Econ 2035 Final Exam
Economists believe that countries recently suffering hyperinflation have experienced
reduced growth
High-powered money minus currency in circulation equals
reserves
High unemployment is undesirable because it
results in a loss of output
Long-term customer relationships _____ the cost of information collection and make it easier to ______ credit risks
reduce; screen
A bank has excess reserves of $6,000 and demand deposit liabilities of $100,000 when the required reserve ratio is 20 percent. If the reserve ratio is raised to 25 percent, the bank's excess reserves will be
$1,000
In the simple deposit expansion model, if the Fed purchases $100 worth of bonds from a bank that previously has no excess reserves, the bank can now increase its loans by
$100
In the simple deposit expansion model, if the Fed purchases $100 worth of bonds from a bank that previously had no excess reserves, deposits in the banking system can potentially increase by
$100 times the reciprocal of the required reserve ratio
If the required reserve ratio is 10 percent, currency in circulation is $400 billion, checkable deposits are $1000 billion, and excess reserves total $1 billion, then the money supply is _____ billion.
$1400
If a bank has $100,000 of checkable deposits, a required reserve ratio of 20 percent, and it holds $40,000 in reserves, then the maximum deposit outflow it can sustain without altering its balance sheet is
$25,000
If a bank has excess reserves of $20,000 and demand deposit liabilities of $80,000, and if the reserve requirement is 20 percent, then the bank has total reserves of
$36,000
The three players in the money supply process include
-banks -depositors -central bank
If a borrower takes out a $200 million loan in a repo agreement and is asked to post $220 million of mortgage-backed securities as collateral, the "haircut" is
10%
The interest rate for primary credit is usually set _____ basis points _____ the federal funds rate. In March 2008, this gap was changed to _____ basis points
100; above; 25
If the required reserve ratio is one-third, currency in circulation is $300 billion, checkable deposits are $900 billion, and there is no excess reserve, then the M1 money multiplier is
2.0
In recent years the interest paid on checkable and time deposits has accounted for around ______ of total bank operating expenses, while the costs involved in servicing accounts have been approximately _____ of operating expenses
25 percent; 50 percent
The interest rate on secondary credit is set ______ basis points _____ the primary credit rate
50; above
Using Taylor's rule, when the equilibrium real federal funds rate is 3 percent, the positive output gap is 2 percent, the target inflation rate is 1 percent, and the actual inflation rate is 2 percent, the nominal federal funds rate target should be
6.5 percent
Of the following, which would be the first choice for a bank facing a reserve deficiency?
Borrow from other banks
Which of the following is NOT an argument against using monetary policy to prick asset-price bubbles?
Even though credit-drive bubbles are easier to identify, they are still relatively hard to identify
Which investment bank filed for bankruptcy on September 15, 2008 making it the largest bankruptcy filing in U.S. history?
Lehman Brothers
The equation that shows the amount of the monetary base needed to support existing levels of checkable deposits, excess reserves, and currency is
MB= (rr A D) + ER + C
The first country to adopt inflation targeting was
New Zealand
Suppose interest rates are kept very low for a long time such that there is a spike in the amount of lending. Everything else held constant, this could cause _______ bubble
a credit-driven
After 2003, The Federal Reserve usually keeps the discount rate
above the target federal funds rate
Everything else held constant, when the Federal funds rate is ______ the interest rate paid on reserves, the quantity of reserves demanded rises when the federal funds rate _______.
above; falls
If borrowers with the most risky investment projects seek bank loans in higher proportion to those borrowers with the safest investment projects, banks are said to face the problem of
adverse selection
The chaebols encouraged the Korean government to open up Korean financial markets to foreign capital. The Korean government responded by:
allowing unlimited short-term foreign borrowing but maintained quantity restrictions on long-term foreign borrowing by financial institutions
At the time of the South Korean financial crisis, the merchant banks were:
almost virtually unregulated
All else the same, if a bank's liabilities are more sensitive to interest rate fluctuations than are its assets, then _____ in interest rates will _____ bank profits
an increase; reduce
A credit boom can lead a _____ such as we saw in the tech stock market in the late 1990s
asset-price bubble
In a bank panic, the source of contagion is the:
asymmetric information problem
If uncertainty about the banks' health causes depositors to begin to withdraw their funds from banks, the country experiences a:
banking crisis
Discount policy affects the money supply by affecting the volume ________ and the ______.
borrowed reserves; monetary base
A financial crisis occurs when an increase in asymmetric information from a disruption in the financial system
causes severe adverse selection and moral hazard problems that make financial markets incapable of channeling funds efficiently
Which of the following are reported as liabilities on a bank's balance sheet?
checkable deposits
The monetary base consists of
currency in circulation and reserves
The economy recovers quickly from most recessions, but the increase in adverse selection and moral hazard problems in the credit markets caused by ______ led to the server economic contraction known as the Great Depression
debt deflation
If the First National Bank has a gap equal to a negative $30 million, then a 5 percentage point increase in interest rates will cause profits to
decline by $1.5 million
Assuming initially that rr = 10%, c = 40%, and e = 0, an increase in rr to 15% causes the M1 money multiplier to ________, everything else held constant.
decrease from 2.8 to 2.55
When good weather speeds the check-clearing process, float tends to ____ causing the Fed to initiate ____ open market _____.
decrease; defensive; purchases
The Federal Reserve will engage in a matched sale-purchase transaction when it wants to _____ reserves _____ in the banking system
decrease; temporarily
When the Federal Reserve calls in a discount loan from a bank, the monetary base ____ and reserves _____.
decreases; decrease
When the Federal Reserve engages in a repurchase agreement to offset a withdrawal of Treasury funds from the Federal Reserve, the open market operation is said to be
defensive
If Treasury deposits at the Fed are predicted to increase, the manager of the trading desk at the New York Fed bank will likely conduct ______ open market operations to ____ reserves
defensive; inject
The problems of raising the level of the inflation target include
if the zero-lower bound problem is rare, then the benefits of a higher inflation target are not very large
Suppose on any given day there is an excess demand of reserves in the federal funds market. If the Federal Reserve wishes to keep the federal funds rate at its current level, then the appropriate action for the Federal Reserve to take is a ______ open market _____, everything else held constant
defensive; purchase
When the value of loans begins to drop, the net worth of financial institutions falls causing them to cut back on lending in a process called:
deleveraging
Inflation targets can increase the central bank's flexibility in responding to declines in aggregate spending. Declines in aggregate _____ that cause the inflation rate to fall below the floor of the target range will automatically stimulate the central bank to _____ monetary policy without fearing that this action will trigger a rise in inflation expectations
demand; loosen
Decisions by depositors to increase their holdings of _____, or of banks to hold excess reserves will result in a _____ expansion of deposits than the simple model predicts
deposits; smaller
Inflation results in
difficulty interpreting relative price movements
Which of the following is not an operating instrument
discount rate
Everything else held constant, the vertical section of the supply curve of reserves is shortened when the
discount rate decreases
The Federal Reserve ________ pay interest on reserves hold on deposit. The European System of Central Banks _____ pay interest on reserves held on deposit
does; does
If the Taylor Principle is not followed and nominal interest rates are increased by less than the increase in the inflation rate, then real interest rates will ______ and monetary policy will be too ______.
fall; loose
When it comes to choosing a policy instrument, both the _____ rate and ____ aggregates are measured accurately and are available daily with almost no delay
federal funds; reserve
Argentina's financial crisis was due to:
fiscal imbalances
A decrease in _____ leads to an equal _____ in the monetary base in the short run.
float; decrease
If the Fed pursues a strategy of targeting an interest rate when fluctuations in money demand are prevalent
fluctuations of non-borrowed reserves will be large
An assumption in the model of the money supply process is that the desired levels of currency and excess reserves
grow proportionally with checkable deposits
The effect of an open market purchase on reserves differs depending on how the seller of the bonds keeps the proceeds. If the proceeds are kept in currency, the open market purchase _____ reserves; if the proceeds are kept as deposits, the open market purchase _____ reserves
has no effect on; increases
When compared to the Fed's _____ anchor approach, ______ targeting can make the institutional framework for the conduct of monetary policy more consistent with democratic principles.
implicit; inflation
As the costs associated with deposit outflows _____, the banks willingness to hold excess reserves will ______.
increase; increase
Foreign exchange rate stability is important because a decline in the value of the domestic currency will _____ the inflation rate, and an increase in the value of the domestic currency makes domestic industries _____ competitive with competing foreign industries
increase; less
The growth of the subprime mortgage market led to
increased demand for houses and helped fuel the boom in housing prices
Factors that led to worsening conditions in Mexico's 1994-1995 financial markets include:
increased uncertainty from political shocks
In the market for reserves, if the federal funds rate is between the discount rate and the interest rate paid on excess reserves, and increase in the reserve requirement ____ the demand for reserves, ______ the federal funds rate, everything else held constant
increases; raising
If the Fed injects reserves into the banking system and they are held as excess reserves, then the monetary base _____ and the money supply_______.
increases; remains unchanged
In the market for reserves, if the federal funds rate is above the interest rate paid on excess reserves, an open market purchase _____ the _____ of reserves which causes the federal funds rate to fall, everything else held constant
increases; supply
The type of monetary policy that is used in Canada, New Zealand, and the United Kingdom is
inflation targeting
Severe fiscal imbalances can directly trigger a currency crisis since:
investors fear that the government may not be able to pay back the debt and so begin to sell domestic currency
A bank that wants to monitor the check payment practices of its commercial borrowers, so that moral hazard can be prevented, will require borrowers to
keep compensating balances in a checking account at the bank
A nominal anchor promotes price stability by
keeping inflation expectations low
Bank capital is listed on the _____ side of the bank's balance sheet because it represents a _____ of funds
liability; source
All of the following might create problems from financial liberalization in emerging countries excepts:
limits on risk-taking
Everything else held constant, in the market for reserves, when the federal funds rate is 5%, lowering the discount rate from 5% to 4%
lowers the federal funds rate
Financial crises in advanced economies might start from a:
mismanagement of financial innovations
Financial crises generally develop along two basic paths:
mismanagement of financial liberalization / globalization and severe fiscal imbalances
From before the financial crisis began in September of 2007 to when the crisis was over at the end of 2009, the huge expansion in the Fed's balance sheet and the monetary base did not result in a large increase in monetary supply because
most of it just flowed into holdings of excess reserve
The goal for high employment should be a level of unemployment at which the demand for labor equals the supply of labor. Economists call this level of unemployment the
natural rate level of unemployment
The amount of borrowed reserves is ____ related to the discount rate, and is _____ related to the market interest rate
negatively; positively
Large-denomination CDs are _______, so that like a bond they can be resold in ____ market
negotiable; secondary
Suppose that from a new checkable deposit, First National Bank holds two million dollars in vault cash, eight million dollars on deposit with the Federal Reserve, and one million dollars in required reserves. Given this information, we can say First National Bank has _____ million dollars in excess reserves.
nine
The time-inconsistency problem in monetary policy can occur when the central bank conducts policy
on a discretionary, day-by-day basis
Either a dual hierarchical mandate is acceptable as long as _____ is the primary goal in the ______.
price stability; long run
The mismanagement of financial liberalization in emerging market countries can be understood as a severe
principal / agent problem
If the Fed expects currency holdings to rise, it conducts open market ______ to offset the expected _____ in reserves
purchases; decrease
The goals of bank asset management include
purchasing securities with high returns and low risk
Suppose, at a given federal funds rate, there is an excess supply of reserves in the federal funds market. If the Fed wants the federal funds rate to stay at that level, then it should undertake an open market _____ of bonds, everything else held constant. If the Fed does nothing, however, the federal funds rate will ______.
sale; decrease
_______ is a process of bundling together smaller loans (like mortgages) into standard debt securities
securitization
All of the following are examples of off-balance sheet activities that generate fee income for banks excepts
selling negotiable CDs
One way for banks to reduce the principal-agent problems associated with trading activities it to
set limits on the total amount of trader's transactions
Secondary reserves include
short-term Treasury securities
In general, banks make profits by selling _____ liabilities and buying _____ assets
short-term; longer-term
Bruce the Bank Manager can reduce interest rate risk by ______ the duration of the bank's assets to increase their rate sensitivity or, alternatively, ______ the duration of the bank's liabilities
shortening-lengthening
If a bank needs to raise the amount of capital relative to assets, a bank manager might choose to
shrink the size of the bank
In the simple deposit expansion model, an expansion in checkable deposits of $1,000 when the required reserve ratio is equal to 20 percent implies that the Fed
sold $200 in government bonds
When the federal funds rate equals the interest rate paid on excess reserves
the demand curve for reserves is horizontal
When a $10 check written on the First National Bank of Chicago is deposited in an account at Citibank, then
the liabilities of Citibank increase by $10
At the time of the South Korean financial crisis, the government allowed many chaebol owned finance companies to convert to merchant banks. Finance companies ______ allowed to borrow abroad and merchant banks ________-.
were not; could borrow abroad
