ch.7 MB exam #2 (Homework Only)

Suppose now that $200 million is withdrawn from the banking system and the required reserve ratio is 5%. The money supply will decrease by ------- . As a result of this change in the demand deposits, the ------ curve will shift to the ------ resulting in a ------ equilibrium interest rate and a ------ equilibrium quantity.

$4,000 million, supply, left, higher, lower

Adjust the following graph to show the effect of a credit crunch on real output and the price level.

SRAS shift left, AD shift left

How might architecture help stabilize the banking system? a. By boosting depositors' confidence b. By satisfying depositors' aesthetic demands c. By increasing depositors' risk aversion d. By increasing a bank's real estate value

a

Which of the following assets has the lowest level of liquidity? a. A bond issued by the U.S. government b. A checking account c. A house in the suburbs of New York City d. Shares in a high-tech start-up firm

a

In this case, a credit crunch caused -- ---------- in real output and -- -------in the price level.

a decrease, a decrease

The dilemma in this problem is an example of which of the following economic concepts? a. Signaling b. Adverse selection c. Screening d. Moral hazard

b

Which of the following are thought to result in a leakage from the banking system to the nonbank public? Check all that apply. a. Moral hazard b. Asymmetric information c. The principle-agent problem d. A lack of financial market development

d

Which of the following are thought to result in a leakage from the banking system to the nonbank public? Check all that apply. a. The free-rider problem b. The subprime mortgage defaults c. Moral hazard d. A lack of financial market development

d

Which of the following are thought to result in a leakage from the banking system to the nonbank public? Check all that apply. a. The subprime mortgage defaults b. Moral hazard c. The principle-agent problem d. A lack of financial market development

d

Suppose $200 million is deposited into the banking system and the required reserve ratio is 6%. The simple deposit multiplier says that the money supply will ------by ------ million .

increase, $3,333

Suppose again that the deposit is $200 million but the required reserve ratio is instead 5%. The simple deposit multiplier says that the money supply will -------by ------ million

increase, $4,000

the was and expense at which one asset can be converted into another asset

liquidity

a lack of unity between the contractual amounts and dates of cash inflows and outflows

liquidity mismatch

Suppose buyers are willing to pay only up to the expected value of a car that you found in the previous question. Since sellers of low-quality cars are willing to sell for $5,000, while sellers of high-quality cars are willing to sell for $10,000, only ----- ---- ------- ----- will be willing to participate in this market at that price.

low-quality sellers

Suppose buyers are willing to pay only up to the expected value of a car that you found in the previous question. Since sellers of low-quality cars are willing to sell for $3,500, while sellers of high-quality cars are willing to sell for $8,000,only ------ ----- --- -------- will be willing to participate in this market at that price.

low-quality sellers

The simple deposit multiplier implies that a one-time deposit into the banking system is going to increase the money supply by ------ ------- than that initial deposit.

much more

A decrease in the required reserve ratio causes the ------ curve to shift to the ----resulting in a ------ equilibrium interest rate and a ------ equilibrium quantity.

supply, right, lower, higher

Consider a market in which there are many potential buyers and sellers of used cars. Each potential seller has one car, which is either of high quality (a plum) or low quality (a lemon). A seller with a low-quality car is willing to sell it for $4,500, whereas a seller with a high-quality car is willing to sell it for $8,500. A buyer is willing to pay $5,500 for a low-quality car and $10,500 for a high-quality car. Of course, only the seller knows whether a car is of high or low quality, as illustrated in the accompanying image. Suppose that 85% of sellers have low-quality cars. Assume buyers know that 85% of sellers have low-quality cars but are unable to determine the quality of individual cars. If all sellers offer their cars for sale and buyers have no way of determining whether a car is a high-quality plum or a low-quality lemon, the expected value of a car to a buyer is ------

$5,100

Consider a market in which there are many potential buyers and sellers of used cars. Each potential seller has one car, which is either of high quality (a plum) or low quality (a lemon). A seller with a low-quality car is willing to sell it for $3,500, whereas a seller with a high-quality car is willing to sell it for $8,000. A buyer is willing to pay $4,500 for a low-quality car and $8,500 for a high-quality car. Of course, only the seller knows whether a car is of high or low quality, as illustrated in the accompanying image. Suppose that 80% of sellers have low-quality cars. Assume buyers know that 80% of sellers have low-quality cars but are unable to determine the quality of individual cars. If all sellers offer their cars for sale and buyers have no way of determining whether a car is a high-quality plum or a low-quality lemon, the expected value of a car to a buyer is --------

$5,300

Consider a market in which there are many potential buyers and sellers of used cars. Each potential seller has one car, which is either of high quality (a plum) or low quality (a lemon). A seller with a low-quality car is willing to sell it for $5,000, whereas a seller with a high-quality car is willing to sell it for $10,000. A buyer is willing to pay $5,500 for a low-quality car and $11,500 for a high-quality car. Of course, only the seller knows whether a car is of high or low quality, as illustrated in the accompanying image. Suppose that 75% of sellers have low-quality cars. Assume buyers know that 75% of sellers have low-quality cars but are unable to determine the quality of individual cars. If all sellers offer their cars for sale and buyers have no way of determining whether a car is a high-quality plum or a low-quality lemon, the expected value of a car to a buyer is -----

$7,000

Charles sees a classified ad from Dina offering a used DVD player for $30. On the opposite page, he sees a big color ad from a national electronics chain offering a new DVD player for $250. Charles values a DVD player at $300 as long as it works, regardless of whether it is new or used. Suppose Charles buys the new DVD player from the national electronics chain, thinking "Someone would ask $30 for a used DVD player only if it didn't work well." Moral Hazard or Adverse Selection

Adverse Selection

Charles sees a classified ad from Dina offering a used DVD player for $30. On the opposite page, he sees a big color ad from a national electronics chain offering a new DVD player for $250. Charles values a DVD player at $300 as long as it works, regardless of whether it is new or used. Suppose Dina, the seller of the DVD player, knows the player works well—she is selling it only because she got a better model as a gift. She thinks about asking $45 and offering a guarantee: She will replace the DVD player with a new $250 DVD player if it turns out not to work. Then she thinks, "That's not a good idea! Someone can just buy it, handle it carelessly, and, if it breaks, can pretend it didn't work and get a new DVD player for $45—meanwhile, I'll be out $205!" Moral Hazard or Adverse Selection

Moral Hazard

Charles sees a classified ad from Dina offering a used DVD player for $30. On the opposite page, he sees a big color ad from a national electronics chain offering a new DVD player for $250. Charles values a DVD player at $300 as long as it works, regardless of whether it is new or used. Why is Dina unable to sell Charles the DVD player? Check all that apply. a. Adverse selection can cause buyers to avoid purchasing high-quality goods because of uncertainty about their quality. b. Moral hazard can prevent sellers from offering guarantees of quality, because they can't be sure that buyers won't try to take advantage of the guarantees by filing false claims.

a, b

Which of the following assumptions make the predictions made using the simple deposit multiplier unrealistic? Check all that apply. a. Zero leakage b. Nonbank public holds on cash c. Zero excess reserves b. Banks holding excess reserves of their own choosing

a, c

Which of the following assumptions make the predictions made using the simple deposit multiplier unrealistic? Check all that apply. a. Nonbank public holds on cash b. Zero leakage c. Banks holding excess reserves of their own choosing d. Zero excess reserves

a, d

Which of the following strategies do financial markets use to overcome the adverse selection problem? Check all that apply. a. Government-required disclosures b. Deductible and premium c. Restrictive covenants d. Screening e. Information collection

a, d, e

Which of the following strategies do financial markets use to overcome the moral hazard problem? Check all that apply. a. Restrictive covenants b. Information collection c. Screening d. Deductibles and premiums e. Compensating balances

a, d, e

How might architecture help stabilize the banking system? a. By increasing a bank's real estate value b. By satisfying depositors' aesthetic demands c. By boosting depositors' confidence d. By increasing depositors' risk aversion

c

The dilemma in this problem is an example of which of the following economic concepts? a. Screening b. Signaling c. Adverse selection d. Moral hazard

c

Which of the following assets has the highest level of liquidity? a. A savings account b. An automobile c. A checking account d. A house in the suburbs of New York City

c

Which of the following assumptions make the predictions made using the simple deposit multiplier unrealistic? Check all that apply. a. Banks holding excess reserves of their own choosing b. Nonbank public holds on cash c. Zero excess reserves d. Zero leakage

c, d

a way of reducing risk by holding a variety of assets

diversification

A situation when output increases while the cost per unit of output declines

economies of scale

True or False: "Whenever loans are repaid, money is created." True False

false

the implicit and explicit costs involved in savers and borrowers looking for each other

search costs

Adjust the graph to illustrate the effect of a decrease in the required reserve ratio.

shift right in supply of loanable funds

True or False: "Whenever loans are repaid, money is destroyed." True False

true

True or False: Savers want liquidity and borrowers want to sign illiquid loans, which allows banks to capitalize on the liquidity mismatch. False True

true