Money and Banking Exam 3

Suppose the macroeconomy is in equilibrium and Congress decides to increase the amount of government spending. What is the most likely short-term result?

An increase in aggregate demand, an increase in inflation, and an increase in output.

Which of the following will lead to a decrease in the monetary base?

An open market sale.

Scrip prices for the First Bank of the United States rapidly increase in value and then decline shortly thereafte

Asset price boom-bust

The Fed announces a plan to target a 2% inflation rate over a period of several years rather than per year.

Average Inflation Targeting

Since August 2020, the Federal Reserve System has used which of the following nominal anchors?

Average Inflation targeting

Lenders to the investment bank Bear Stearns refuse to rollover repos and, as a result, Bear Stearns risks becoming insolvent.

Banking crisis

Mortgage lenders start relaxing lending standards in order to make more loans and, eventually, many borrowers are unable to repay their debt.

Credit-boom bust

Economic activity slows down, leading to a decline in the velocity of money and the price level. This decline in the price level causes real interest rates to rise and increases personal and business bankruptcies.

Debt deflation

Which federal agency was created in response to the bank panics that occurred between 1930 and 1933?

Federal Deposit Insurance Corporation

Several members of the Board of Governors believe the economy is overheating, but other members argue that their position is based on an incorrect estimate of the natural rate of unemployment.

Forecast uncertainty

Which of the following is a nonconventional monetary policy tool?

Forward guidance.

Data from the bond market shows that investors are expecting inflation to increase above 2% but the FOMC will not meet for another month.

Inside lag

Oil prices suddenly spike, but the Board of Governors does not meet to discuss the issue for several days

Inside lags

The Treasury Secretary who navigated the United States government through the Panic of 1972 was

John Snow

Federal Reserve Chair Jay Powell announces an interest rate increase but cautions that the change will take time to work through the economy.

Outside Lag

The Board of Governors announces a new lending facility for commercial banks, but the program cannot start immediately and when it does banks will not start lending immediately.

Outside lag

The Federal Reserve wants to maintain 2% inflation over the long-run but they're worried that war in Eastern Europe might cause inflation to increase by 5% over the next 12 months.

Time-Inconsistency Problem

Some members of the FOMC want to keep the federal funds rate low, even though it might lead to an inflation rate above the target in the future.

Time-inconsistency problem

Monetary and fiscal policy are mostly unable to help correct

a negative supply shock.

A nominal variable that central bankers use to keep the price level low and stable is known as

a nominal anchor

The Taylor principles states that the nominal federal funds rate should be set

above the inflation rate.

Technological progress can lead to

an increase in aggregate supply, higher growth, and lower inflation.

Commercial bank reserves

are used to settle transactions and withdrawals.

Which of the following financial regulatory tools is best use for screening against adverse selection?

bank chartering

The FDIC was created primarily to prevent

bank panics

At the zero lower bound

conventional monetary policy tools are ineffective.

The Fed selling government bonds on the open market _________ the monetary base while the Fed buying government bonds on the open market ________ the monetary base.

decreases; increases

The Federal Reserve System operates under a

dual mandate

Economists at the Federal Reserve estimate that the inflation rate will fall by 0.5% over the next month but their estimates show that the real number could by higher or lower by 1%.

forecast uncertainty

The Federal Reserve states that 2% annual inflation is consistent with its mandate to achieve "stable prices." The fact that the Fed can establish this target indicates that it has

goal independence.

When a central bank is required to focus on price stability above all other objectives it is operating under a

hierarchical mandate.

If the Federal Reserve began buying Treasury bonds directly from the federal government in order to fund government spending a likely result would be

hyperinflation.

In a financial crisis, credit spreads tend to __________ which

increase; indicates heightened uncertainty in financial markets

A policy in which a central bank publicly commits to maintaining a numerical inflation goal is known as

inflation targeting.

Which of the following is an economic variable that the Federal Reserve can directly control?

interest paid on reserves

The monetary base

is composed of currency in circulation and bank reserves.

The downward slope of the aggregate demand curve

is due to a factor known as the interest rate effect.

Debt deflation

is the phenomenon in which a falling price level increases the real value of indebtedness.

In the aggregate demand-aggregate supply model, higher interest rates shift aggregate demand to the ________ because

left; a higher rate will raise the cost of business investment

Time-varying capital requirements, whereby capital ratios increase during good times and decrease during bad times, are an example of

macroprudential regulation.

Currency in circulation and bank reserves are considered to be the

monetary base.

"Following an asset price bust, we might see individuals make riskier investments in an attempt to make up their losses." This statement is an example of

moral hazard.

When the economy is at full employment

only frictional and structural unemployment exist.

The principle-agent problem which a lender's business model is to attract as many borrowers as possible and quickly sell the loans is know as

originate-to-distribute

Suppose the economy experiences a negative aggregate demand shock. Without a monetary policy response, over the long-run

output will return to its long-run potential and the price level will fall.

Overnight bank borrowing from the Federal Reserve is known as

primary credit.

Using the __________ method, the FDIC finds another bank that is willing to take possession of the failed bank's assets and liabilities.

purchase and assumption

When interest rates are at the zero lower bound, a decrease in the inflation rate can

raise the real interest rate.

In the too big to fail policy, there is an inherent tension between __________ and __________.

reducing systemic risk; increasing moral hazard

A reduction in the monetary base can be accomplished by an open market ________ while an increase in the monetary base can be accomplished by an open market ________.

sale; purchase

In the aggregate demand-aggregate supply model, an autonomous increase in interest rates by the Federal Reserve would

shift the aggregate demand curve to the left.

In the aggregate demand-aggregate supply model, an autonomous decrease in interest rates by the Federal Reserve would

shift the aggregate demand curve to the right

A phenomenon in which inflation increases and the level of real output in the economy falls is known as

stagflation

The U.S. government responded to the Financial Crisis of 2007 - 2009 with

the Dodd-Frank Wall Street Reform and Consumer Protection Act.

Changes to the discount rate will not affect the equilibrium federal funds rate as long as

the discount rate is higher than the federal funds rate.

Under a corridor system

the discount rate serves as the upper bound for the federal funds rate and interest on reserves serves as the lower bound

When the nonbank public converts deposits into currency

the monetary base does not change because the increase in currency is offset by the decrease in reserves.

If deflation occurs following a financial crisis, the real interest rate

will increase leading to higher real values of debt.