed by the full faith and credit of the United States government. B. FDIC protects every dollar a customer has in a bank.

A history of deposit insurance on the Web site of the FDIC notes​ that: "Some have argued at different points in time that there have been too few bank failures because of deposit​ insurance, that it undermines market​ discipline, ... and that it amounts to a federal subsidy for banking companies." ​Source: FDIC Bureau of Research and​ Statistics, "A Brief History of Deposit Insurance in the United ​States," https://www.fdic.gov/bank/historical/brief/brhist.pdfopens in a new tab. Part 2 What does it mean to describe deposit insurance as undermining "market discipline"​? Because ________ depositors are fully​ insured, they have ________ incentive to withdraw their money and cause their bank to fail. This encourages _____________ by bank managers as depositors are protected ________________ how the bank actually performs. Part 3 From this​ perspective, why might there be too few bank failures as the result of deposit​ insurance? A. Rather than let banks​ fail, the FDIC steps in to minimize the amount of money it will have to pay out. B. Conservative money management on the part of bank managers reduces the risk of failing. C. Banks are prevented from taking on risks that might cause them to fail. D. Banks are so large now that they are too big to fail. Part 4 In what sense might deposit insurance be considered a federal subsidy for​ banks? A. FDIC insurance provides cash subsidies to banks in times of trouble. B. FDIC insurance is paid for with federal tax dollars. C. FDIC insurance protects every dollar deposited in a bank. D. FDIC insurance is backed by the full faith and credit of the United States government. Part 5 Despite these potential​ drawbacks, economists and members of Congress overwhelmingly support deposit insurance for all of the following​ reasons, except: A. FDIC limits the effect on the economy when a bank fails. B. FDIC monitors and addresses risks to deposit insurance funds. C. FDIC promotes public confidence in the U.S. financial system. D. FDIC protects every dollar a customer has in a bank.

most, little, risk-taking, regardless of A. Rather than let banks​ fail, the FDIC steps in to minimize the amount of money it will have to pay out. D. FDIC insurance is backed by the full faith and credit of the United States government. D. FDIC protects every dollar a customer has in a bank.

In his​ memoirs, former Fed Chairman Ben Bernanke discussed the reaction of the Federal Reserve Bank presidents to a Congressional proposal that the Reserve Banks no longer be responsible for supervising state banks that were members of the Federal Reserve​ System: The Reserve Bank presidents were particularly alarmed at the prospect of losing bank supervision duties .... The​ [Reserve] banks had already endured rounds of staff layoffs over the previous decade as many of the Federal​ Reserve's financial​ services, such as check​ clearing, were consolidated into fewer locations. ...​ [A] large proportion of their remaining employees examined and supervised banks and bank holding companies. ​Source: Ben S.​ Bernanke, The Courage to​ Act: A Memoir of a Crisis and Its Aftermath​, New​ York: W.W.​ Norton, 2015, p.458. Part 2 The positions of the Reserve Bank presidents during this episode are better explained by the ▼_____________ view of Fed motivation than by the ▼____________ view as the presidents were ▼____________ acting in the public's best interestsacting in the best interests of their member banks.

principal-agent, public interest, acting in the best interest of their member banks

[Related to the Making the​ Connection] Financial journalist James Stewart notes that in contrast to its actions with respect to Lehman​ Brothers, "the Fed did lend into continuing runs at both Bear Stearns and​ A.I.G., although officials argued then that those companies had adequate collateral to guarantee repayment." ​Source: James​ Stewart, "Pointing a Finger at the Fed in the Lehman ​Disaster," New York Times​, July​ 21, 2016. Part 2 In "lending into continuing runs" the Fed ____________ additional ___________________ banks in order to avoid ____________ ​longer-term assets at a loss​, further ______________ investor confidence. Part 3 Why is the issue of whether Bear Stearns and AIG held sufficient collateral important​ legally? A. Holding sufficient capital does not have legal ramifications. B. Without sufficient​ collateral, they would be in default on their loans. C. The Fed can only make loans to firms provided that the loan being made is secured by adequate collateral. D. Without sufficient collateral they would be forced to declare bankruptcy. Part 4 All of the following might be reasons why the Fed did not lend to Lehman Brothers in the days before its​ bankruptcy, except: A. provisions in the Federal Reserve Act. B. Congressional criticism over the​ Fed's handling of Bear Stearns. C. increasing moral hazard. D. the failure of Lehman Brothers would have little impact on the economy.

provided, capital from, selling, loss, undermining C. The Fed can only make loans to firms provided that the loan being made is secured by adequate collateral. D. the failure of Lehman Brothers would have little impact on the economy.