Econ 330 Exam 2
The Dodd-Frank Act of 2010 is the most comprehensive:
financial reform legislation since the Great Depression.
________ is the process of researching and developing new instruments to address the needs of investors and institutions in a rapidly changing financial climate.
Financial engineering
he additional ease of information acquisition and lower _____ are the two effects of information technology improvements.
cost of processing financial transactions
Each of the Federal Reserve banks is considered a quasi-public institution because:
it is owned by the private commercial banks in its district that are members of the federal reserve.
The New York Federal Reserve Bank is so important to the Federal Reserve System because of the following except that
it serves as the location for Federal Reserve board meetings.
Some firms had fallen on bad times and their previously issued long-term securities have ratings below Baa. These bonds are dubbed as
junk bonds
_____ are the most important policy tool the Fed has for controlling the money supply.
open market operations
_____ is the purchase and sale of government securities by the Federal Reserve that affect both interest rates and the amount of reserves in the banking system.
open market operations
A well-functioning financial system:
solves asymmetric information problems.
The twelve Federal Reserve banks are involved in monetary policy in several ways including:
voting on the purchase and sale of government securities that affect both interest rates and the amount of reserves
There are ______regional Federal Reserve banks in the Federal Reserve system.
12
The Board of Governors appoints ____directors of each district bank.
3
The presence of so many commercial banks in the United States is most likely the result of:
previous restrictions on branch banking
To prevent future depositor losses from bank failures, banking legislation in 1933 established the
FDIC
When a fire sale occurs,
banks may become insolvent.
The Federal Reserve System was established in 1913
because the public became convinced a central bank was needed to avoid bank panics.
The government agency that oversees the banking system and is responsible for the supply of money and credit in the economy is the
central bank
A short-term debt security issued by large banks and corporations is called a
commercial paper
Identify the similarities between the United States' experiences during the Great Depression and the financial crisis of 2007-2009. (Check all that apply.)
credit spreads widen and the availability of credit declined during both episodes. both episodes were preceded by sharp increases in asset prices.
Uncertainty about future interest-rate volatility and returns is known as:
interest-rate parity
An increase in adverse selection and moral hazard in credit markets _____ bank lending.
tends to decrease
Which of the following entities in the Federal Reserve System directs open market operations?
the FOMC
Each governor of the Board of Governors is appointed by
the US president
The Federal Open Market Committee is comprised of
the seven members of the Board of Governors plus five of the twelve Federal Reserve Bank presidents.
When the charter of the Second Bank of the United States expired in 1836:
there was no lender of last resort to provide reserves to the banking system.
Monetary policy is determined by
FOMC
The Federal Reserve System include the:
FOMC (Federal Open Market Committee)
The bank panic of 1907 led to the passage of the:
Federal Reserve Act of 1913.
Why might American businesses want to hold Eurodollars?
Many commercial transactions and international contracts are denominated in dollars
Which of the following entities in the Federal Reserve System controls the discount rate?
The Board of Governors
Which of the following entities in the Federal Reserve System sets reserve requirements?
The Board of Governors
Which of the following statements are likely to be in favor of the idea that the Fed was responsible for the housing price bubble in the mid-2000s in the United States? (Select all that apply.)
The Fed was not stringent enough in regulating and monitoring financial intermediaries. The Fed set the federal funds rate at an extremely low level.
The current central bank of the United States is
The Federal Reserve
Why is the New York Federal Reserve always a voting member on the FOMC?
The New York Federal Reserve district contains many of the largest commercial banks in the United States. It is the only Federal Reserve bank that is a member of the Bank for International Settlements (BIS). The New York Federal Reserve is actively involved in the bond and foreign exchange markets. (All of the above)
Although neither _____ nor the _____ is officially set by the Federal Open Market Committee, decisions concerning these policy tools are effectively made by the committee.
reserve requirements; discount rate
The policy tools of the Fed are the following except
bond creation
Why is a financial crisis likely to lead to a contraction in economic activity?
A disruption in the financial system diminishes the flow of funds from savers to borrowers.
How can a bursting of an asset-price bubble in the stock market trigger a financial crisis?
A reduction in asset prices causes lenders to become more cautious and reduce the amount of loans they make A reduction in asset prices causes a serious deterioration in borrowing firms' balance sheets A reduction in asset prices causes borrowing firms to have less to lose so they are willing to take on additional risk (All of the above)
Which of the following is likely a result of increased interest-rate volatility?
An increase in demand for financial services and products
Which of the following factors apart from securitization was responsible for the Great Recession of 2007-2009?
An increase in funds lent to subprime borrowers.
The ________, established in 1791, is the first central bank in the United States.
Bank of the US
Which of the following is not a reason why bank failures worsen financial crises?
Bank panics reduce the amount of asymmetric information, which makes it more difficult to lend funds.
Reserve requirements are set by the __________ and advised upon by the __________.
Board of Governors; FOMC
Which of the following statements is likely to contradict the idea that the Fed was responsible for the housing price bubble of the mid-2000s in the United States? (Select all that apply.)
Capital inflows from India and China coupled with no attractive investment opportunities. Lowering of lending standards.
Deposits in European banks denominated in dollars for the purpose of international transactions are known as:
Eurodollars
Why does the United States operate under a dual banking system? (Select all that apply)
Federally chartered banks help to stabilize the banking system and are less prone to failure There is skepticism of centralized power in the U.S. banking system
Which of the following statements is true of financial frictions?
Financial frictions are a set of conditions that prevents financial markets from effectively assigning funds to the best investment opportunities.
What would be the result of an increase in haircuts on collateral?
Financial institutions would engage in fire sales on assets.
The first central bank in the United States was
First Bank of the United States
Which of the following is not a factor that commonly initiates financial crises?
Increases in government regulations that make it harder to manage the risks of financial assets.
How did financial innovations in mortgage markets contribute to the 2007-2009 financial crisis?
Information technology lowered the cost of packaging numerous subprime mortgages into mortgage-backed securities that could be sold in financial markets, attracting more funds into mortgage finance. Advances in information technology and new statistical techniques lowered the cost of evaluating the risk of mortgages to subprime borrowers who did not meet the standards for traditional mortgage loans. Borrowers could get mortgage loans with little or no money down and could borrow more money relative to the value of the house they were buying and relative to their incomes than allowed with traditional mortgages. (All of the above)
What role does weak financial regulation and supervision play in causing financial crises?
It allows financial institutions a better opportunity to engage in excessive risk-taking behavior.
Which of the following is true of securitization?
It is a process that converts a series of financial instruments into marketable securities.
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?
It provides a greater opportunity for nonvoting members to become voting members in the future.
Which of the following statements are true of the firewall created by the Glass-Steagall Act of 1933? (Select all that apply)
It put the U.S. banks at a disadvantage against their foreign competitors in terms of lost opportunities to make profits. It was able to separate a risky industry from traditional commercial banking.
Historically in the United States, branching laws have been most restrictive in the
Midwest
The largest Federal Reserve bank in terms of assets is that of
New York
Some countries do not advertise that a system of deposit insurance like the FDIC (The Federal Deposit Insurance Corporation) in the United States exists in their banking system. Which of the following explain why some countries do not advertise that a system of deposit insurance exists in their banking system? (Select all that apply.)
Not advertising deposit insurance may reduce the problem of moral hazard, which is created by a system of deposit insurance. The information about the presence of a system of deposit insurance makes depositors and bank clients less likely to monitor a bank's activities.
Which of the following functions is not performed by any of the 12 regional Federal Reserve banks?
Setting interest rates payable on time deposits
Which of the following functions is not performed by the twelve Federal Reserve Banks?
Setting the reserve requirement.
Which of the following is not a principal-agent problem resulting from the originate-to-distribute business model?
Since mortgage brokers do not intend to hold the mortgage loans they make, they take extra care to gather as much information as possible about the borrower.
Housing prices boomed from 2002 to 2006, and then prices started to decline in 2006, falling by more than 30%, which led to defaults by subprime mortgage holders.
Subprime borrowers found the value of the house fell below the amount of the mortgage banks began to restrict the availability of credit to households
Why is the Twelfth Federal Reserve district so geographically large, while the Second Federal Reserve district is so small by comparison?
The districts represent the population and economic interests in 1913 when the Federal Reserve Act was created.
Which of the following statements is true of the role of a loan originator in the securitization process of a mortgage loan?
The loan originator is only concerned with households accepting the terms of the mortgage loan.
Why is the originate-to-distribute business model subject to the principal-agent problem?
The more volume the broker originates, the more he or she makes Once the mortgage broker earns his or her fee, the broker does not care if the borrower makes good on his payment The mortgage broker has little incentive to ensure the borrower is credit-worthy, since loans will be sold as mortgage-backed securities (All of the above)
Which of the following did not help prevent the financial crisis of 2007-2009 from becoming a depression?
The purchase of stock and ownership takeovers of troubled banks by the Federal Reserve.
Why does a financial crisis ultimately cause a substantial reduction in economic activity?
The resulting credit crash severely reduces investment for productive activities.
Why was the Federal Reserve System set up with twelve regional Federal Reserve banks rather than one central bank, as in other countries?
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 associated with asymmetric information in a financial crisis?
There is a lack of information about one or more of the parties involved in a transaction. Adverse selection can occur if lenders must select from a pool of bad credit risks. Moral hazard could occur when only borrowers know if the funds will be used to finance high-risk activities. (all of the above)
Why would haircuts on collateral increase sharply during a financial crisis?
There is an increase in the uncertainty over the value of assets.
Do you think that before the National Bank Act of 1863 the prevailing conditions in the banking industry fostered or hindered trade across states in the United States?
They hindered trade across states because there was no national currency and the banknotes issued by the state-chartered banks had become worthless.
In what ways can the regional Federal Reserve Banks influence the conduct of monetary policy?
Through their administration of the discount facilities at each bank. By having members serve on the Federal Advisory Council. By having five of their presidents sit on the FOMC. (All of the above)
"The Federal Reserve System 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.
True. Because of public hostility and the centralization of power, the Federal Reserve System was created with many checks and balances to diffuse power.
When the risk that some banks might fail increases, depositors may not have enough information to determine whether their bank is a good one or one of the banks at greater risk to fail. Depositors have an incentive to withdraw their deposits before the bank runs out of funds. If this becomes a widespread occurrence, it is known as:
a bank panic
A financial crisis occurs when:
a particularly large disruption to information flows occurs in financial markets.
The many regional Federal Reserve banks resulted from a compromise between parties favoring:
a private central bank and those favoring a government institution.
Which of the following does not cause a reduction in the net worth of the borrowing firm in a loan market?
a rise in the stock market that raises the value of the firm
Regardless of the original source of the financial crisis, all credit booms end in a credit crash because of
an increase in adverse selection and moral hazard in the loan market.
The Board of Governors is not involved in which of the following activities?
approval of bank loans
The large number of banks in the United States
are greater than the number of banks in most developed countries
The Glass-Steagall Act, which was repealed in 1999, prohibited commercial banks from:
engaging in underwriting and dealing in corporate securities
The Board of Governors of the Federal Reserve System:
establishes, within limits, reserve requirements. effectively sets the discount rate. sets margin requirements. (All of the above)
true or false: Deposit insurance always prevents financial crises. what supports your answer (Select all that apply)
false Deposit insurance is unable to prevent the effects of an asset price decline or the spread of a financial crisis to international financial markets. Deposit insurance creates moral hazard incentives encouraging risk taking on the part of banks
The interest rate on overnight loans from one bank to another is the
federal funds rate
Currency in circulation that cannot be redeemed for gold is called
fiat money
Financial instruments with returns tied to previously issued securities are called:
financial derivatives
The most important source of the changes in supply conditions that stimulate financial innovation has been the
improvements in information technology.
As a result of strict banking regulations, the United States has:
many more smaller banks when compared to other industrialised countries
Which of the following statements concerning the fourteen-year term for members of the Board of Governors is true?
members of the board of governors is appointed by the president for 14 year terms
Was the process of securitization solely responsible for the Great Recession of 2007-2009?
no
Financial crises
occur when information flows in financial markets experience a particularly large disruption.
The Federal Reserve Bank of New York holds ____ of the assets of the Federal Reserve System.
one-quarter
The Glass-Steagall Act of 1933
prohibited commercial banks from underwriting corporate securities.
There was no central bank in the United States between 1836 and 1913 because of the following except:
prominent support for centralized power
The primary reason for the creation of the Federal Reserve System was:
to reduce or eliminate future bank panics.
Advances in computer technology and new statistical techniques led to the development of subprime mortgages.
true
