Quiz Ch 12 and 13
Which of the following is associated with asymmetric information in a financial crisis?
ALL 1.Moral hazard could occur when only borrowers know if the funds will be used to finance high-risk activities. 2.There is a lack of information about one or more of the parties involved in a transaction. 3.Adverse selection can occur if lenders must select from a pool of bad credit risks
If uncertainty about banks' health causes depositors to begin to withdraw their funds from banks, the country experiences a(n)
banking crisis.
When a fire sale occurs,
banks may become insolvent.
The teal book is the Fed research document containing
both A and B A.the forecast of national economic variables for the next three years B.forecasts of the money aggregates conditional on different monetary policy stances.
The political business cycle refers to the phenomenon that just before elections, politicians enact ________ policies. After the elections, the bad effects of these policies (for example, ________ ) have to be counteracted with ________ policies
expansionary; a higher inflation rate; contractionary
The interest rate on overnight loans from one bank to another is the _____. ________________are the most important policy tool the Fed has for controlling the money supply.
federal funds rate; Open market operations
The ability of a central bank to set monetary policy goals is
goal independence.
The trend in recent years is that more and more governments
have been granting greater independence to their central banks
The growth of the subprime mortgage market led to
increased demand for houses and helped fuel the boom in housing prices.
The new Consumer Financial Protection Bureau is an independent agency but is funded and housed within
the Federal Reserve.
Prior to 1980, member banks left the Federal Reserve System due to
the high cost of required reserves.
Recent research indicates that inflation performance (low inflation) has been found to be best in countries with
the most independent central banks.
One suggested method of reducing excessive −taking by SIFIs is to require them to hold ________ capital when credit is expanding rapidly and ________ capital when credit is contracting.
more; less
Which of the following does not cause a reduction in the net worth of the borrowing firm in a loan market?
an unanticipated increase in the price level that reduces the value of the firm's liabilities.
The ________, the difference between the interest rate on Baa corporate bonds and U.S. Treasury bonds. rose sharply during the Great Depression
. credit spread
How does an unanticipated decline in the price level cause a drop in lending?
A decline in the price level raises the real value of borrowing firms' liabilities while lowering the firms' real net worth
Why is the shadow banking system an important part of the 2007-2009 financial crisis?
A decrease of funding from the shadow banking system caused a restriction of lending and a decline in economic activity.
The oldest central bank, having been founded in 1694, is the
Bank of England.
Which of the following is NOT a reason why bank failures worsen financial crises?
Bank panics reduce the amount of asymmetric information, which makes it more difficult to lend funds
Why were consumer protection provisions included in the Dodd-Frank bill, a bill designed to strengthen the financial system?
Consumer protection will avert future financial problems in the housing market.
'A general increase in uncertainty as a result of a failure of a major financial institution makes it easier to separate good credit from bad credit, which can lead to a reduction in adverse selection and moral hazard problems.' Is this statement true or false?
False
The Federal Reserve entity that makes decisions regarding the conduct of open market operations is the
Federal Open Market Committee.
Choose the components of the shadow banking system. (Check all that apply.)
Money market funds. Hedge funds Investment banks.
The Federal Reserve Bank of ________ houses the open market desk.
New York
Which of the following functions is not performed by any of the twelve regional Federal Reserve Banks?
Setting interest rates payable on time deposits
Which of the following is a duty of the Board of Governors of the Federal Reserve System?
Setting margin requirements, the fraction of the purchase price of the securities that has to be paid for with cash.
Which of the following is NOT a principal-agent problem resulting from the originate-to-distribute business model?
Since mortgage brokers do not intend to hold the mortgage loans they make, they take extra care to gather as much information as possible about the borrower.
Which of the following is an entity of the Federal Reserve System?
The FOMC
The Depository Institutions Deregulation and Monetary Control Act of 1980
established uniform reserve requirements for all banks
Which of the following is a correct statement about the Dodd-Frank Act of 2010?
The Dodd-Frank Act created a new independent —the Consumer Financial Protection Bureau—that is funded and housed within the Federal Reserve.
When the risk that some banks might fail increases, depositors may not have enough information to determine whether their bank is a good one or one of the banks at greater risk to fail. Depositors have an incentive to withdraw their deposits before the bank runs out of funds. If this becomes a widespread occurrence, it is known as:
a bank panic.
The financial panic of 1907 resulted in such widespread bank failures and substantial losses to depositors that the American public finally became convinced that
a central bank was needed to prevent future panics.
A substantial decrease in the aggregate price level that reduces firms' net worth may stall a recovery from a recession. This process is called
debt deflation