ECN 315 Assignments EXAM 2

Property taxes in a particular district are 2​% of the purchase price every year. If you just purchased a ​$300,000 ​home, what is the present value of all the future property tax​ payments? Assume that the house remains worth ​$300,000 ​forever, property tax rates never​ change, and that a 4​% interest rate is used for discounting.

$150,000 0.02x300,000= 6000 6000/0.04= 150,000

A bank has ​$10,000 of checkable deposits and a required reserve ratio of 25 percent. The bank currently holds $7,500 in reserves. How much of these reserves are excess​ reserves?

$5,000

From 1836 to​ 1913, the United States did not have a central bank. This changed when the _________ was created in 1913.

Federal Reserve System

Question content area Banks make profits by selling liabilities with one set of characterisitics and using the proceeds to buy assets with a different set of characteristics. This process is known as _____ Joe deposits his ​$1600 paycheck into his checking account at Local Bank. The​ bank's assets will then increase by ​_________ ​(Round your response to the nearest whole​ number.)

asset transformation. 1600

Assume that you are interested in earning some return on idle balances you usually keep in your checking account and decide to buy some money market mutual fund shares by writing a check. Everything else the​ same, M1 will ______ and M2 will______

decrease, stay the same.

The interest rate on overnight loans from one bank to another is the______

federal funds rate

You are given the following series of​ one-year interest​ rates: 3​%, 5​%, 13​%, 15​% Assuming that the expectations theory is the correct theory of the term​ structure, calculate the interest rates in the term structure for maturities of one to four​ years, and plot the resulting yield curve. 1. Using the point drawing​ tool, plot the interest rate​ (calculated using the data​ above) for each of the four terms to maturity. Properly label each point according to its corresponding term. 2. Using the​ 4-point curved line drawing tool​, connect these points. Label your curve​ 'yield curve'. Part 2 Carefully follow the instructions​ above, and only draw the required objects.

1) 3/1=3 2) 5+3/2=4 3) 3+5+13/3= 7 4) 3+5+13+15/4= 9

As a real estate​ speculator, you are planning and able to buy a house that costs​ $200,000, borrowing the full amount with no money down with the goal of selling this same property in exactly one year. Mortgage interest rates are​ 5%, and the expected increase in housing prices is​ 2%.​ (All rates and percentages are annual​ values.) What is your expected capital​ gain/loss when you flip the house in one​ year? 1) The expected capital gain​ (or loss) is _______ ​(Round your response to the nearest dollar.​) 2) What is your real rate of​ return? The real rate of return is ________ ​(Round your response to the nearest​ integer.) 3) How will an increase in mortgage rates to​ 10% and an expected increase in housing prices of​ 9% affect your​ decision?

1) 4,000 (200,000x0.02) 2) -3 (2-5) 3) More likely to buy

When the dollar is worth less in relation to currencies of other​ countries, are you more likely to buy​ American-made or​ foreign-made electronics? You are more likely to purchase ______. Are US companies that manufacture​ semi-conductors happier when the dollar is strong or when it is​ weak? ​Semi-conductor manufacturers are happier when the dollar is ______. What about an American company that is in the business of importing electronic consumer goods into the United​ States? Importers of electronic goods into the United States are happier when the dollar is ________.

1) American-made products 2)weaker 3)stronger

What would happen to the risk premiums of municipal bonds if the federal government guarantees today that it will pay creditors if municipal governments default on their payments. A. Risk premium on municipal bonds will increase. B. Risk premium on municipal bonds will decrease. C. Risk premium on municipal bonds will stay the same. D. There is not enough information to tell. Part 2 Do you think that it will then make sense for municipal bonds to be exempt from income​ taxes? A. Yes. Municipal bonds will continue to have higher risk premium than Treasury bonds and will need​ "help" to gain access to funds. B. No. If this were to​ happen, then municipal bonds will be even better than U.S. government bonds.

1) B. Risk premium on municipal bonds will decrease. 2) B. No. If this were to​ happen, then municipal bonds will be even better than U.S. government bonds.

If the housing market suddenly​ crashed, Universal Bank would be better off with the______ system. If the price of commodities suddenly increased​ sharply, Universal Bank would be better off with a________ accounting system.

1) historical-cost accounting Using historical cost can provide more capital stability for banks during downturns. 2) mark-to-market Mark-to-market rules generally provide a more accurate picture of a​ bank's capital position.

Most of the time it is quite difficult to separate the three functions of money. Money performs its three functions at all​ times, but sometimes we can stress one in particular. For each of the following​ situations, identify which function of money is emphasized. 1) Brooke accepts money in exchange for performing her daily tasks at her​ office, since she knows she can use that money to buy goods and services. In this​ case, money is being used as a ________ Tim wants to calculate the relative value of oranges and​ apples, and therefore checks the price per pound of each of these goods quoted in currency units. In this​ case, money is being used as a_______ Maria is currently pregnant. She expects her expenditures to increase in the future and decides to increase the balance in her savings account. In this​ case, money is being used as a______

1) medium of exchange. 2)unit of account. 3)store of value

Would you be more or less willing to buy​ long-term AT&T bonds under the following​ circumstances: LOADING... 1) Trading in these bonds​ increases, making them easier to sell. More willing Part 3 2) You expect a bear market in stocks​ (stock prices are expected to​ decline). More willing Part 4 3) Brokerage commissions on stocks fall. Less willing Part 5 4) You expect interest rates to rise. Less willing Part 6 5) Brokerage commissions on bonds fall. More willing

1)more 2)more 3)less 4)less 5)more

When the Fed wants to raise reserves in the banking​ system, it will A.purchase government bonds. B.extend discount loans to banks. C.sell government bonds. D. print more currency.

A.purchase government bonds.

In which of the following situations do financial markets allow consumers to better time their​ purchases? A. Paying for tuition B. Purchasing a car or furniture. C. Buying groceries. D. Paying the cost of repairing a flooded basement.

A,B,D

Question content area Part 1 Which of the following best illustrates the time-inconsistency problem A. A parent says that he or she will punish a child whenever the child breaks a rule.​ Afterward, when the child​ misbehaves, the parent forgives the misbehavior because punishment is unpleasant for both the parent and child. B. Your professor says that this course will end with a final exam. After you have studied and learned all the​ material, you are surprised to find the exam easier than you expected. C. A nation states that they will not negotiate over hostages. Once hostages are​ taken, policymakers do not make any concessions to obtain the​ hostages' release. D. Both A and B are correct. E. All of the above are correct.

A. A parent says that he or she will punish a child whenever the child breaks a rule.​ Afterward, when the child​ misbehaves, the parent forgives the misbehavior because punishment is unpleasant for both the parent and child.

Why is loophole mining so prevalent in the banking industry in the United​ States? A. Banks engage in loophole mining in order to avoid regulatory constraints that restrict their ability to earn profits. B. By engaging in loophole​ mining, banks can limit financial innovation and thus increase their profits. C. Because banks are heavily​ regulated, loopholes are always written into new legislation. D. Banks engage in loophole mining in order to protect their depositors from the risks of regulatory constraints.

A. Banks engage in loophole mining in order to avoid regulatory constraints that restrict their ability to earn profits.

Which of the following is a cost of Fed discount​ operations? A. Banks that deserve to go out of business due to poor management may survive because of Fed discounting to prevent bank panics. B. Banks have to pay back the discount loans at the discount​ rate, which costs money. C. The Fed has to pick and choose which banks receive discount​ loans, which banks dislike. D. There are no costs to discount operations because the discount loans have to be paid back.

A. Banks that deserve to go out of business due to poor management may survive because of Fed discounting to prevent bank panics.

In​ 2008, as a financial crisis began to unfold in the United​ States, the FDIC raised the limit on insured losses to bank depositors from​ $100,000 per account to​ $250,000 per account. How would this help stabilize the financial​ system? A. It would reassure depositors that their money was safe in banks and prevent a possible bank panic. B. It would enable banks to lower interest rates​ (as money is more​ safe) and decrease future interest payments. C. It would attract new foreign depositors and rapidly increase the cash amounts available to banks. D. It would decrease​ banks' reserve requirements and thus increase their available assets.

A. It would reassure depositors that their money was safe in banks and prevent a possible bank panic.

The​ _______________ established the Office of the Comptroller of the Currency. Part 2 A. National Bank Act of 1863 B. Federal Reserve Act of 1913 C. ​Garn-St. Germain Act of 1982 D. National Bank Charter Amendments of 1918

A. National Bank Act of 1863

Suppose that many big corporations decide not to issue​ bonds, since it is now too costly to comply with new financial market regulations. Can you describe the expected effect on interest​ rates? A. The impact will translate into a shift to the left in the supply​ curve, increasing​ bond's prices​ (lowering interest​ rates) and lowering the quantity of bonds bought and sold in the market. B. The impact will translate into a shift to the right in the demand​ curve, decreasing​ bond's prices​ (increasing interest​ rates) and increasing the quantity of bonds bought and sold in the market. C. The impact will translate into a shift to the left in the demand​ curve, increasing​ bond's prices​ (lowering interest​ rates) and lowering the quantity of bonds bought and sold in the market. D. The impact will translate into a shift to the right in the supply​ curve, decreasing​ bond's prices​ (increasing interest​ rates) and increasing the quantity of bonds bought and sold in the market.

A. The impact will translate into a shift to the left in the supply​ curve, increasing​ bond's prices​ (lowering interest​ rates) and lowering the quantity of bonds bought and sold in the market.

​"The Federal Reserve SystemLOADING... resembles the U.S. Constitution in that it was designed with many checks and ​balances." Is this statement​ true, false, or​ uncertain? Explain your answer. A. True. Because of public hostility and the centralization of​ power, the Federal Reserve System was created with many checks and balances to diffuse power. B. False. The Federal Reserve System was created to affect monetary policy​ only, and thus does not fall under the same checks and balances as the executive or legislative branches of government. C. False. Because the Federal Reserve acts independently from the​ government, it is not subject to a system of checks and balances. D. Uncertain. Because every Federal Reserve chairman has a different​ style, checks and balances may vary with each administration.

A. True. Because of public hostility and the centralization of​ power, the Federal Reserve System was created with many checks and balances to diffuse power.

In order to limit the moral hazard incentives for banks to engage in the excessively risky behavior encouraged by deposit​ insurance, A. a​ strong, institutional environment must be in place. B. the government should be able to monitor the actions of the depositors. C. there must be only a few large banks. D. banks should pay a premium for the deposit insurance.

A. a​ strong, institutional environment must be in place.

Currency in circulation that cannot be redeemed for gold is​ called: A. fiat money B. state money C. junk bonds D. gold bills

A. fiat money

The ability of a central bank to set monetary policy instruments is​ ___________, while the ability of a central bank to set goals of monetary policy is​ _______. A. instrument​ independence; goal independence B. goal​ independence; target independence C. policy​ independence; target independence D. target​ independence; policy independence

A. instrument​ independence; goal independence

What monetary policy tool does the Fed use to control the amount of nonborrowed​ reserves? A. open market operations B. interest on reserves C. discount lending D. reserve requirements

A. open market operations

According to the​ text, the most important goal of monetary policy. is thought to​ be: A. price stability B. eliminating deflation C. low interest rates D. high economic growth rates

A. price stability

The portion of checkable deposits that banks are required to hold is​ called: A. required reserves. B. currency outstanding. C. vault cash. D. excess reserves.

A. required reserves.

When float​ increases, A. the monetary base rises. B. the money supply falls. C. currency in circulation falls. D. currency in circulation increases.

A. the monetary base rises.

When the charter of the Second Bank of the United States expired in​ 1836: A. there was no lender of last resort to provide reserves to the banking system. B. it created a central bank to help prevent future bank panics. C. the Treasury assumed the role as lender of last resort. D. bank panics and losses to depositors declined.

A. there was no lender of last resort to provide reserves to the banking system.

Is it better for bondholders when the yield to maturity increases or​ decreases? Bondholders are better off when the yield to​ maturity: A. ​decreases, since this represents an increase in the price of the bond and a decrease in potential capital losses. B. ​increases, since this represents a decrease in the bond maturity and a decrease in potential capital losses. C. ​increases, since this represents a decrease in the price of the bond and an increase in potential capital gains. D. ​decreases, since this represents an increase in the coupon payment and an increase in potential capital gains.

A. ​decreases, since this represents an increase in the price of the bond and a decrease in potential capital losses.

Banks generate profits by earning higher returns on their​ ____________ than they pay in interest on​ _____________. A. ​loans; deposits B. ​liabilities; deposits C. ​deposits; loans D. ​deposits; securities

A. ​loans; deposits

Eliminating the​ Fed's independence might lead to a more pronounced political business cycle because a politically exposed Fed would be more concerned with​: A. ​short-run objectives and thus be more likely to engage in expansionary policies designed to lower unemployment and interest rates before an election. B. ​long-run objectives and thus be more likely to engage in expansionary policies designed to lower unemployment and interest rates before an election. C. ​short-run objectives and thus be a defender of a sound dollar and a stable price level. D. ​long-run objectives and thus be a defender of a sound dollar and a stable price level.

A. ​short-run objectives and thus be more likely to engage in expansionary policies designed to lower unemployment and interest rates before an election.

Under​ 100% reserve​ banking, the money multiplier will​ be: A. 0 B. 1 C. 10 D. 100 E. infinite

B. 1

If the Treasury has just paid a large bill to defense contractors and as a result its deposits with the Fed​ fall, what defensive open market operations will the manager of the open market desk​ undertake? A. A repurchase agreement. B. A defensive open market sale. C. A defensive open market purchase. D. None of the above are correct.

B. A defensive open market sale.

Part 2 Is that the end of the information​ asymmetry? A. Yes. Addressing adverse selection implies that other forms of information asymmetry have been resolved as well. B. No. Workers and employers have to continue to solve the problem of moral hazard.

B. No. Workers and employers have to continue to solve the problem of moral hazard.

Which of the following is a main provision of the Financial Institutions​ Reform, Recovery, and Enforcement Act of​ 1989? A. Directing the Federal Home Loan Bank Board to continue to pursue regulatory forbearance. B. The establishment of the Resolution Trust Corporation to manage and resolve insolvent thrifts. C. Encouraging the FDIC to take prompt corrective action. D. Reducing the regulatory responsibilities of the FDIC.

B. The establishment of the Resolution Trust Corporation to manage and resolve insolvent thrifts.

How do financial intermediaries benefit by providing​ risk-sharing services? A. Customers pay a fee to financial intermediaries for being able to invest in safer assets B. They are able to earn a profit on the spread between the returns they earn on risky assets and the payments they make on the assets they have sold C. They are able to turn safe assets into​ high-risk, high-return investments D. A collection of riskier assets is always more profitable for a bank or intermediary

B. They are able to earn a profit on the spread between the returns they earn on risky assets and the payments they make on the assets they have sold

If inflation is currently low but policymakers believe inflation will rise over the next two years with an unchanged stance of monetary​ policy, what should they do to prevent the inflationary​ surge? A. They should tighten monetary policy two years after the initial inflation surges. B. They should tighten monetary policy before inflation surges. C. They should tighten monetary policy immediately after inflation surges. D. There is no monetary policy response that can affect inflation.

B. They should tighten monetary policy before inflation surges.

​"The federal funds rate can sometimes be above the discount​ rate." Is this statement​ true, false, or​ uncertain? A. False. Once the federal funds rate reaches the discount​ rate, banks borrow directly from the​ Fed, preventing the federal funds rate from a further rise. B. True. Banks may prefer to pay a higher market rate than to borrow directly from the Fed and incur the perceived stigma. C. Uncertain. It depends on the extent to which nonbank financial companies participate in the federal funds market.

B. True. Banks may prefer to pay a higher market rate than to borrow directly from the Fed and incur the perceived stigma.

The many regional Federal Reserve banks resulted from a compromise between parties​ favoring: A. a Board of Governors in​ Washington, D.C., and those who favored its establishment in New York City. B. a private central bank and those favoring a government institution. C. the establishment of a central bank and those who opposed its establishment. D. None of the above are correct.

B. a private central bank and those favoring a government institution.

The graph to the right illustrates how the Fed uses discounting to keep the federal funds rate from rising far above the federal funds target. It shows a rightward shift of the demand curve for reserves from Rd1 to Rd2. The initial equilibrium is at point​ 1, where the discount rate ​(id​ ) is above the federal funds​ rate, which is equal to its target​ level, iTff . The shift moves the equilibrium to point​ 2, where the federal funds rate equals the discount rate ​(i2ff=id​). According to this​ graph, at point​ 2, borrowed reserves​ are: A. equal to the distance between A and C. B. equal to the distance between B and C. C. equal to the distance between A and B. D. zero.

B. equal to the distance between B and C.

Regulatory policy to affect what is happening in credit markets in the aggregate is referred to​ as: A. monetary targeting. B. macroprudential regulation. C. the Taylor rule. D. ​asset-price bubble policy.

B. macroprudential regulation.

The goals of a dual mandate can sometimes conflict​ because: A. it is difficult to achieve both​ long-run price stability and the natural rate of unemployment B. policies that increase output and employment in the short run can create excessive inflation in the long run C. low and stable rates of inflation detract from economic growth

B. policies that increase output and employment in the short run can create excessive inflation in the long run

The United States is said to have a dual banking system because A. banks are regulated and examined by both the Federal Reserve and the FDIC. B. state banks and national banks operate side by side. C. the banking system includes both bank holding company affiliates and branch banks. D. commercial banks offer both banking and securities market services. E. the depository system includes both commercial banks and thrift institutions.

B. state banks and national banks operate side by side.

Float is A. the difference between the monetary base and borrowed reserves from the Fed. B. the temporary net increase in bank reserves occurring from the​ Fed's check-clearing process. C. the lag between the issuance of Fed loans and the acceptance of the full loan payment. D. a loan from the Fed.

B. the temporary net increase in bank reserves occurring from the​ Fed's check-clearing process.

​"According to the expectations theory of the term​ structure, it is better to invest in​ one-year bonds, reinvested over two​ years, than to invest in a​ two-year bond, if interest rates on​ one-year bonds are expected to be the same in both​ years." Is this statement​ true, false, or​ uncertain? A. ​True: The expected return on​ one-year bonds, reinvested over two​ years, is always higher at amount it−iet+1. B. ​False: These investments are almost of the same profitability. C. ​Uncertain: The answer depends on whether we can ignore the i2t2 and it−iet+1 values.

B. ​False: These investments are almost of the same profitability.

Suppose Universal Bank holds​ $100 million in​ assets, which are composed of the​ following: Required​ Reserves: ​$10 million Excess​ Reserves: ​$ 5 million Mortgage​ Loans: ​$20 million Corporate​ Bonds: ​$15 million ​Stocks: ​$25 million ​Commodities: ​$25 million Do you think it is a good idea for Universal Bank to hold​ stocks, corporate​ bonds, and commodities as​ assets? A. ​Yes, as these types of assets surely provide the bank with extra profits. B. ​No, as these types of assets are relatively high​ risk, and there is a threat of insolvency.

B. ​No, as these types of assets are relatively high​ risk, and there is a threat of insolvency.

High employment is a worthy goal. A. ​False, high employment results in much human misery B. ​True, unemployment results in​ under-utilized resources and lower output C. ​True, unemployment results in​ over-utilized resources and higher output D. ​False, high employment results in​ over-utilized resources and lower output

B. ​True, unemployment results in​ under-utilized resources and lower output

Which of the following is true of a banking system with deposit​ insurance? A. The moral hazard problem in banking is reduced. The moral hazard problem in banking is reduced. B. Depositors are less likely to withdraw their money in the event of a crisis. C. Depositors are less likely to deposit their money in a bank. D. Depositors are more likely to collect information about the quality of the​ bank's loans.

B. Depositors are less likely to withdraw their money in the event of a crisis.

If a bank experiences a deposit outflow of​ $50 million with a required reserve ratio on deposits of​ 10%, which balance sheet would the bank rather have​ initially: Balance Sheet A or Balance Sheet B​? ​Why?

Balance Sheet B because the excess reserves are adequate to cover the deposit outflow without the bank needing to alter its balance sheet.

Which of the following explains why dating can be considered a method to solve the adverse selection​ problem? A. Couples share selective information about​ themselves, thus increasing asymmetric information and reducing the adverse selection problem. B. While​ dating, couples often make commitments to each other which reduces moral hazard in the short term and the adverse selection problem in the long run. C. Couples are able to extract information about their significant other and make better decisions about a probable future together.

C. Couples are able to extract information about their significant other and make better decisions about a probable future together.

Why does the existence of deposit insurance increase the likelihood that depositors will need deposit​ protection? A. Insured banks tend to regard deposits as an unattractive source of funds due to depositor demands for safety B. With increased deposit​ protection, depositors are likely to withdraw large amounts of funds from their accounts C. Insured banks tend to pursue greater risks than they otherwise would D. Insured banks tend to be too​ conservative, reducing the profitability of the bank

C. Insured banks tend to pursue greater risks than they otherwise would

If junk bonds are​ "junk," then why would investors buy​ them? A. Some junk bonds may have a rating of​ AA- by the​ credit-rating agencies. B. The theory of portfolio choice predicts that portfolios with junk bonds are more diversified. C. Junk bonds can provide high yields. D. Junk bonds have lower default risk.

C. Junk bonds can provide high yields.

The collapse of the Bank of Credit and Commerce​ International, BCCI, showed the difficulty of international banking regulation. BCCI operated in more than 70 countries and was supervised by the small country​ of: A. Brunei B. Singapore C. Luxembourg D. Monaco

C. Luxembourg

Which of the following functions is not performed by any of the 12 regional Federal Reserve​ banks? A. Cheque clearing B. Conducting economic research related to monetary policy C. Setting interest rates payable on time deposits D. Issuing new currency and withdrawing damaged currency

C. Setting interest rates payable on time deposits

Why was the Federal Reserve System set up with twelve regional Federal Reserve banks rather than one central​ bank, as in other​ countries? A. By creating twelve regional​ banks, writers of the Federal Reserve Act could ensure that finances from all parts of the country would flow through the Federal Reserve System. B. With twelve regional​ banks, the Federal Reserve could easily influence politics in all parts of the United States. C. The writers of the Federal Reserve Act wanted to ensure the​ Fed's power was not centralized in a single location. D. With twelve regional​ banks, employees of the Federal Reserve could quickly and easily get to a monetary crisis point anywhere in the United States.

C. The writers of the Federal Reserve Act wanted to ensure the​ Fed's power was not centralized in a single location.

Which of the following is not a goal of monetary​ policy? A. low interest rates B. high employment C. an unemployment rate as close to zero as possible D. economic growth

C. an unemployment rate as close to zero as possible

Assets of value promised to the lender as compensation if the borrower defaults are​ called: A. restrictive covenants B. contingencies C. collateral D. deductibles

C. collateral

Question content area The most imporant source of the changes in supply conditions that stimulate financial innovation has been the A. creation of the Federal Reserve. B. chartering of state banks. C. improvements in information technology. D. implementation of the shadow banking system.

C. improvements in information technology.

Savings and loans grew rapidly in the latter half of the twentieth century because of the following except A. of the removal of restrictions on the interest rates depository institutions could pay on deposits. B. deposit insurance coverage was raised to​ $100,000 per account. C. large investment subsidies provided by the federal government to new savings and loan associations. D. the market for large certificates of deposit expanded. Part 2 A significant part of the cost of the savings and loan bailout was ultimately passed onto the _______

C. large investment subsidies provided by the federal government to new savings and loan associations. taxpayers.

When an economy is at its natural rate of unemployment A. the rate of unemployment is zero. B. the economy is at a​ full-employment level. C. the demand for labor is equal to the supply of labor. D. Both B and C are correct. E. All of the above are correct.

D. Both B and C are correct.

The Eurosystem is different from the United States but similar to​ Canada, Australia, and New Zealand in that​ it: A. charges banks a fixed interest rate on​ loans, providing a floor for the overnight market interest rate B. charges banks a fixed interest rate on​ loans, providing a ceiling for the overnight market interest rate C. pays banks a fixed interest rate on​ deposits, providing a floor for the overnight market interest rate D. pays banks a fixed interest rate on​ deposits, providing a ceiling for the overnight market interest rate

C. pays banks a fixed interest rate on​ deposits, providing a floor for the overnight market interest rate

The presence of so many commercial banks in the United States is most likely the result​ of: A. consumer preferences for federally chartered banks B. asymmetric information problems that give local banks a competitive advantage over larger banks C. previous restrictions on branch banking D. ​consumers' desire to deal with local banks only

C. previous restrictions on branch banking

A major advantage of​ ________ targeting over​ ________ targeting is that it is readily understood by the public. A. implicit nominal​ anchor; monetary B. implicit nominal​ anchor; inflation C. ​inflation; monetary D. ​monetary; inflation

C. ​inflation; monetary

Which problem of asymmetric information are prospective employers trying to solve when they ask applicants to go through a job​ interview? A. Moral hazard in debt contracts. B. ​Free-rider problem. C. Moral hazard in equity contracts. D. Adverse selection problem.

D. Adverse selection problem.

Which of the following is a reason why monetary policy should not be used to prick​ asset-price bubbles? A. There are many different asset​ prices, and at any one time a bubble may be present in only a fraction of assets. B. Monetary policy actions to prick bubbles can have harmful effects on the aggregate economy. C. The effect of raising interest rates on asset prices is highly uncertain. D. All of the above are correct. E. None of the above are correct.

D. All of the above are correct.

If a bank sells​ $10 million of bonds to the Fed to pay back​ $10 million on the loan it​ owes, what will be the effect on the level of checkable​ deposits? Assume that the required reserve ratio on checkable deposits is​ 10%, banks do not hold any excess​ reserves, and the​ public's holdings of currency do not change. A. Checkable deposits decline by​ $100 million. B. Checkable deposits decline by​ $10 million. C. Checkable deposits decline by​ $1 million. D. Checkable deposits do not change.

D. Checkable deposits do not change.

Which of the following is not an asset on a​ bank's balance​ sheet? A. Loans. B. Government securities. C. Reserves. D. Checkable deposits.

D. Checkable deposits.

Suppose the interest rates on​ one-, five-, and​ ten-year U.S. Treasury bonds are currently​ 3%, 6%, and​ 6%, respectively. Investor A chooses to hold only​ one-year bonds, and Investor B is indifferent with regard to holding​ five- and​ ten-year bonds. Which theories best explain the behavior of Investors A and​ B? A. Both Investors A and B exhibit preferences that are consistent with the segmented markets theory. B. Both Investors A and B exhibit preferences that are consistent with expectations theory. C. Investor​ A's preferences are best explained by the liquidity premium​ theory, while Investor​ B's preferences are more consistent with the segmented markets theory. D. Investor​ A's preferences are best explained by the segmented markets​ theory, while Investor​ B's preferences are more consistent with the expectations theory.

D. Investor​ A's preferences are best explained by the segmented markets​ theory, while Investor​ B's preferences are more consistent with the expectations theory.

Which of the following is not an important reason for the regional Federal Reserve bank presidents to attend the FOMC​ meetings, even if they are nonvoting​ members? A. By attending​ meetings, nonvoting members can participate in deliberations and discussions of the FOMC. B. By attending​ meetings, bank presidents may have an opportunity to influence the​ committee's decisions. C. It provides an opportunity for bank presidents to contribute information about economic conditions in their districts. D. It provides a greater opportunity for nonvoting members to become voting members in the future.

D. It provides a greater opportunity for nonvoting members to become voting members in the future.

When interest rates​ decrease, how might businesses and consumers change their economic​ behavior? A. Consumers and businesses will hold smaller​ (average) cash balances. B. Consumers and businesses will invest in bonds or similar debt instruments. C. Consumers and businesses will spend less and save more. D. There will be more consumption spending on​ interest-sensitive items and more investment by businesses.

D. There will be more consumption spending on​ interest-sensitive items and more investment by businesses.

The​ "cast of​ characters" in the money supply story includes the following except: A. central bank. B. depository institutions. C. depositors. D. U.S. Treasury.

D. U.S. Treasury.

The Federal Reserve System is the​ ___________ for the United​ States, which is defined as the government agency responsible for​ __________. A. financial​ comptroller; regulatory oversight of government reserves B. ​Treasury; carrying out open market exchanges of government securities C. national​ bank; ensuring money demand equals money supply D. central​ bank; the conduct of monetary policy

D. central​ bank; the conduct of monetary policy

A purchase of government bonds from the public by the Federal Reserve​ Bank: A. reduces the wealth of the public. B. decreases the monetary base. C. increases reserves directly and may increase the monetary base. D. increases the monetary base directly and may increase reserves.

D. increases the monetary base directly and may increase reserves.

The​ Fed's most commonly used means of changing the money supply​ is: A. changes in the Regulation Q ceiling B. changing reserve requirements C. changing the discount rate D. open market operations

D. open market operations

There are two types of​ mandates: _________​ mandates, which prioritise price stability above all other​ objectives, and​ _________ mandates, which place different objectives on equal footing. A. ​hierarchical; double B. ​policy; dual C. ​dual; hierarchical D. ​hierarchical; dual

D. ​hierarchical; dual

An open market purchase will cause A.nonborrowed reserves to fall and the federal funds rate to rise. nonborrowed reserves to fall and the federal funds rate to rise. B. borrowed reserves to fall and the federal funds rate to rise. C. borrowed reserves to rise and the federal funds rate to fall. D.nonborrowed reserves to rise and the federal funds rate to fall.

D.nonborrowed reserves to rise and the federal funds rate to fall.

Using the liquidity preference frameworkLOADING...​, show why interest rates are procyclical ​(rising when the economy is expanding and falling during recessions​). Suppose GDP is rising. ​1.) Using the line drawing​ tool, show the effect of rising GDP on the market for money. Properly label your line. ​2.) Using the point drawing tool​, indicate the new equilibrium interest rate and quantity of money. Label the point​ '2'. Carefully follow the instructions​ above, and only draw the required objects

Demand increases, shifts up and right

The European system of central banks uses similar monetary policy tools to that of the Federal reserve. These tools​ involve: A. open market operations B. lending to banks C. reserve requirements D. Both A and C are correct E. All of the above are correct

E. All of the above are correct

Which of the Federal​ Reserve's measures of the monetary aggregates—M1 or M2—is composed of the most liquid​ assets? Which is the larger​ measure? All else​ equal, _______ is the monetary aggregate composed of the most liquid assets and ________ is the larger measure.

M1, M2

_______are the most important policy tool the Fed has for controlling the money supply.

Open market operations

If history repeats itself and we see a decline in the rate of money growth as shown between 1980 and​ 1993, what might you expect to happen to Real​ output: The inflation​ rate: Interest​ rates:

Real​ output: Uncertain. The inflation​ rate: Decline. Interest​ rates: Uncertain

Real GDP is computed by adjusting nominal GDP​ for:

changes in the price level

The additional ease of information acquisition and lower __________ are the two effects of information technology improvements.

cost of processing financial transactions

The graph shows an equilibrium in the market for reserves. An open market sale would shift the supply curve to the​ __________ and cause the federal funds rate to​ ________. Part 2 A.left rise left, rise B.right rise right, rise C.left fall left, fall D.right fall

left, rise

_________is comprised of currency in circulation plus total reserves.

monetary base

The​ zero-lower-bound problem: A. implies that nominal interest rates can be zero. B. occurs because people can always earn more from holding bonds than holding cash. C. creates a negative shock to the economy. D. is responsible for the recession of​ 2007-2009.

occurs because people can always earn more from holding bonds than holding cash.

If the Fed lends five banks an additional total of​ $100 million but depositors withdraw​ $50 million and hold it as​ currency, what happens to reserves and the monetary​ base? Use​ T-accounts to explain your answer.

reserves + 50 million, discount loans increase by +100 million, deposits fall by -50 million