ULL FNAN 320 Justin Callais Exam 2

. Using a two-part aggregate supply curve, an increase in aggregate demand when the economy is at less than full employment would be expected to lead to __________ in real GDP and __________ in the price level.

an increase; no increase

Holly goes to her bank to take out a loan, and the bank agrees to the loan on the condition that Holly maintain a balance of $1,000 in her savings account with the bank. This is an example of a bank using a

b compensating balance as a way to mitigate the problem of moral hazard.

Armand buys a 10-year, $10,000 bond that pays him $500 every year for 10 years and repays the face value in year 10. During the 10-year period, the rate of inflation holds steady at 3% per year. The real rate of return on Armand's investment is

2%.

Which of these could be a reason for a decrease in the demand for loanable funds?

A decrease in expectations about future inflation

Suppose the market for loanable funds is currently in equilibrium. Which of the following factors will cause an increase in the interest rate?

An increase in business confidence

Which of these would cause a decrease in aggregate demand?

An increase in imports

The rational expectations approach postulates what two aggregate supply curves?

An upward-sloping short-run aggregate supply curve and a vertical long-run supply curve at the full-employment level of GDP.

. Aggregate demand is equal to

C + I + G + (X - M).

What is the best description of the relationship between the price of bonds and the quantity of bonds supplied, all else equal?

Direct

Which of the following could cause an increase in the supply of loanable funds?

Expansionary monetary policy being followed by the Federal Reserve

An increase in the price of bonds will cause a decrease in the demand for bonds.

False

Keynes suggested that what kind of spending would be necessary to move the economy out of the Depression?

Government spending of some kind

According to Keynes, when the price level rises, it causes the interest rate to do what? It causes the level of business spending to do what?

It causes an increase in the interest rate, due to a greater consumer demand for money to spend; business spending decreases.

Which of these groups of people is most hurt by inflation?

Lenders and working class people

Several factors can cause the SRAS curve to shift; these factors include a change in the cost of inputs, a change in taxes, and even a change in seller expectations.

True

When the actual level of output is less than the potential level of output, there is an output gap, sometimes called a recessionary gap.

True

When the Federal Reserve buys US Treasury securities on the open market, it is attempting to

a lower interest rates.

The securities that the Federal Reserve holds on its balance sheet include

a. US Treasury securities, federal agency debt, and privately issued mortgage-backed securities

Which of these statements is true of the board of governors of the Fed?

b. The board of governors consists of six members plus the chair; the term length for members is fourteen years

The board of governors of the Federal Reserve has three primary responsibilities, which are

b. the operations of the Fed, commercial bank regulation, and monetary policy

Inflation is a benefit in the short run to

borrowers

Which of these statements best describes why the required reserve ratio is no longer relevant in most cases today?

c About 70% of banks already have reserves that exceed their level of required reserves.

. Which of these statements is most true of the function of banks?

c Banks play a key role in creating money, and they help with the problem of adverse selection.

. Which of the following qualifies as a liability to a bank?

c Demand deposits

. Which of these is the most often used and the most flexible monetary tool used by the Federal Reserve?

c Open market operations

The business of banking solves the problem of

c a liquidity mismatch with savers desiring liquidity and borrowers desiring illiquid loans.

The result of asymmetric information in a market is __________ selection.

c adverse

The bond rating system, in which companies like Moody's and Standard & Poor's provide ratings for a company's default risk, is one way to deal with

c adverse selection.

A financially healthy bank borrowing overnight from the Federal Reserve is known as

c primary credit.

Cleo is hired as the CEO of Wolfstarter Company, a publicly owned corporation. After she is hired, she authorizes the purchase of a company limousine to chauffeur her around town, purchases a skybox at the stadium of the local NFL team, and provides herself with a company-paid membership at the local country club. This behavior could be an example of

c the principal-agent problem.

The Fed is composed of

c. Three branches with overlapping responsibilities

Rachel goes for a job interview and knows a lot about the job she is applying for. The woman who interviews her is filling in for another employee and knows very little about Rachel. We might say the woman conducting the interview is likely to have what kind of situation?

d The interviewer has asymmetric information as she knows less about Rachel than Rachel knows of herself.

Changes in the federal funds rate influence the economy's growth rate through all of the following except by

d. Altering the real interest rate when inflation is changing quickly

The Pigou effect is one of the reasons that the aggregate demand curve slopes downward. According to this argument, when the price level

goes down, peoples' savings are able to purchase more stuff so the total level of spending increases.

Originally, Keynes conceived of the aggregate supply curve as consisting of two distinct segments. In this conception, below the full-employment level of output the aggregate supply curve is __________, and once the economy reaches the full-employment level of output it becomes __________.

horizontal; vertical

The relationship between the economy-wide price level and the level of real GDP illustrated by the aggregate demand curve is

inverse.

Bond prices and interest rates are

inversely related

The three reasons that the economy-wide price level and the level of real GDP move in opposite directions are

the Pigou effect, Keynes's interest rate effect, and the foreign trade effect.

The quantity of loanable funds supplied is directly related to interest rates because as interest rates increase

the opportunity cost of household consumption increases, causing households to bring more of their after-tax income to the pool of loanable funds.

Deductibles are one way insurance companies protect themselves from careless drivers.

true

Liquidity is the term that has which of these meanings?

a A measure of the ease with which one asset can be converted into another asset, usually money

An example of asymmetric information in financial markets is that, in equity markets, directors __________ than shareholders.

a have a better sense of future profitability

. Which of the following would be considered an asset on a bank's balance sheet?

a A consumer loan

When the parties to a transaction have different levels of knowledge about each other and/or the nature and implications of the transaction, it is said that there exists __________ information

a asymmetric

The interest rate that the FOMC currently chooses to control is the

a. Federal funds rate

Why is it easier for the Fed to manage the level of bank reserves using the term auction facility (TAF) as opposed to using discount window lending?

b Banks receive TAF proceeds on a 3-day delay, rather than on the day they are requested.

The principal of a school hires Daniel to teach eighth grade students. One goal the principal has is to prepare the students to do well on standardized tests, as he will be judged based on the results of those tests. Daniel prefers to teach in a more creative way, so the students learn a lot, but perform poorly on their standardized tests. This is an example of what problem?

b Moral hazard

What would be expected in a market for used cars, assuming asymmetric information and buyers who have little way to determine good used cars from poor used cars?

b The average price for used cars would go down and drive the better used cars out of the market.

Which of these describes an example of asymmetric information in the bond market?

b b. Bond issuers have better insight about their future profitability than bond buyers.

Banks that have some financial difficulty and borrow from the Federal Reserve in what is known as secondary credit will pay an interest rate equal to the

b discount rate plus a penalty.

One emergency lending procedure put into place in 2008 was the creation of the Term Securities Lending Facility. This entity was set up to

b lend up to $200 billion of Treasury securities to primary securities dealers for a fee.

The purchase of direct debt and mortgage-backed securities by the Federal Reserve in November 2008 is referred to as

b quantitative easing.

The federal funds rate is the interest rate

b. Banks charge each other for overnight loans on excess reserves held at the Fed

The Chairman of the Board of Governors

b. Is appointed by the US President, selected from the Board of Governors

The three branches of the Federal Reserve System include each of the following, except which one?

b. The Federal Deposit Insurance Corporation

Which of the following is (are) not a permanent voting member on the FOMC?

b. The Secretary of the Treasury

The primary purpose of meetings of the FOMC is to

c. Decide on how to influence financial conditions

The Governors of the Federal Reserve System are appointed by the

c. President of the United States

. In Vance's homeowner's insurance policy, it states that he is required to pay out-of-pocket the first $5,000 for any homeowner's insurance claim that he submits before the insurance company will reimburse for any loss. This is an example of using

d a deductible to try to mitigate the problem of moral hazard.

The loan application process that banks require potential borrowers to go through is an attempt to deal with

d adverse selection.

Which of these is an example of asymmetric information in banking?

d borrowers know more about their capacity to repay loans than members

When the Federal Reserve increases the required reserve ratio, the impact will be to

d decrease the size of the money multiplier.

Petra has an automobile accident and finds that as a result her auto insurance premium will increase by 25%. This is an example of an adjustable premium that insurance companies often use as a mechanism to combat

d moral hazard.

In order to overcome the stigma that might come from borrowing from the Federal Reserve following the 2007 financial crisis, the Federal Reserve first created

d the term auction facility (TAF).

Which of these categories is the largest asset on the Federal Reserve's balance sheet—by far?

d. Securities

The position of chair of the Federal Reserve is filled in what way?

d. The chair of the Fed is appointed by the president of the United States and confirmed by the US Senate

Which of these is currently true for the chair of the Federal Reserve?

d. The chair position has no formal qualifications; the four-year term is renewable

When the Federal Reserve was created in 1913, what were its two primary purposes

d. To maintain the gold standard and be a "lender of last resort" to commercial banks