Exam 3
Why does the US operate under a dual banking system?
-Federally charted banks help to stabilize the banking system and are less prone to failure -There is skepticism over centralized power
How did competitive forces lead to the repeal of the Glass-Steagall Act's separation of the banking and securities industries
-Financial innovation motivated banks and other financial institutions to bypass the intent of the Glass-Steagall Act -The Act's restrictions put American banks at a competitive disadvantage relative to foreign banks -The Fed allowed bank holding companies to enter the underwriting business
The 1980s is known for banking:
-innovation -deregulation -consolidation
what are the determinants for money demand?
-interest rates -income -transaction costs -wealth -risk -inflation -liquidity
What is not true of securitization?
-you do not make it higher than its fundamental value -higher risk does not make it default free
What are three major parts of the Federal Reserve?
1. Board of Governors 2. District Banks 3. FOMC
What three parties play a role in determining the money multiplier thus the money supply?
1. Central Bank 2. Banks 3. Depositors
Order the dynamics of a Financial Crisis
1. credit and asset boom 2. banking crisis 3. debt deflation 4. price deflation
What are the 3 determinants that shift the demand for domestic assets?
1. domestic interest rate 2. foreign interest rate 3. price level
4 factors that affect exchange rates in the LONG run
1. relative price level 2. preference for domestic vs foreign goods 3. trade barriers (ex: tariffs) 4. productivity
What are the 3 Theory of Purchasing Power Parity assumptions?
1. transportation/barrier costs are low 2. identical goods 3. goods/services are tradable across borders
What are the 4 determinants in the bond market?
1. wealth 2. expected returns 3. risk 4. liquidity
The US got its first national currency around the
1860s
When was the Federal Reserve created?
1913
Who was the first US Treasury Secretary of the United States?
Alexander Hamilton
What is a factor apart from securitization that was responsible for the Great Recession of 2007-2009?
An increase in funds lent to subprime borrowers
Why do bank runs occur?
Asymmetric information
The _____ established in 1791 is the first central bank in the US
Bank of the US
The Federal Reserve was created AFTER the crisis surrounding
Banking Panics of the 1900s
The greatest period of financial regulation in the US occurred in the
Early 1900s
To prevent future depositors losses from bank failures ____ was established
FDIC
What did the Wizard and Emerald City represent
Fed; fiat money
The _____ required separation of commercial and investment banking
Glass-Steagall Act
What did yellow brick road represent?
Gold
Before the National Bank Act, did the prevailing conditions in the banking industry foster or hinder trade across states?
Hindered because there was no national currency and the banknotes issued by the state-charted banks had become worthless
What is true of securitization?
It is a process that converts a series of financial instruments into marketable securities
What is true of the firewall created by the Glass-Steagall Act?
It was able to separate a risky industry from traditional commercial banking
When the Federal Reserve conducts an expansionary monetary policy, what happens to the money supply?
Money supply increases, but the supply of dollar assets does not change since dollar currency is a small part of the total US dollar-denominated assets
The _____ established the Office of the Comptroller of the Currency.
National Bank Act of 1963
Which entity in the Federal Reserve controls the discount rate
The Board of Govenors
Which entity in the Federal Reserve System sets reserve requirements?
The Board of Governors
Which entity in the Federal Reserve System directs open market operations?
The FOMC
What is the Global Pool of Money?
The world's savings
What gives the Federal Reserve the ability to be so independent?
They have their own income
What is likely a result of increased interest-rate volatility?
an increase in demand for financial services and products
What is the process by which simultaneous withdrawals by a particular banks' depositors results in the bank closing known as a
bank run
What is the name of currency circulated by banks that could be redeemed for gold?
banknotes
When a fire sale occurs
banks may become insolvent.
Open Market Operations refer to the Fed doing what?
buying/selling bonds
The government agency that oversees the banking system and is responsible for the supply of money is the _______
central bank
A short-term debt security issued by large banks and corporations is called a
commercial paper
The additional ease of information acquisition and lower _____ are the two effects of information technology improvements
cost of processing financial transactions
If expected inflation drops in Europe, so that interest rates increases there, predict what would happen to the exchange rate for the US dollar. The US dollar will
depreciate
When an expected inflation increases, the domestic currency ____ because the domestic interest rates ______
depreciates; decrease
An increase in the domestic money supply results in ______ in domestic currency because of ______ inflation
depreciation; higher
A _____ is bought at a price below its face value, & the _____ value is repaid at the maturity date
discount bond; face
What is the interest rate parity?
domestic rate = foreign rate - change in the exchange rate
Deposits in European banks denominated in dollars for the purpose of international transactions are known as
eurodollars
A _____ occurs when there is a particularly large disruption to information flows with the result that financial frictions increase sharply and market stops functioning. Often characterized by sharp ____ in asset prices
financial crisis; decline
________ is the process of researching and developing new instruments to address the needs of investors and institutions in a rapidly changing environment
financial engineering
______ are the asymmetric information problems that prevent efficient allocation of capital
financial friction
An exchange rate is the price of domestic assets in terms of _______
foreign assets
Law of one price
identical products sold in different countries must sell for the same price when their price is expressed in the same currency
Uncertainty about future interest-rate volatility and returns is known as
interest-rate risk
What is the exchange rate relationship for import demand?
inverse
What is the exchange rate relationship for relative price levels?
inverse
what is the money demand relationship of inflation?
inverse
what is the money demand relationship of interest rates?
inverse
what is the relationship of risk in the bond market?
inverse
Currency in circulation that cannot be redeemed for gold is called
junk bonds
Some firms had fallen on bad times and their previously issued long-term securities have ratings below Baa are called
junk bonds
A rise in the expected domestic price level shifts the demand for domestic assets to the _____ and cause the domestic currency to _______
left; depreciate
In the bond market, the bond demanders are the ______ and the bond suppliers are the _____
lenders; borrowers
___ is the relative ease & speed with which an asset can be converted into a medium of exchange
liquidity
why might an American business want to hold eurodollars?
many commercial transactions and international contracts are denominated in dollars
As a result of strict banking regulations, the United States has:
many more smaller banks when compared to other industrialized countries
Kevin purchasing a concert ticket with a $100 bill is an example of the ___ function of money
medium of exchange
What is a requirement of the FDIC?
member banks of the federal reserve system are required to purchase FDIC insurance for their depositors
The Federal Reserve did not rescue the Lehman Brothers because of
moral hazard
The yield to maturity for a discount bond is _____ related to the current bond price
negatively
What is the exchange rate relationship for export demand?
positive
What is the exchange rate relationship for productivity?
positive
What is the exchange rate relationship for trade barriers?
positive
what is the money demand relationship of income?
positive
what is the money demand relationship of risk?
positive
what is the money demand relationship of wealth?
positive
what is the relationship of expected returns in the bond market?
positive
what is the relationship of liquidity in the bond market?
positive
what is the relationship of wealth in the bond market?
positive
The Troubled Asset Relief Program (TARP) authorized the Treasury to:
purchase subprime mortgage assets from troubled financial institutions
What makes QE QE2 QE3 different from normal Federal Reserve activity?
quantitative easing through long-term bonds
What did Dorothy's slipper represent?
silver
A well-functioning financial system:
solves asymmetric information problems
The Federal Reserve rescued the investment bank Bear Sterns because of
systematic risk
What is the Theory of Purchasing Power Parity?
the exchange rate between two countries is equal to the ratio of the currencies' respective purchasing power -it would exactly the same number of US dollars to buy euros then buy a basket of goods as it would cost to directly buy the good with dollars
A bank panic occurs when
the situation in which many banks experience a bank run simultaneously
What happens to European watches in the US if the euro depreciates?
they become less expensive
Describe the process of securitization
transforms illiquid & small securities into something that's tradable
