Study plan for Chapters 18, 12 & 16

Lakukan tugas rumah & ujian kamu dengan baik sekarang menggunakan Quizwiz!

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.

C. both A and B are correct

How might imposing capital controls help to stop a decline in the value of the​ lira?

Capital controls would reduce the demand for foreign​ currencies, thereby increasing the value of the lira.

How can changes in the federal funds rate cause changes in​ long-term real interest​ rates?

Changes in the federal funds rate can change​ long-term real interest rates because​ short-term interest rates and​ long-term interest rates tend to rise and fall together.

Writing on his​ blog, former Fed Chairman Ben Bernanke​ noted: "Here is the trilemma in​ action: If China wants to use monetary policy to manage domestic demand and to simultaneously free up international capital​ flows, it may not be able to fix the exchange rate at current​ levels." What does Bernanke mean by​ "the trilemma"?

China cannot have exchange rate​ stability, monetary policy​ independence, and free capital flows at the same time

what is a lender of last resort? A.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. B.A lender of last resort is an institution that serves as an ultimate source of credit to which banks can turn during a panic. C. The Federal Reserve acts as a lender of last resort. D. All of the above.

D. all of the above

which of the following is true regarding the bursting of the housing bubble in the U.S economy A. Once housing prices started to​ fall, homeowners realized their mistake and began defaulting on their mortgages. B.Once housing prices started to​ fall, the banks that owned​ mortgaged-backed securities experienced losses. C.Many financial assets were based on the bet that housing prices would only increase. D.All of the above.

D. all of the above

what are capital controls?

Government-imposed limits on foreign investors buying domestic assets or domestic investors buying foreign assets

why would markets interpret this change as indicating that interest rates were likely to remain low for a very long time?

Historically, when the economy starts to recover from a​ recession, the Fed raises interest rates to limit that inflation.

Does greenspan's analysis provide insight into why the fed during his tenure may have been reluctant to take action against asset bubbles

If Greenspan believes that most bubbles burst without severe economic​ consequences, then,​ yes, it would explain the​ Fed's actions.

Which of the following could be a negative implication if the maturity of the debt is less than the maturity of the debt is less than the maturity of the assets it funds

If the debt is not​ renewed, or rolled​ over, the asset side of the balance sheet becomes unsustainable

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. How did the emergence of shadow banking increase the risk to the financial​ system? ​(Check all that apply.​)

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

The late Allan Meltzer of Carnegie Mellon University once​ argued: I have yet to see a study that shows that sterilized​ intervention, the most common type of intervention used by the Fed in the foreign exchange​ markets, has any effect on the value of the dollar at all. What is a​ "sterilized intervention"?

It is a foreign exchange intervention where the central bank offsets the effect of the intervention on the monetary base.

An article in the Wall Street Journal observes​ that: "The dollar is an asset unlike any other for one​ reason: its position as the​ world's reserve​ currency." The article notes that the position of the dollar in the world financial system can cause problems for other countries by making​ "dollar-denominated debt more expensive to service in local markets. And it hurts foreign nations importing​ goods, which feeds​ inflation." In what sense is the dollar the​ world's reserve​ currency?

It is considered the​ world's reserve currency because the majority of international reserves are held in dollars.

What actions did the Fed take during the recession of 2020 that relied on its authority under Section​ 13(3) of the Federal Reserve​ Act?

It provided easy credit within the banking system along with providing funds directly to state and local governments by setting up credit and liquidity facilities.

What happened to the size of the default risk premium during the 2007-2009 and 2020​ recessions?

It rose dramatically during both​ recessions, but the increase was much greater in 2007-2009 than in 2020.

An article on bloomberg.com quoted then Governor of the Bank of Canada Stephen S. Poloz as saying that the size of the multiplier for government purchases depended in part on​ "offsets such as upward creep in interest rates or movement in the exchange​ rate." How would an increase in interest rates in Canada affect the exchange rate between the Canadian dollar and other​ currencies?

It would increase the demand for Canadian​ dollars, thereby raising the exchange rate.

What would be the effect of this change in the exchange rate on the size of the​ multiplier?

It would lead to a drop in net​ exports, thereby lowering domestic​ income, causing the multiplier to be smaller.

would an increase in interest rates affect the size of the multiplier in other ways in addition to its effect on the exchange rate?

It would reduce investment and​ interest-sensitive consumption, further reducing the size of the multiplier.

How did the Federal Reserve rescue Bear​ Stearns? The Federal Reserve arranged a buyout of Bear Stearns by

JP morgan chase

is the dollar the only reserve currency

No, while the dollar is the dominant reserve​ currency, countries also hold the​ yen, the​ euro, and the yuan as reserves.

what are dollar denominated debts

Securities purchased by foreign central banks and private investors priced in U.S. dollars

We've seen that since the Fed first formally adopted an inflation target of​ 2% in​ 2012, inflation has persistently been below that target.​ We've seen that in the five years leading up to​ Covid-19, the FOMC forecast that the inflation rate would be higher than it turned out to be. If the FOMC had realized ahead of time that inflation was going to remain well below its​ 2% target most of the​ time, how might it have changed monetary policy compared with the policy that it actually​ used?

The Fed may have kept the federal funds rate low instead of raising it beginning in 2015.

In August​ 2020, during the​ Covid-19 pandemic, an article in the Wall Street Journal reported that the Fed was preparing​ "to effectively abandon its strategy of​ pre-emptively lifting interest rates to head off higher​ inflation." The article noted that the policy change would be​ "a way of essentially telling markets that rates will stay low for a very long time. Markets have likely already picked up on this​ change, given the continued declines in​ long-term interest​ rates." Why had the Fed previously been following a policy of raising its target for the federal funds rate when it expected that inflation would rise in the future rather than waiting until inflation had actually​ risen?

The Fed wanted to head off that inflation rather than waiting until inflation rises and then trying to fix the problem.

What does it mean for the central bank of Turkey to​ "prop up the​ lira"? Why would the actions the central bank took to prop up the lira use up the​ bank's foreign-exchange​ reserves?

The central bank is looking to raise the value of the lira by selling foreign assets currently on its balance sheet

Why would the dollar serving as the​ "world's reserve​ currency" make it difficult for governments and firms in other countries that have​ dollar-denominated debts?

The cost of repaying the debt changes as the value of the dollar changes relative to the value of local currencies.

In his​ memoirs, published in​ 2014, former Treasury Secretary Timothy Geithner​ observed: "Eventually, Congress will have to make some tough choices about the mortgage market—not just how to reduce the​ government's dominant​ role, but how to balance the​ trade-off between safety and​ accessibility." In what sense does the government have a dominant role in the mortgage​ market?

The government implicitly guarantees Fannie Mae and Freddie Mac​ mortgage-backed securities.

Under the Bretton Woods​ system, what was devaluation?​

The lowering of a​ currency's official value relative to the U.S. dollar

What was the economist likely referring to by​ "doesn't bode well for the U.S. balance of​ payments"?

This disparity means that the United States may become even more reliant on savings from abroad

Shortly after the Federal Reserve arranged the purchase of Bear Stearns by JPMorgan​ Chase, the Wall Street Journal recounted the events that led to the extraordinarily low price that JPMorgan paid for Bear​ Stearns: ​"The bank was mulling a price of​ $4 or​ $5 a share.​ 'That sounds high to​ me,' Mr. Paulson said.​ 'I think this should be done at a low​ price.'" Why did Treasury Secretary Paulson want Bear Stearns to sell for such a low​ price? ​(Check all that apply.​)

To punish the​ firm's owners and managers for bad​ decisions, without letting them go bankrupt. In order to prevent systemic risk

An article on bloomberg.com observes​ that: "One​ often-used argument for a gold standard is that it disciplines​ governments, preventing them from printing a lot of paper money to pay their​ debts." What is the reasoning behind this​ argument?

Under the gold​ standard, a country would need to acquire additional gold to expand its money supply.

Evaluate the following​ argument: ​"The United States did not really leave the gold standard in 1933. Under the Bretton Woods​ system, the United States stood ready to redeem U.S. currency for gold at a fixed​ price, and that is the basic requirement of the gold​ standard." Which of the following regarding the above statement is​ true?

When the U.S. joined the Bretton Woods​ system, the quantity of gold did not determine the U.S. money supply.

John Maynard Keynes and John Hicks developed a model of the economy in which total output is determined solely by total spending with little or no consideration of the supply​ (production) side of the economy. Why would Keynes and Hicks writing during the Great Depression be likely to develop a model of the economy that focused only on total​ spending?

With the economy during the Great Depression way below potential in output and​ employment, the concern​ wasn't whether producers would​ produce, but whether households and firms would spend

Is it possible for the United States to run a​ balance-of-payments deficit?

Yes, it is possible to run a deficit if the official settlements balance is excluded from the financial account

n describing the bank panic that occurred in the fall of​ 1930, Milton Friedman and Anna Schwartz​ wrote: A contagion of fear spread among​ depositors, starting from the agricultural​ areas, which had experienced the heaviest impact of bank failures in the twenties. But such contagion knows no geographical limits. What do the authors mean by a​ "contagion of​ fear"?

a bank run that is fueled by fear of bank failure

what are the two main ways in which the government can keep one bank failure from leading to a bank panic?

a central bank can act as a lender of last resort, and the government can insure deposits

What is a sovereign debt​ crisis? A sovereign debt crisis occurs when​ ________.

a country has difficulty covering the interest or principal payments on its government issued bonds

IS curve

a curve that shows the combinations of the real interest rate and aggregate output that represent equilibrium in the market for goods and services

What is a​ "foreign exchange market​ intervention"? What are a central​ bank's "international​ reserves"? Foreign exchange market intervention is when there is​ ________ exchange rates. International reserves are​ ________.

a deliverate action by the central bank to influence; central bank assets denominated in a foreign currency

An article in the Wall Street Journal discussing the possibility that Greece might leave the eurozone observed​ that: "​Traditionally, devaluations are viewed as providing a​ short-run spur to growth." Why might the Greek economy experience an increase in growth following a departure from the​ eurozone?

a depreciation of currency to stimulate exports

All of the following are reasons why Greece might still choose to remain in the eurozone despite any possible​ benefits, except:

a likely appreciation of drachmas

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." Why should a recession connected with a financial crisis be more severe than a recession that did not involve a financial​ crisis?

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

what is Okun's law?

a statistical relationship between the output gap and the cyclical rate of unemployment

What do economists mean by an​ "exchange rate​ regime"? By an​ "exchange rate​ regime," economists mean​ ________.

a system a country chooses for adjusting exchange rates and flows of goods and capital among countries

Why would a government want its currency to be​ weaker? Don't countries prefer to have strong​ currencies?

a weaker currency means the prices of its exports will be lower in terms of other countries' currencies thereby raising net exports

What does it mean to say that there is a bubble in the housing​ market? A bubble means that

asset prices have increased beyond the point that could be jusitfied by fundamental evaluation

Monetary policy that changes interest rates in order to affect​ borrowers' net worth and spending decisions.

balance sheet channel

What role did the bank panics of the early 1930s play in explaining the severity of the Great​ Depression?

bank panics exacerbated the effect of the great depression by making residential and commercial loans more difficult to get, which further reduced economic activity

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. What does it mean to say that bank lending is​ "information sensitive"?

banks acquire information to decide if borrowers are creditworthy

why would bank lending being information sensitive make it difficult to replace with nonbank forms of credit

banks have economies of scale or some other advantage in evaluating the riskiness of loans

why might a country impose capital controls

because currency crises are fueled in part by sharp inflows and outflows of financial investments

Which of the following are advantages of​ pegging? ​(Check all that apply.​)

A check against inflation reduced exchange rate risk

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. Why did Bear Stearns almost​ fail? ​(Check all that​ apply.)

because lenders lost faith in bear's ability to pay back short term loans because lenders declined to renew bear's short term loans because bear liquidated assets in order to pay back short term loans

What happens to the output gap during a recession? During a recession the output gap _____________

becomes negative

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. What does Greenspan mean by​ "debt leverage"?

borrowing and purchasing assets with borrowed funds

does Bernanke's observation help 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.

both a and c are correct

To reduce the foreign exchange value of its​ currency, would a central bank buy or sell foreign​ assets? What would be the effect on the monetary​ base? What would be the effect on domestic interest​ rates? To reduce the foreign exchange​ rate, the central bank would ____- foreign assets, which would________ the monetary base and _______ domestic interest rates

buy; raise; reduce

In describing the performance of the Federal Reserve during the Great​ Depression, former Federal Reserve Chairman Ben Bernanke has​ written: "The Fed proved far too passive during the Depression. It was ineffective in its role of lender of last​ resort, failing to stop the runs that forced thousands of small banks to close ...." A lender of last resort is a _______ that acts as the ultimate source of credit to _____________, making loans to solvent banks against their _________ ​illiquid, loans

central bank, the banking system, good, but

Monetary policy that impacts​ banks' ability to lend to​ bank-dependent borrowers.

commercial bank lending channel

n the​ 1790s, Alexander​ Hamilton, the secretary of the​ Treasury, urged Congress to agree to pay off the bonds that state governments had issued to finance expenditures during the American Revolution. An opinion columnist in the Wall Street Journal notes that​ Hamilton's proposal, which Congress​ adopted, "instantly won the new nation global​ credibility." What kind of credibility was the columnist likely referring​ to? The columnist was likely referring to the United​ States' ________

credibility in fully honoring all of its sovereign debr

Distinguish between the types of transactions recorded in the current account and those recorded in the financial account. The _____ account records transactions of currently produced goods and​ services, and the _______ account records transactions of existing financial or real assets.

current; financial

Suppose that a U.S. firm buys 13 BMW autos for ​$30,000 each. How is this transaction recorded in the​ balance-of-payments accounts for the United​ States? The purchase of the 13 BMW autos would be recorded in the _______ account as a $ _______- payment to _______ which is recorded as a ______ number

currnet; 390,000; foreigners; negative

A larger value for the MPC would tend to ____________ the stability of the economy because it would lead to ________ fluctuations in consumption

decrease, higher

If the Fed sells ​$15 billion of foreign​ assets, what happens to the​ Fed's holdings of international reserves and to the monetary​ base? The​ Fed's holdings of international reserves ___ by $15 billion, and the monetary base ____ by $15 billion

decrease; decreases

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 ________

decreases; assets the fund holds

if nominal interest rates remain unchanged during a period of deflation, then when inflation rates are _______, the real interest rate in the economy will _________

decreasing, increase

What problems might the Fed face when it has difficulty determining whether current circumstances in financial markets and the economy actually are​ "unusual and​ exigent"? What problems might it face in having difficulty determining whether circumstances were no longer​ "unusual and​ exigent"? If the Fed has difficulty determining if current circumstances are​ "unusual and​ exigent," it may _________________

delay important policy actions

What is the difference between a devaluation and a​ depreciation? A __________ refers to a drop in the value of a currency in a flexible exchange rate​ system, whereas a __________ refers to a drop in the official fixed exchange rate in a fixed exchange rate system.

depreciation; devaluation

Explain whether you agree with the following​ argument: Potential GDP is the level of real GDP attained when all firms are producing at capacity. Firms have the capacity to operate 24 hours per day if they have​ to, but they rarely do.​ Therefore, because firms can almost always produce much more output than they actually​ do, real GDP is almost always well below potential GDP. agree or disagree

disagree

The Fed buys ​$4.0 billion in German government​ bonds, denominated in euros​, ​and, at the same​ time, conducts an open market sale of ​$4.0 billion of U.S. Treasury securities. What happens to the monetary​ base? Is this a sterilized or an unsterilized foreign exchange​ intervention? The monetary base

does not change; sterilized

When the Federal Reserve lowers the real interest​ rate, does the economy move up or down the IS​ curve, and does the value of the output gap increase or​ decrease? When the Fed lowers the real interest​ rate, the economy moves _____ the IS curve and the value of the output gap __________

down, increases

If the intervention were​ successful, would it take more units of foreign currency to buy a U.S. dollar or fewer​ units? A weakening of the dollar means the measure of foreign currency per dollar would _______ so it would take _____ units of foreign currency to buy a dollar

fall; fewer

the debt deflation process is the process of ___________ that can increase the severity of an economic down turn

falling asset prices

n​ 2020, two articles in the Wall Street Journal discussed the decline in the value of the Turkish lira in exchange for the euro and the U.S. dollar. One article noted​ that: "President Recep Tayyip Erdogan has been under pressure to prop up the​ currency, because a rapid drop would add to the costs of foreign currency debt for Turkish banks and​ companies." The other article reported​ that: "The central bank has . . . used up much of its​ foreign-exchange reserves to prop up the​ currency." And:​ "Analysts and investors are concerned that Turkey may now look to impose partial capital controls . . . to try to stabilize the​ market." Why would a decline in the lira​ "add to the costs of foreign currency debt for Turkish banks and​ companies"? A decline in the lira means that each lira can be exchanged for ________units of the foreign currency. This means that as the value of the lira​ declines, it takes ____________ lira to pay off existing foreign currency debt.

fewer; more

​Later, the German company uses the money to buy a ​$390,000 U.S. Treasury bond at a Treasury auction. How is this transaction recorded in the​ balance-of-payments accounts for the United​ States? The purchase of the U.S. Treasury bond would be recorded in the _____ account as a $________ receipt from _______ which is recorded as a ______ number

financial; 390,000; foreigners; positive

What is pegging?

he decision by a country to keep the exchange rate fixed between its currency and another​ country's currency.

What did bank depositors have to fear in the early​ 1930s?

if a bank failed, then depositors would potentially lose all their moeny

The 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. What does a hedge​ fund's trades​ "moving against​ it" mean? ​"Moving against​ it" means that

if a hedge fund bets one way and the price moves another away it has to exit the position fast

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." All of the following are reasons why one bank failure might lead to many bank​ failures, except:

if multiple banks have to sell the same assets, the prices of those assets are likely to rise

How would the Fed carry out a sterilized intervention in the foreign exchange​ market? ​(Check all that apply.​)

if the fed purchased foreign assets, it would also sell u.s treasury secruities if the fed sold foreign assets, it would also buy u.s treasury securities

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

increased their capital

The Fed changes the real interest​ rate, which affects the components of aggregate​ expenditure, thereby changing the output gap and the inflation rate.

interest rate channel

A column in the Wall Street Journal notes that "every heavily indebted country weighs the cost of repaying debt against the loss of confidence and creditworthiness that default entails." whose confidence is the country afraid of losing?

investors

why wouldn't a sterilized intervention have any effect on the value of the dollar

it does not change domestic interest rates

how did this change in the default risk premium affect the MP curve and the output gap?

it shifts the MP curve up and decreases the output gap

Why would this type of global credibility be particularly important to a relatively underdeveloped​ country, as the United States then​ was?

it showed that the United States was low risk as a borrower, allowing for lower interest rates on sovereign debt

was deflation during the early 1930s good or bad for firms

it was bad for firms that were borrowers because it effectively raised interest rates

As of​ 2020, the federal government was only beginning to take steps to reduce its role in the mortgage market. Why has moving away from the current system proven to be difficult​ politically?

it would increase mortgage interest rates and reduce the accessibility of mortgages

If a country runs a current account surplus​, are its exports of goods and services larger or smaller than its imports of goods and​ services? If a country runs a current account surplus​, its exports of goods and services are _________ than its imports of goods and services

larger

The consequences of losing investor confidence will most likely result in a ______ credit rating and _____ interest costs

lower, higher

Why might China be unable to fix its exchange rate if it is using an expansionary monetary policy and allowing free capital​ flows? An expansionary policy would _____ interest rates and ________ the demand for Chinese financial​ assets, causing the exchange rate value of the yuan to __________

lower; decrease; fall

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

magnifies, reducing, magnifies, reduces

What are​ "capital requirements"? What purpose do they​ serve? Capital requirements describe the​ ________ amount of capital a bank can hold. They are put in place to​ ________, resulting in a more​ ________ banking industry.

minimum; limit moral hazard in banking; stable

Fiscal stimulus was necessary in​ mid-2020 since at the time the output gap was ___________-

negative

Use the​ IS-MP model to discuss whether the U.S. economy can experience inflation and slack at the same time. Inflation can occur if there is a _________. if this increases inflation expectations then slack can be created as __________

negative supply shock causing the phillips curve to shift up, real interest rates rise causing MP to shift up

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?

no borrowers would be hurt by the higher real interest rates and higher real value of debts that deflation causes

why had markets responded in a way that caused long term interest rates to decline? A. If the chance of higher inflation is​ reduced, then investors will require a lower term premium. B.If markets expect that​ long-run inflation will be lower than previously​ expected, then​ long-term interest rates will fall. C.Markets realized that the FOMC had been consistently overstating and missing its​ 2% inflation target. D.Only A and B are correct. E.All of the above are correct.

only A and B are correct

What is the "output gap"? the "output gap" is the gap between real GDP and ________

potential GDP

Does this process provide any insight into why the Federal Reserve rescued Bear​ Stearns? ​ A​ debt-deflation process

pushes down the price of those assets which other investment banks hold, thus worsening their balance sheets, which in turn can accelerate bankruptcies would occur if bear stearns goes bankrupt and has to sell its assets

What is the​ trade-off between safety and accessibility with respect to home​ mortgages? Stricter safety requirments will _____________ the accessibility of mortgages to potential homebuyers.

reduce

How does the​ government's role in the mortgage market affect that​ trade-off? By guaranteeing​ mortgage-backed securities like Fannie Mae and Freddie​ Mac, the government _______ the risk to financial firms and ____________ mortgage interest rates, which ______ the accessibility of mortgages

reduces, reduces, increases

nonbank forms of credit

refer to credit from providers other than banks

When the Federal Reserve changes the real interest rate to affect the output gap and inflation​ rate, the bank lending channel and the balance sheet channel _______ the effect of the change in the real interest rate

reinforce

How can​ Okun's law be used to derive an output gap Phillips​ curve? The output gap Phillips curve can be derived from the unemployment Phillips curve by

replacing the unemployment gap​ (cyclical unemployment) with the output gap equivalent ​(Y​/2) from​ Okun's law

What does a​ fund's "dumping its​ positions" mean? ​(Check all that apply.​)

selling before capital runs out selling before a margin call

Why did Congress write into Section​ 13(3) that the Fed could only take these actions under​ "unusual and exigent​ circumstances"? Congress wants the Fed to​ ________. This will encourage firms and government entities to​ ________ and will help avoid​ ________.

serve as the lender of last resort; act in a safe manner; moral hazard

Monetary policy designed to impact the ability of money market mutual funds to purchase commercial paper issued by firms

shadow bank lending channel

Economist John Cochrane of​ Stanford's Hoover Institution notes that supporters of Modern Monetary Theory​ (MMT) argue that inflation only occurs when the economy has no​ "slack." But he​ asks, "Did not the 1970s see​ stagflation, refuting​ [the] assertion​ [of supporters of​ MMT] that inflation comes only when there is no​ 'slack'"? What is economic slack in terms of the output​ gap?

slack occurs when there is a negative output gap

Would you expect the bank lending channel of monetary policy to have a larger or a smaller effect in emerging​ economies, such as Brazil or​ India, than in the United​ States? The bank lending channel of monetary policy has a _____ effect in the U.S than in emerging economies

smaller

all of the following are reasons why the fed didn't take action to rescue insolvent banks, except

some fed officials didn't think the problem was as bad as it was

What is the difference between a sterilized foreign exchange intervention and an unsterilized foreign exchange​ intervention? with ___ foreign-exchange ​intervention, the central bank offsets the effect of the intervention on the monetary base. with ______ foreign-exchange ​intervention, the central bank does not offset the effect on the monetary base.

sterilized unsterilized

If it has difficulty determining whether circumstances are no longer​ "unusual and​ exigent," it may ______________

stop policies too early or upset congress for overstepping its authority

Chapter 17 discussed whether the Federal Reserve and the government should attempt to​ "fine-tune" the economy—smooth almost every fluctuation in GDP or inflation—with stabilization​ policy, or,​ instead, should focus on​ long-run objectives, such as low inflation or steady economic​ growth, and restrict the use of activist policy to fighting major downturns in the economy. The reality that the Fed and the government must rely on​ "real-time data" that is subject to revisions _______________ the argument against​ fine-tuning the economy with activist stabilization policy.

strengthens

In July​ 2020, during the​ Covid-19 pandemic, an article on barrons.com reported that in testifying before Congress in July 2020 during the​ Covid-19 pandemic, former Fed chairs Ben Bernanke and Janet Yellen​ "called for Congress to provide more fiscal stimulus to the U.S.​ economy." What is​ "fiscal stimulus" and why was it called for in​ mid-2020? Fiscal stimulus includes expansionary ___________________

tax or spending policies implemented by the federal government

What is the difference between a​ "liquidity facility" and a​ "credit facility"? A credit facility is when​ ________, while a liquidity facility is when​ ________.

the Fed aggressively uses the repo market to provide credit within the banking​ system; the Fed provides funds to nonfinancial firms through loans or bond purchases

An article in the Wall Street Journal in 2019 reported that​ "President Trump and his economic advisers discussed a proposal to intervene in​ foreign-currency markets to weaken the U.S. dollar but ultimately decided against such an​ action." How could the United States intervene in​ foreign-currency markets to weaken the U.S.​ dollar?

the United states could increase the supply of U.S dollars by buying foreign assets

what is a default risk premium

the additional yield that an investor requires for holding a bond with some default risk

Why might an economist consider what happened during 2007-2009 to be a financial crisis but not the events of​ 2020? The 2007-2009 recession was the result of​ ________, while the 2020 recession was the result of​ ________.

the crash of the housing market; a once in a lifetime pandemic with social distancing measures

An article in the Wall Street Journal published in 2020 during the​ Covid-19 pandemic noted​ that: "The U.S. usually runs a deficit in goods and a surplus in services such as medical​ care, higher​ education, royalties and payments​ processing." The article noted that the pandemic was having a large negative effect on U.S. exports of services but having a much smaller effect on U.S. imports of manufactured goods. It quoted an economist at a consulting firm observing that this result​ "doesn't tend to bode well for the U.S. balance of payments because we tend to export a lot of services and import a lot of​ goods." In which component of the​ balance-of-payments account would U.S. exports of services and imports of manufactured goods​ appear?

the current account

Why would the dollar serving as the​ world's reserve currency make it difficult for countries importing​ goods, and why might those countries experience higher inflation as a​ result? Because of the​ dollar's role as an international reserve​ currency, ________.

the dollar may appreciate in​ value, making imports denominated in dollars more​ expensive, resulting in inflation

What is​ "contagion"? What role does it play in bank​ panics? Contagion is when​ ________.

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

how might the fed have stopped the bank runs during the early 1930s?

the fed could have lent money insolvent banks

Why might former Fed Chairs Bernanke and Yellen have believed that in 2020 fiscal stimulus was necessary rather than a more expansionary monetary​ policy?

the fed had already moved the target federal funds rate to near zero and had few policy options avaliable

which of the following is a reason that the Federal reserve failed to intervene to stabilize the banking system in the early​ 1930s?

the fed was reluctant to rescure insolvent banks, believing that doing so would encourage risky behavior by bank managers (the moral hazard problem)

what policy actions did the federal reserve take during the financial crisis

the federal reserve helped JPMorgan chase acquire bear stearns

Financial crisis typically results in a recession for all of the following reasons​ EXCEPT?

the government is unwilling to intervene during a financial crisis

Which of the following steps would not need to be taken to reduce the​ government's role in the mortgage​ market?

the government would need to stop charging fannie mae and freddie mac fees

what is the relationship between the MPC and the multiplier?

the larger the MPC the larger the multiplier

What do economists mean by the​ "channels of monetary​ policy"? By the​ "channels of monetary​ policy," economists are referring to​ ________.

the ways in which monetary policy can affect output and prices

In the following​ situation, briefly explain whether the​ short-run Phillips curve with the unemployment rate on the horizontal axis will​ shift, and if it does​ shift, in which direction it will​ shift: The actual inflation rate increases.

this would cause a movement up along the short - run phillips curve

In the following​ situation, explain whether the IS curve will shift​ and, if it does​ shift, in which direction it will​ shift: The federal government cuts the corporate profit tax.

this would shift the IS curve to the right

Why did the Fed decide to use both during​ 2020? The Fed used both​ ________.

to maintain a flow of funds through the financial system so banks and governments could still function as needed

What is the controversy over​ China's pegging the value of the​ yuan? The value of the yuan is _____ making chinese exports _________ and imports into china _________-

undervalued; cheaper; more expensive

Under a gold​ standard, for the world as a whole​, inflation

was possible from gold discoveries that increased the world money supply

Why were countries hesitant to pursue a devaluation​? ​(Check all that​ apply.)

B. Because the governments had to face political charges that their monetary policies were flawed. C. Because it wiped out a portion of the value of financial assets denominated in the domestic currency.

How do central banks use official reserve​ assets? ​(Check all that apply.​)

B. To make international payments to conduct international monetary policy. C. To make international payments to settle the balance of payments.

what do the authors means that "such contagion knows no geographical limits"

Bank panics may start in an isolated​ area, but the fear they engender quickly spreads to banks elsewhere.

How does deposit insurance encourage banks to take on too much risk?

Banks can make riskier investments without worrying about deposit withdrawals because the government has insured depositors against losses

do depositors today face similar fears?

Because FDIC insurance did not exist in the early​ 1930s, depositors today do not face similar fears.

what are capital controls

​C. Government-imposed restrictions on foreign investors buying domestic assets. D. ​Government-imposed restrictions on domestic investors buying foreign assets.

The United States​ hasn't been on the gold standard since 1933. What has prevented the United States from​ "printing a lot of paper money to pay its​ debts" in the years​ since? Printing paper money to pay its debts can be​ ________ for the​ country, and it​ ________.

​inflationary; angers lenders who are receiving devalued currency in repayment

what are the disadvantages of imposing capital controls

A. heightened reluctance of multinational firms to expand operations in countries with capital controls. C. Impetus is given to the formation of a black market for the currency so entities can evade the capital controls. D. Increased government corruption with bribes to government officials.

Why was the decision by the Fed to orchestrate the purchase of Bear Stearns so​ controversial? (check all that apply)

A.Because, according to some​ economists, the action increased moral hazard in the financial system. C. Because the Fed intervened by brokering a guaranteed deal with JP Morgan. E.Because Bear Stearns is an investment​ bank, as opposed to a commercial​ bank, and, as​ such, policymakers faced unexpected challenges.

What are official reserve​ assets? ​(Check all that apply.​)

A.Gold that central banks hold and use in making international payments. B. Government securities that central banks hold and use in making international payments. D.Special Drawing Rights that central banks hold and use in making international payments.

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

How did the gold standard​ operate? ​(Check all that apply.​)

A. Trade deficits led to gold outflows and a decrease in the money​ supply, and trade surpluses led to gold inflows and an increase in the money supply. D. The quantity of gold held by a country determined its money​ supply, and gold served as official reserves.

Name three downsides to a government imposing capital controls.

A. capital controls may lead to increased corruption. B. Multinational firms may be hesitant to locate in countries with capital controls. C. Capital controls may lead to the development of black markets for the currency.


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