econ 2
The capital market is the collective set of institutions that exist in order to:
funnel household savings to firms
A situation in which one side of an economic relationship takes undesirable or costly actions that the other side of the relationship cannot observe is called __________.
moral hazard
Which of these facts is true about the creation of the Federal Reserve System (the Fed)?
The Fed was created in 1913.
Which body of the Federal Reserve System sets the majority of U.S. monetary policy?
The Federal Open Market Committee
the chairperson of the Federal Open Market Committee (FOMC)?
The chairperson of the Board of Governors.
M1
currency, demand deposits, traveler's checks, and other checkable deposits
Assuming there are no leakages out of the banking system, a money multiplier equal to 5 means that:
each additional dollar of reserves creates $5 of deposits.
The Federal Open Market Committee
the Federal Reserve System that sets the majority of U.S. monetary policy
M2
consists of M1 plus other less liquid assets such as deposits in savings and loans and money market mutual funds.
M3
consists of everything in M2 plus large time deposits and institutional money market funds.
How many Federal Reserve districts are there?
12
How do firms acquire funds by using indirect finance rather than direct finance?
By borrowing from a bank. Rather than borrow directly from the household with excess funds, firms typically go through a financial intermediary such as a bank to access funds. The household loans money to the bank which then loans the money to the firm. This is an indirect transaction. If a firm borrowed money from another firm or a household, it would be direct finance.
Which of these is a function that the financial system provides for savers and borrowers?
Matching savers and borrowers
Suppose that the reserve ratio is 25% and that banks loan out all their excess reserves. If a person deposits $100 cash in a bank, checking account balances will increase by a maximum of:
The total increase in checking account balance throughout all banks in the system is equal to the initial cash deposit multiplied by 1 / reserve ratio. So, $100 x (1 / .25) = $400.
asymmetric information
a situation in which one side of the market has more reliable information than the other side
When many depositors decide simultaneously to withdraw their money from a bank, there is __________.
bank run
financial intermediary
institution that helps channel funds from savers to borrowers
On the balance sheet of a bank:
loans are the most important asset. Loans are typically the bank's largest asset
the Fed is to be a lender of last resort, we mean that the Fed:
provides funds to troubled banks that cannot find any other source of funds.
The name given to the fraction of deposits that a bank is legally required to hold in its vault, or as deposits at the Fed, is __________.
required reserve
When we say that money serves as a unit of account, we mean that:
Prices are quoted in terms of money.
Federal Reserve System
the central bank of the United States
