FIN Unit 3 Review

As the federal funds rate increases​, the opportunity cost to banks of holding excess reserves ___(A)___ because the return they could earn from lending out those reserves ___(B)___.

(A) increases (B) goes up

​"Extraordinary easing​ measures" would end deflation by greatly ___(A)___ aggregate demand and thus pushing prices ___(B)___.

(A) increasing (B) upward

The​ Fed's inability to observe instantaneously changes in​ GDP, inflation, or other economic variables is referred to as the ___(A)___ lag, and the time that is required for monetary policy changes to affect​ output, employment, or inflation is known as the ___(B)___ lag.

(A) information (B) impact

The Taylor rule is a monetary policy guideline

developed by economist John Taylor for determining the target for the federal funds rate.

The term​ "extraordinary easing​ measures" refers to

the Fed using all possible methods to engage in quantative easing.

The positions of the Reserve Bank presidents during this episode are better explained by the ___(A)___ view of Fed motivation by the ___(B)___ view as the presidents were ___(C)___.

(A) principal-agent (B) public interest (C) acting in the best interests of their member banks

In "lending into continuing runs" the FED ___(A)___ additional ___(B)___ banks in order to avoid ___(C)___ longer-term assets at a ___(D)___, further ___(E)___ investor confidence.

(A) provided (B) capital from (C) selling (D) loss (E) undermining

What is a​ SIFI?

A firm whose failure would potentially cause a financial crisis.

What is the public interest view of the​ Fed's motivation?

A theory of central bank decision making that holds that officials act in the best interests of the public.

What is the​ principal-agent view?

A theory of central banking that holds that officials maximize their personal​ well-being rather than that of the general public.

Why would​ 100% reserve requirements on checking accounts eliminate the need for FDIC​ insurance?

If a bank​ failed, it would have​ 100% of the deposits on​ hand, so there would be no possibility of anyone losing their deposits.​ Therefore, there would be no need for FDIC insurance.

At what interest rate does the demand curve for reserves become perfectly​ elastic?

At the interest rate the Fed pays on​ banks' reserve balances.

Which from the following variables is most likely to be an intermediate target of monetary​ policy? ​(Check all that apply.​)

Monetary base M1 M2

Was Fed Chairman Bernanke justified in evading the requirements of this act during the financial crisis of​ 2007-2009?

Because the financial crisis was unfolding so​ quickly, one could argue that Bernanke was justified in evading the Sunshine Act.

Why does Congress directly control fiscal policy-the federal​ government's decisions with respect to spending and taxes-but delegate the authority over monetary policy to the Federal​ Reserve?

Congress wanted the Federal Reserve to operate independently of external political pressures.

Who is eligible to borrow and lend in the federal funds​ market?

Depository institutions and Financial institutions

Why might each of these four elements occur during a financial​ crisis?

Each of these elements is connected to another.

Why would holding more capital limit how much a financial firm can borrow and reduce the​ firm's profitability?

It decreases the amount of funds available to invest in​ riskier, potentially​ higher-yielding assets.

What was abnormal about the level of the federal funds rate in​ 2016?

It was at a historically low level.

What innovations did banks develop to get around ceilings on deposit interest​ rates? ​(Check all that apply.​)

Negotiable CDs NOW accounts ATS accounts

If there is a conflict of interest in the governance structure of the Federal Reserve​ Banks, why did Congress establish this structure when it passed the Federal Reserve Act in​ 1913?

To prevent one constituency from exploiting the central​ bank's economic power at the expense of another constituency.

Why did the Fed use it during the financial crisis of​ 2007-2009?

To reduce the interest rates on mortgages and other​ long-term rates.

Which from the following variables is most likely to be a goal of monetary​ policy? ​(Check all that apply.​)

Unemployment rate Real GDP growth

How can the Taylor rule be used as a guide to evaluating Federal Reserve monetary policy over​ time?

Using the Taylor​ rule, it is possible to compare the actual federal funds rate with the federal funds rate target.

​Why, with the monetary policy tools it had used prior to the financial​ crisis, could the Fed not control the federal funds​ rate?

Using the tools the Fed had available would have disrupted the financial system.

Are there counterarguments to​ Rolnick's view?

Yes. Some would argue that the Bank of United States was not as interconnected as​ Friedman/Schwartz argue because there is not a lot of evidence that other bank failures were tied to this particular​ bank's failure.

​Traditionally, the​ Fed's securities holdings have been composed primarily of​ short-term Treasury​ securities, such as​ T-bills. The Fed came to own agency debt and agency​ mortgage-backed securities:

as part of its quantitative easing program.

Who are the Class A​ directors?

bankers

All of the following are reasons why the​ Dodd-Frank Act required SIFIs to hold more​ capital, except:

because the FDIC was prohibited from intervening when SIFIs experienced economic distress.

All of the following are considered "non banks" ​except:

credit unions

A bank run:

is the process by which depositors who have lost confidence in a bank simultaneously withdraw enough funds to force the bank to close.

Being leveraged too high means that a bank is​ _______, this impacts financial crisis since banks that are leveraged too highly are more likely to​ _______.

not holding adequate capital as a cushion against losses relative to its​ assets: fail if there are substantial defaults on their loans since the level of total assets will fall below total liabilities

What was the Bank of United​ States, when did it​ fail, and why did it​ fail? The Bank of United States was:

one of the largest banks at the​ time, and it failed in December​ 1930, largely from falling real estate prices.

To increase the federal funds rate the​ Fed:

raises the interest rate it pays on excess reserves and the interest rate it offers on reverse purchase agreements.

Agency debt and agency​ mortgage-backed securities include all of the​ following, except:

securities issued by the Fed.

How can an investment bank experience a​ "run"? Because investment banks borrow:

short term in the repo​ market, the refusal of lenders to renew their repos is akin to a commercial​ bank's depositors withdrawing funds.

Quantitative easing is the central bank policy that attempts to

stimulate the economy by buying​ long-term securities.

All of the following might be reasons why the Fed did not lend to Lehman Brothers in the days before its​ bankruptcy, except:

the failure of Lehman Brothers would have little impact on the economy.

The interest rate offered by the Fed on overnight repurchase agreements​ is:

the interest rate the Fed pay on loans from financial firms in reverse purchase agreements.

At the interest rate the Fed pays on​ banks' reserve balances.

the interest rate the Fed pays on​ banks' required and excess reserves.

These monetary policy tools have become more important than the​ Fed's traditional monetary policy tools because​ of:

the large volume of reserves held by banks.

What potential conflicts of interest is this document referring​ to?

the supervision of member banks

To open "roll over" maturing Treasury securities means to ___(A)___ the ___(B)___ Treasury securities.

(A) reinvest (B) principal in new

Since the leverage ratio equals a​ bank's capital divided by its ___(A)___ the leverage ratio rise as the bank holds ___(B)___.

(A) risk adjusted assets (B) less capital

The advantages of the British approach is that ___(A)___ while the U.S. approach ___(B)___.

(A) the Treasury has a voice in the decision-making process (B) gives the appearance of greater independence form political pressure

How was the Fed able to use its new monetary policy tools to increase the federal funds rate in December​ 2015?

The Fed raised the rate it pays on excess reserves and reverse purchase agreements.

Why was the Federal Reserve System split into 12​ districts?

The Federal Reserve System was split into 12 districts because there was opposition in Congress to establishing a​ single, unified central bank.

What is the purpose of the Government in the Sunshine​ Act?

The Government in the Sunshine​ Act, which required government agencies to post meetings before they​ happened, was created to promote public awareness.

What does the statement mean by the open "normalization of the level of the federal funds rate"​?

The federal funds rate will return to levels like those before the​ 2007-2009 financial crisis.

Which of the following are true regarding​ "regulatory capital​ requirements"?​ (Check all that​ apply)

The international agreement on bank capital requirements is called the Basel accord. The measure of a​ bank's capital relative to its​ risk-adjusted assets is a called a leverage ratio. Capital requirements dictate the amount of liquid assets a bank must hold relative to what has been lent out.

What are the implications of this statement for the level of reserves held by​ banks?

The level of reserves held by banks will stay the same.

How are the​ principal-agent view and the public interest view connected to the theory of the political business​ cycle?

The political business cycle would be more likely with the​ principal-agent view where the Fed lowers interest rates to stimulate the economy before an election to avoid conflict with groups that could limit its power and influence.

What does Bernanke mean by "solvent under normal conditions"​?

The value of a​ bank's assets is more than the value of its​ liabilities, so its net​ worth, or​ capital, is positive.

If you owned a firm that did business​ internationally, why would excess fluctuations in the foreign exchange value of the dollar make planning for business and financial transactions more​ difficult? ​(Check all that apply.​)

They make it difficult to know the dollar value of foreign assets. They make it difficult to know the cost of your products abroad. They make it difficult to know the cost of imported intermediate goods.

Evaluate the following​ statement: "Because the Fed does not have to ask Congress for money to fund its​ operations, the​ principal-agent view of the​ Fed's motivation cannot be​ correct."

This is not necessarily correct. For​ instance, despite the apolitical setup of the​ Fed, each member of the Federal Reserve Board still has an incentive to maximize personal​ well-being, power, and​ influence, and may make decisions that promote those factors.

What are the reasons banks demand​ reserves? ​(Check all that apply.​)

To meet their legal obligation to hold required reserves. To hold excess reserves to meet their​ short-term liquidity needs.

Which from the following variables is most likely to be a monetary policy​ tool? ​(Check all that apply.​)

Open market purchases Discount rate

What legislative change and financial innovations occurred after 1979 that changed M1 from representing a pure medium of exchange to also representing a store of​ value? ​(Check all that apply.​)

Congress authorized NOW accounts on which banks can pay interest. Banks developed automated transfer of saving​ accounts, which move checkable deposit balances into​ higher-interest CDs each night and then back into checkable deposit balances in the morning.

Which of the following is an example of the interconnections among banks and non banks he was referring​ to?

Falling prices of​ mortgage-backed securities and other​ housing-related assets led to losses at banks and other intermediaries.

What does Yellen mean by saying that "reserves were no longer relatively scarce"​?

Reserves are so large that banks have little need to borrow reserves from other banks.

Deflation would be​ "potentially highly​ damaging" because of all of the following​ EXCEPT?

It would make prices​ fall, so goods would become less expensive.

Why would this change in M1 break the​ short-run link between money and​ inflation?

M1 became more a store of value than a pure medium of exchange.

What are the changes to the Fed under the​ Dodd-Frank Act? ​(Check all that apply.​)

Making the Fed a member of the new Financial Stability Oversight Council. Designating a Fed vice chairman for regulatory supervision. Ordering the Government Accountability Office to audit the emergency lending programs the Fed carried out during the financial crisis.

What effects did the run on Lehman Brothers have on the U.S.​ economy? ​(Check all that apply.​)

Many parts of the financial system became​ frozen, as trading in securitized loans largely stopped. The failure of Lehman Brothers marked a turning point in the crisis.

Which of the following is NOT a supportive argument that the​ Fed's dual mandate should be replaced with a single mandate of price​ stability?

Monetary policy can sometimes be used to stimulate the economy quickly in times of large decreases in demand which can reduce unemployment in the economy.

Does a bank have to be insolvent to experience a​ run?

No

Would depositors need to fear losing money if their bank​ failed?

No

Which from the following variables is most likely to be an operating target of monetary​ policy? ​(Check all that apply.​)

Non borrowed reserves Federal funds rate

What does he mean by a "sustained run"? Why​ can't a bank survive a sustained​ run?

Simultaneous withdrawals by a​ bank's depositors result in the bank closing.

Why is the issue of whether Bear Stearns and AIG held sufficient collateral important​ legally?

The Fed can only make loans to firms provided that the loan being made is secured by adequate collateral.

Why might the​ Fed's failure to save the Bank of United States provide a rationale for the policy of​ "too big to​ fail"?

​Friedman/Schwartz argue that the Bank of United States had so many deposits and was so interconnected to other banks that letting this bank fail caused a cascade of other bank failures.