Money and Banking Multiple Choice

If the Fed uses the federal funds rate as a policy​ instrument, then increases in the demand for reserves will lead to an (increase/decrease) in the level of reserves. If the Fed uses the level of reserves as a policy​ instrument, then increases in the demand for reserves will lead to an (increase/decrease) in the federal funds rate.

increase increase

The​ debt-deflation process is the process of (Increasing/Decreasing) bankruptcies and defaults that can increase the severity of an economic downturn. The​ debt-deflation process contributed to the severity of the Great Depression by (Increasing/Decreasing) the real interest rate and the real value of​ debts, which (Increased/Decreased) the burden on borrowers and led to (Less/More) loan defaults.

Increasing Increasing Increasing More

Consider the following​ data: Currency ​$100 billion Bank reserves $400 billion Checkable deposits $800 billion Time deposits $1,200 billion Excess reserves $40 billion Part 2 Calculate the values for the​ currency-to-deposit ratio, the ratio of total reserves to​ deposits, the monetary​ base, the M1 money​ multiplier, and the M1 money supply. The​ currency-to-deposit ratio is ______. ​(Enter your response rounded to two decimal places.​) The ratio of total reserves to deposits is ______. ​(Enter your response rounded to two decimal places.​) The monetary base is ​$_____ billion. ​(Enter your response as an integer.​) The M1 money multiplier is ______. ​(Enter your response rounded to two decimal places.​) The M1 money supply is ​$______billion. ​(Enter your response as an integer.​)

.13 .5 500 1.79 895

Calculate the value of the money multiplier in each of the following​ situations: Banks hold no excess​ reserves, the required reserve ratio is​ 100%, and households and firms hold currency and deposits in equal amounts. The value of the money multiplier is ________. ​(Enter your response as a whole number​.) Part 2 The required reserve ratio is​ 0, banks hold reserves equal to the value of their​ deposits, and households and firms hold half as much in currency as in deposits. The value of the money multiplier is ________. ​(Enter your response as a whole number​.) Part 3 The required reserve ratio is​ 0, households and firms hold three times as much in currency as in​ deposits, and banks hold reserves equal to one-quarter the value of their deposits. The value of the money multiplier is ____. ​(Round your response to two decimal places.​)

1 1 1.23

Consider the following​ data: Currency $710 billion Checkable deposits ​$560 billion Bank reserves $560 billion Part 2 a. Calculate the values for the​ currency-to-deposit ratio, the ratio of total reserves to​ deposits, the monetary​ base, the M1 money​ multiplier, and the M1 money supply. Part 3 The​ currency-to-deposit ratio is ______. ​(Enter your response rounded to two decimal places.​) Part 4 The ratio of total reserves to deposits is _____. ​(Enter your response as an integer.​) Part 5 The monetary base equals ​$________ billion. ​(Enter your response as an integer.​) Part 6 The M1 money multiplier is ______. ​(Enter your response as an integer.​) Part 7 The M1 money supply is ​$_______ billion. ​(Enter your response as an integer.​) Part 8 b. Suppose that the ratio of total reserves to deposits changes from the value you calculated in part​ (a) to 2.​ (Assume that the​ currency-to-deposit ratio remains the​ same.) Now what is the value of the money​ multiplier? The money multiplier is _____. ​(Enter your response rounded to two decimal places.​)

1.27 1 1270 1 1270 .7

Question content area Part 1 ​[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 0.25​% on its holdings of reserves and that Bank of America can earn 8​% 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 lower 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 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 high. D. 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.

7.75 D. 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.

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. B. Policy decisions made by the ECB must be unanimously approved by the governments of member countries. C. The ECB has an executive board of six​ members, with one of its members serving as president. D. The governance of the ECB includes the governors of each of the member national central banks. Part 2 What special problems does the ECB​ confront? A. The ECB is required to employ separate interest rate policies for each of the member nations. B. The ECB must function with a highly centralized structure. C. 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.. D. The ECB must coordinate the use of multiple currencies. Part 3 What difficulties did the ECB encounter during the financial crisis of 2007-​2009? A. The ECB encountered the same difficulties as every other central bank—​namely, the combination of higher inflation coupled with higher unemployment. 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 difficulty conducting a common monetary policy for countries experiencing different economic conditions. Part 4 What difficulties did the ECB encounter during the 2020​ Covid-19 pandemic? A. The ECB was unwilling to employ any monetary policy since inflation was already at its​ 2% target rate. B. The ECB dropped its​ 2% inflation target in order to increase​ employment, causing inflation rates to increase exponentially. C. The ECB encouraged member countries to stop implementing expansionary fiscal policy because it limited the effectiveness of monetary policy. D. The ECB realized the effectiveness of monetary policy was limited and urged member countries to employ more expansionary fiscal 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 ECB has an executive board of six​ members, with one of its members serving as president. D. The governance of the ECB includes the governors of each of the member national central banks. C. 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. D. The ECB encountered difficulty conducting a common monetary policy for countries experiencing different economic conditions. D. The ECB realized the effectiveness of monetary policy was limited and urged member countries to employ more expansionary fiscal policy.

Is it easier for a central bank to be independent in a​ high-income country or in a​ low-income country? A. It is often difficult for a central bank to act independently in a​ low-income country. B. ​Low-income countries rarely have central banks. C. The independence of a central bank does not depend on the level of a​ country's income. D. It is often difficult for a central bank to act independently in a​ high-income country. 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. 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. B. Research has shown that the rate of inflation does not depend on the level of the central​ bank's independence. 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 lower than in industrial countries. D. The average inflation rate will be higher in​ low-income countries, but only because of the limited ability of the economy to expand production.

A. It is often difficult for a central bank to act independently in a​ low-income country. A. 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.

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

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

What are the main arguments for 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. 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. An independent Fed makes a political business cycle less likely. 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. It would be more democratic for elected officials to control monetary policy. C. Only an independent central bank can deal with a financial crisis without causing an increase in unemployment and inflation. D. The public is unable to hold Fed officials accountable for their​ policies, unlike elected officials.

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

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. No, borrowers would be hurt by the higher real interest rates and higher real value of debts that deflation causes. B. ​Yes, allowing the price level to fall is necessary before an economic recovery can begin. 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 (Increasing/Decreasing)​, the real interest rate in the economy will (Decrease/increase/stay the same). 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.

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

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 acted on the behalf of Presidents Roosevelt and Truman. B. The Treasury assumed some control over the Fed to help finance wartime deficits. C. The Treasury encouraged the Fed to engage in pegging of the interest rate. D. The Treasury did not agree with the Fed's decision

A. The Treasury acted on the behalf of Presidents Roosevelt and Truman. B. The Treasury assumed some control over the Fed to help finance wartime deficits. C. The Treasury encouraged the Fed to engage in pegging of the interest rate.

What are the reasons banks demand​ reserves? ​(Check all that apply.​) A. To meet their legal obligation to hold required reserves. B. To hold excess reserves to meet their​ long-term liquidity needs. C. To make money by earning interest on reserve balances. D. To hold excess reserves to meet their​ short-term liquidity needs. Part 2 Why does an increase in the federal funds rate decrease the quantity of reserves​ demanded? As the federal funds rate increases​, the opportunity cost to banks of holding excess reserves (increases/decreases) because the return they could earn from lending out those reserves goes (up/down). Part 3 At what interest rate does the demand curve for reserves become perfectly​ elastic? A. At the interest rate the Fed pays on​ banks' reserve balances. B. At the discount rate the Fed sets. C. At the equilibrium federal funds rate. D. The demand curve for reserves never becomes perfectly elastic.

A. To meet their legal obligation to hold required reserves. D. To hold excess reserves to meet their​ short-term liquidity needs. increases up A. At the interest rate the Fed pays on​ banks' reserve balances.

In​ 2019, a Federal Reserve publication​ stated: "The Federal Reserve can no longer effectively influence the FFR by small changes in the supply of​ reserves." Is this statement​ true? A. Yes, since the 2007-2009 financial​ crisis, banks have held substantial excess​ reserves, so small changes in reserves by the Fed do not significantly influence the FFR. B. ​No, since the 2007-2009 financial​ crisis, the Fed has fixed the FFR to match the level of reserves held in the banking system. C. ​No, the FFR always reacts to the level of​ reserves, so any changes in reserves by the Fed will impact the FFR. D. ​Yes, since the 2007-2009 financial​ crisis, banks have stopped holding excess reserves​ altogether, so small changes in reserves have no impact on the FFR.

A. Yes, since the 2007-2009 financial​ crisis, banks have held substantial excess​ reserves, so small changes in reserves by the Fed do not significantly influence the FFR.

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 lenders lost faith in​ Bear's ability to pay back​ short-term loans B. because Bear liquidated assets in order to pay back​ long-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 Bear liquidated assets in order 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. Citibank. B. Lehman Brothers. C. Bank of America. D. JP Morgan Chase. Part 3 The​ debt-deflation process is the process of (decreasing/increasing) bankruptcies and defaults 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. would occur if Bear Stearns goes bankrupt and has to sell its assets. B. pushes up the price of those assets which other investment banks​ hold, thus worsening their balance sheets. C. does not provide any insight into why the Federal Reserve rescued Bear Stearns. D. pushes down the price of those assets which other investment banks​ hold, thus worsening their balance​ sheets, which in turn can accelerate bankruptcies.

A. because lenders lost faith in​ Bear's ability to pay back​ short-term loans C. because lenders declined to renew​ Bear's short-term loans E. because Bear liquidated assets in order to pay back​ short-term loans D. JP Morgan Chase. decreasing A. 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.

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 banking that holds that officials maximize the general​ public's well-being rather than their personal​ well-being. D. A theory of central bank decision making that holds that officials act in the best interest of the public. Part 3 How are the​ principal-agent view and the public interest view connected to the theory of the political business​ cycle? A. 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. B. These views are unrelated to the theory of the political business cycle. 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. 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. 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. D. 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.

What legislative change and financial innovations occurred after 1979 that changed M1 from representing a pure medium of exchange to also representing a store of​ value? ​(Check all that apply.​) A. The shadow banking system was created by Congress to compete with traditional banks. B. Banks developed automated transfer of saving​ accounts, which move checkable deposit balances into​ higher-interest CDs each night and then back into checkable deposit balances in the morning. C. Banks developed sweep​ accounts, which move savings deposits of businesses into checkable deposits each morning and then move the funds back into savings deposits at the end of the day. D. Congress authorized NOW accounts on which banks can pay interest. Part 2 Why would this change in M1 break the​ short-run link between money and​ inflation? A. M1 became more a world currency than a currency for usage within the country. B. M1 became more a medium of exchange than a pure store of value. C. M1 narrowed significantly. D. M1 became more a store of value than a pure medium of exchange.

B. Banks developed automated transfer of saving​ accounts, which move checkable deposit balances into​ higher-interest CDs each night and then back into checkable deposit balances in the morning. D. Congress authorized NOW accounts on which banks can pay interest. D. M1 became more a store of value than a pure medium of exchange.

Explain whether you agree with the following​ observation: "Since March​ 2020, the required reserve ratio has been equal to​ 0, therefore any increase in the monetary base can lead to an infinite increase in the money​ supply." A. Agree. If the required reserve ratio equaled​ zero, the simple deposit multiplier would equal​ infinity, implying that multiple deposit expansion would go on​ forever, and the realistic money​ multiplier, which includes currency and excess reserve​ holdings, would also equal infinity. B. Disagree. If the required reserve ratio equaled​ zero, the simple deposit multiplier would equal​ infinity, implying that multiple deposit expansion would go on forever.​ However, the realistic money​ multiplier, which includes currency and excess reserve​ holdings, would not equal infinity even if the required reserve ratio equaled zero. C. Agree. If the required reserve ratio equaled​ zero, the simple deposit multiplier would equal​ zero, implying that multiple deposit expansion would go on​ forever, and the realistic money​ multiplier, which includes currency and excess reserve​ holdings, would also equal zero. D. Disagree. If the required reserve ratio was equal to​ zero, the simple deposit multiplier would be equal to zero too.​ Therefore, multiple deposit expansion would not go on forever.

B. Disagree. If the required reserve ratio equaled​ zero, the simple deposit multiplier would equal​ infinity, implying that multiple deposit expansion would go on forever.​ However, the realistic money​ multiplier, which includes currency and excess reserve​ holdings, would not equal infinity even if the required reserve ratio equaled zero.

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 encourage struggling firms to expand. B. Liquidate means to let prices fall to their equilibrium level. 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, 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. B. Yes. The Fed and the government did absolutely nothing to help the economy during the Great Depression. 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.

B. Liquidate means to let prices fall to their equilibrium level. A. 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.

Does a bank have to be insolvent to experience a run? A. No, banks 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, bank runs are cause 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

B. No, bank runs are caused by bank panics, which can occur whether a bank is insolvent or not

Which from the following variables is most likely to be a goal of monetary​ policy? ​(Check all that apply.​) A. Open market purchases B. Real GDP growth C. Federal funds rate D. Unemployment rate E. M1 F. Nonborrowed reserves G. Monetary base H. Discount rate I. M2 Which from the following variables is most likely to be an intermediate target of monetary​ policy? ​(Check all that apply.​) A. Open market purchases B. Real GDP growth C. Federal funds rate D. Unemployment rate E. M1 F. Nonborrowed reserves G. Monetary base H. Discount rate I. M2 Which from the following variables is most likely to be an operating target of monetary​ policy? ​(Check all that apply.​) A. Open market purchases B. Real GDP growth C. Federal funds rate D. Unemployment rate E. M1 F. Nonborrowed reserves G. Monetary base H. Discount rate I. M2 Which from the following variables is most likely to be a monetary policy​ tool? ​(Check all that apply.​) A. Open market purchases B. Real GDP growth C. Federal funds rate D. Unemployment rate E. M1 F. Nonborrowed reserves G. Monetary base H. Discount rate I. M2

B. Real GDP growth D. Unemployment rate I. M2 E. M1 G. Monetary base F. Nonborrowed reserves C. Federal funds rate H. Discount rate A. Open market purchases

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. If such an amendment were​ enacted, the U.S. dollar would likely undergo a large depreciation. B. The Fed already serves the role described in the hypothetical amendment. C. The amendment would cause the making of monetary policy to be transferred from a private organization to a public agency. D. The amendment would likely have little effect on the Fed and would simply quiet dissenters who​ don't believe the Fed is constitutional.

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

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

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

] 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 comma such as increasing asset prices and lending comma which affects the economy for a longer time period than a traditional recession. B. When financial institutions fail comma credit markets can be damaged comma and the amount of borrowing comma and hence economic activity comma can decrease comma 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 comma credit markets can be damaged comma and the amount of borrowing comma and hence economic activity comma can decrease comma further affecting real output.

According to an article in the Wall Street Journal​, Congressman Jeb Hensarling of​ Texas, who was at the time chair of the House Financial Services​ Committee, criticized the Fed for paying banks an interest rate on their reserves that was higher than the federal funds rate. Briefly explain why the federal funds rate is typically lower than the interest rate the Fed pays banks on reserves. If the interest rate on reserves moves above the federal funds​ rate, then​ ________. A. banks would prefer to borrow from other banks instead of borrowing from the Fed B. banks would prefer to sit on their excess reserves instead of lending to other banks in the federal funds market C. the Fed would no longer be able to use the interest rate it pays on reserves to manage the federal funds rate D. banks would become unstable from lending out too much of their excess reserves in the federal funds market Part 2 Is it likely that the Fed would be able to set the interest rate it pays banks on reserves equal to the actual federal funds​ rate? A. No, because the Fed does not control the IOER—it only influences it through its policy decisions. B. ​Yes, the Fed was given this authority when Congress passed the Federal Reserve Act in 1913. C. ​No, because the Fed does not control the federal funds rate—it only influences it through its policy decisions. D. It depends on whether the Fed is pursuing expansionary or contractionary monetary policy.

B. banks would prefer to sit on their excess reserves instead of lending to other banks in the federal funds market C. ​No, because the Fed does not control the federal funds rate—it only influences it through its policy decisions.

A Federal Reserve publication states​ that: "The rate paid on ON RRP transactions acts as a floor for​ the" effective federal funds rate. What is the difference between the IOER and the rate on ON​ RRP? The IOER is the interest rate paid on​ ________, while the ON RRP is the interest rate paid on​ ________. A. the​ Fed's reserve​ balances; overnight repurchase agreements B. banks' reserve​ balances; overnight repurchase agreements C. overnight repurchase​ agreements; banks' reserve balances D. ​banks' excess​ reserves; banks' required reserves Part 2 Is every financial firm that can participate in ON RRP transactions with the Fed also eligible to receive the​ IOER? A. ​No, government-sponsored enterprises like Fannie Mae and Freddie Mac are not eligible to receive the IOER. B. ​No, only large commercial banks are eligible to receive the IOER. C. ​Yes, any financial firm that participates in ON RRP transactions is also eligible to receive the IOER. D. ​Uncertain, as eligibility depends on the size of the reserve balances being held with the Fed. Part 3 Why​ doesn't the IOER serve as a floor for the effective federal funds​ rate? A. Banks no longer want to hold very large levels of excess reserves. B. Financial firms not eligible to receive the IOER may be willing to lend at rates lower than the IOER. C. The Fed discontinued the IOER shortly after the 2007-2009 financial crisis. D. Financial firms receiving the IOER may be unwilling to lend to financial firms not eligible to receive the IOER. Part 4 How does the rate on ON RRP transactions serve as a floor for the federal funds​ rate? A. Financial firms receiving the ON RRP must agree to lend at rates at least​ 0% to​ 0.25% above the federal funds rate. B. The ON RRP represents the highest rate that banks are able to borrow short​ term, regardless of the lender. C. Financial firms receiving the ON RRP are typically unwilling to lend in the federal funds market at a lower rate. D. Similar to the​ IOER, the ON RRP​ doesn't actually serve as a floor for the effective federal funds rate.

B. banks' reserve​ balances; overnight repurchase agreements A. ​No, government-sponsored enterprises like Fannie Mae and Freddie Mac are not eligible to receive the IOER. B. Financial firms not eligible to receive the IOER may be willing to lend at rates lower than the IOER. C. Financial firms receiving the ON RRP are typically unwilling to lend in the federal funds market at a lower rate.

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. financing investments by issuing stocks B. borrowing and purchasing assets with borrowed funds C. purchasing other​ firms' derivatives D. purchasing assets with personal funds 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. 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. B. If the debt is not​ renewed, or rolled​ over, the asset side of the balance sheet becomes unsustainable. C. A debt could be renewed on very bad​ conditions: lower​ costs, longer​ terms, etc. 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. If the Fed followed​ Greenspan's analysis, their actions should have been sharply different. B. If Greenspan believes that most bubbles burst without severe economic​ consequences, then,​ yes, it would explain the​ Fed's actions. C. Bubbles always cause severe economic consequences.​ So, Greenspan's analysis is unsustainable. D. 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. borrowing and purchasing assets with borrowed funds B. If the debt is not​ renewed, or rolled​ over, the asset side of the balance sheet becomes unsustainable. B. If Greenspan believes that most bubbles burst without severe economic​ consequences, then,​ yes, it would explain the​ Fed's actions.

Given that inflation erodes the value of​ money, should the Federal Reserve pursue a goal of deflation​? A. No, deflation erodes the value of money more quickly than inflation. B. ​No, deflation encourages consumers to delay​ consumption, which can cause the economy to contract. C. ​Yes, deflation lowers real interest​ rates, which benefits everyone. D. ​Yes, deflation increases the value of​ money, which encourages consumers to increase​ spending, resulting in faster growth. Part 2 Would deflation create some of the same problems as inflation in terms of the information communicated by price changes and the arbitrary redistribution of​ income? ​(Check all that apply.​) A. Unanticipated deflation redistributes income just as unanticipated inflation​ does, with​ lower-income households losing purchasing power to​ higher-income households. B. Unanticipated deflation redistributes income just as unanticipated inflation​ does, but from borrowers to lenders rather than from lenders to borrowers. C. ​Deflation, just like​ inflation, complicates the ability to distinguish overall price changes from relative price​ changes, which determine resource allocation. D. Deflation does not create any problems for the economy. On the​ contrary, it helps spur economic​ growth, which benefits everyone. Part 3 Which groups would likely benefit from​ deflation? Which groups would likely be​ hurt? (Creditors/Borrowers) would likely gain from deflation and (creditors/borrowers) would likely lose.

B. ​No, deflation encourages consumers to delay​ consumption, which can cause the economy to contract. B. Unanticipated deflation redistributes income just as unanticipated inflation​ does, but from borrowers to lenders rather than from lenders to borrowers. C. ​Deflation, just like​ inflation, complicates the ability to distinguish overall price changes from relative price​ changes, which determine resource allocation. Creditors borrowers

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's actions might exacerbate a crisis. B. A regional Federal Reserve Bank would be circumventing the checks and balances built into the system. C. A regional Federal Reserve Bank acting independently can act quickly to address regional issues. D. A regional Federal Reserve Bank acting independently can increase the stability of the entire banking system. 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 would be circumventing the checks and balances built into the system. C. A regional Federal Reserve Bank acting independently can increase the stability of the entire banking system. D. A regional Federal Reserve​ Bank's actions might exacerbate a crisis. 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 use open market purchases and liberal discount window lending independently. B. No. In the modern Fed a Reserve Bank cannot conduct monetary policy independent from the FOMC and the Board of Governors. 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. Yes. In the modern Fed a Reserve Bank can act independently in case of a severe crisis in order to improve the economic situation.

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

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 larger banks that could be forced to shut down at any moment C. Bank borrow short to lend long and are relatively illiquid on any given day D. commercial banks tend to be similar banks that could be forced to shut down at any moment

C. Bank borrow short to lend long and are relatively illiquid on any given day

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' lending is highly sensitive to the information about the interest rate. B. Savers can easily withdraw their deposits based on the information about the yield. C. Banks acquire information to decide if borrowers are creditworthy. D. None of the above. Part 2 Nonbank forms of credit A. are credits issued by the U.S. Treasury. B. are credits issued by the Fed. C. refer to credit from providers other than banks. D. refer to credits issued by one commercial bank to another commercial bank. 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. When thousands of banks​ failed, it became difficult for their customers to obtain​ credit, thus exacerbating 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. ​Yes, Bernanke's observation helps to explain the role bank panics played in the severity of the Great Depression. D. Both A and C are correct.

C. Banks acquire information to decide if borrowers are creditworthy. C. 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.

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

C. In the event of a nonbank financial institution​ run, there is no equivalent of the FDIC. D. 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. increased their capital.

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 higher unemployment. B. Research studies have shown that the most independent central banks had the highest average rates of inflation during the 1970s and 1980s. C. 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 lower interest rates.

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

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 in order to make the Fed more centralized. B. Tension was necessary to improve the competitiveness of the U.S. banking system. C. This was all part of the organizational plan to prevent one faction of the banking system from having too much power. D. Tension was created to ensure that various interests would have input into the conduct of monetary policy. Part 2 Has the tension been resolved in the modern​ Fed? A. The board has much more power​ today, but the tension remains. B. The tension has been resolved by the Consumer Protection Act. C. The tension has been resolved by the FOMC. D. The tension has been resolved by the​ Dodd-Frank Act.

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

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. It is a partnership made up of both government and private entities. C. While authorized by the​ government, it is owned by private banks. D. While formed by private​ banks, it is owned by the government. Part 3 In what sense is the Federal Reserve System both accountable to the government and independent of​ it? A. Member banks have to complete annual government reporting requirements but are owned by private shareholders. B. The Board of Governors is the legal equivalent of a private corporation while the Federal Reserve Banks are government agencies. C. Regulatory requirements are set by the federal and state​ governments, but banks are owned by private shareholders. D. The Board of Governors is a federal government​ agency, while the Federal Reserve Banks are legally the equivalent of private corporations.

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

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. ​Yes, since members of the Fed are appointed by member banks and serve​ life-long terms, the quote is correct. B. ​No, similar to the​ president, members of the Fed are elected at the national level—they just serve longer terms. C. ​Yes, it is true that Fed officials are not​ elected, so in some sense the quote is correct. D. No, similar to members of​ Congress, members of the Fed are elected at the state level—they just serve longer terms. Part 2 What is the​ "Constitutional question" involved​ here? Is the existence of the Fed​ constitutional? A. 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. B. The Constitution does not directly discuss a central banking​ system; however, the​ Fed's constitutionality was confirmed by the Supreme Court. C. 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. D. 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. 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. Congress could exert considerable control over the Fed by limiting the funds sent to the Fed from the federal budget. D. Only the president has direct control over the​ Fed, so Congress must petition the president regarding any proposed changes.

C. ​Yes, it is true that Fed officials are not​ elected, so in some sense the quote is correct. B. 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.

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. 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. B. When these actions can put downward pressure on exchange​ rates, increasing exports to spur recovery. C. All answers are correct. D. When these actions can lower the cost of government borrowing in bad economic times.

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

What is a lender of last​ resort? A. The Federal Reserve acts as a lender of last resort. B. 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. C. A lender of last resort is an institution that serves as an ultimate source of credit to which banks can turn during a panic. 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 strive to promote​ "moral hazard" in the banking system. 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 have to provide liquidity to banks during bank panics. D. A lender of last resort is not connected to the​ too-big-to-fail policy.

D. All of the above. 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 have to provide liquidity to banks during bank panics.

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

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

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. All of the following are reasons why one bank failure might lead to many bank​ failures, except: A. Depositors of other banks may become concerned that their banks might also have problems. B. Banks will be forced to sell loans and securities to raise money to pay off depositors. 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 insure deposits. B. A central bank can act as a lender of last​ resort, and the government can insure deposits. C. A central bank can act as a borrower of last​ resort, and the government can insure deposits. D. A central bank can act as a lender 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. B. A central bank can act as a lender of last​ resort, and the government can insure deposits.

What is the simple deposit​ multiplier? A. It is the ratio of the amount of deposits created by banks to the amount of already existing reserves. B. It is the ratio of the amount of new reserves to the amount of deposits created by banks. C. It is the percentage of checkable deposits that the Fed specifies banks must hold as reserves. D. It is the ratio of the amount of deposits created by banks to the amount of new reserves. Part 2 If the Fed cuts the required reserve ratio from 8​% to 6​%, calculate the change in the value of the simple deposit multiplier. The simple deposit multiplier would (increase/decrease) by _____ ​(Round your response to two decimal places.​)

D. It is the ratio of the amount of deposits created by banks to the amount of new reserves. Increase, 4.17

An article on bloomberg.com in 2020 noted that in​ Argentina, "Since the lockdown​ [imposed to slow the spread of​ Covid-19] was announced March​ 19, the monetary base has increased about​ 20% . . . . Up until the​ quarantine, the . . . monetary base had only grown​ 7% this​ year." What is the likeliest explanation for why the arrival in Argentina of the​ Covid-19 pandemic resulted in an increase in the​ country's monetary​ base? A. Its central bank was likely selling large amounts of government​ securities, causing its balance sheet to shrink. B. The government had likely decreased its fiscal spending to stabilize the​ economy, causing the monetary base to increase. C. The central bank had likely decreased the money supply to stabilize the​ economy, causing the monetary base to increase. D. Its central bank was likely purchasing large amounts of government​ securities, causing its balance sheet to expand.

D. Its central bank was likely purchasing large amounts of government​ securities, causing its balance sheet to expand.

[Related to the Making the​ Connection] A column in the Wall Street Journal mentions the famous billionaire investor "Warren ​Buffet, who in 1999 and early 2000 was widely derided as​ 'a dinosaur' and​ 'out of​ touch' for his refusal to buy technology stocks." ​Source: Jason​ Zweig, "When Does A Bubble Spell ​Trouble?" Wall Street Journal​, January​ 10, 2014. Part 2 Why would anyone refer to an investor as out of touch if he​ wasn't investing in technology stocks in 1999 and early​ 2000? A. Investor expectations for technology stocks were based on the proven performance of​ long-term market leaders. B. Technology companies were generated huge profits at the time. C. Technology stocks were overvalued in what is known as a "bubble". D. Technology stocks were rising with the​ dot-com boom. Part 3 Given the subsequent crash of technology​ stocks, why might the Fed have not intervened during this period of​ time? A. It was difficult to determine whether an asset bubble existed. B. ​Buffet's changed his mind and bought technology stocks. C. The Fed determined no asset bubble existed. D. Professional investors were raising alarms.

D. Technology stocks were rising with the​ dot-com boom. A. It was difficult to determine whether an asset bubble existed.

Former Federal Reserve Chair Ben Bernanke has observed​ that; "Even a bank that is solvent under normal conditions can rarely survive a sustained run." ​ 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 positive. B. The value of a​ bank's assets is less than the value of its​ liabilities, so its net​ worth, or​ capital, is negative. C. The value of a​ bank's assets is more than the value of its​ liabilities, so its net​ worth, or​ capital, is negative. D. The value of a​ bank's assets is more than the value of its​ liabilities, so its net​ worth, or​ capital, is positive. 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 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. B. 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. C. 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. D. 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.

D. The value of a​ bank's assets is more than the value of its​ liabilities, so its net​ worth, or​ capital, is positive. B. 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.

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 decreased below the point that could be justified by fundamental evaluation. C. means that asset prices have increased beyond the point that could be justified by property appraisers. 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. Mortgage companies generally markup mortgages 2−3% above the 10−year Treasury bond yield. B. Housing purchases are typically​ short-term investments. C. The Fed can control and change​ long-term interest rates more easily than​ short-term interest rates. D. 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. Mortgage-backed securities are usually​ short-term loans. B. Buying a house is linked with​ short-term borrowings, which were insured by​ mortgage-backed securities. 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. A. 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.

Place the following in​ sequence, from what the Fed has the most influence on to what the Fed has the least influence​ on: policy​ goals, policy​ tools, policy​ instruments, intermediate targets. From the most influence to the least​ influence:

Policy tools Policy instruments Intermediate targets Policy Goals

Use​ T-accounts to show the effect of the following actions on the balance sheets of the Fed and the banking​ system: Part 2 The Fed increases discount loans by​ $2 billion. Discount​ Loans, an (asset/liability)​, (increases/decreases) by​ $2 billion. ​Reserves, an (asset/liability)​, (increases/decreases) by​ $2 billion. Part 3 The Fed carries out a​ $2 billion open market sale. Discount​ Loans, (asset/liability)​, (increases/decreases) by​ $2 billion. ​Reserves, (asset/liability)​, (increases/decreases) by​ $2 billion. Part 4 The Fed buys a new information technology system for the Federal Reserve Bank of Atlanta from​ DeShawn's Computer Services for​ $1 million. Discount​ Loans, (asset/liability)​, (increases/decreases) by​ $1 million. ​Reserves, (asset/liability)​, (increases/decreases) by​ $1 million.

asset, increases liability, increases asset, decreases liability, decreases asset, increases liability, increases

The U.S. Mint describes the demand for the​ gold, silver, and platinum coins it produces as being dependent on the prices of these metals as commodities. In​ addition, the Mint​ notes: "These commodity prices​ are, in​ turn, dependent on variables such as . . .​ [1] perceived strength as a​ safe-haven asset . . . and​ [2] earnings potential from other commodities or​ investments." Briefly explain whether these two factors help account for the surge in demand for gold coins in 2020. The more these metals are perceived as​ safe-haven assets, the (less/more) investors will want to purchase them during uncertain​ times, like those experienced during the​ Covid-19 pandemic. As the earnings potential from other commodities or investments​ increases, the demand for these precious metals will likely (increase/decrease).

more decrease