Finance Final :)
Why is the shadow banking system an important part of the 2007-2009 financial crisis?
A decrease of funding from the shadow banking system caused a restriction of lending and a decline in economic activity.
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.
An advantage of an international lender of last resort is its ability to prevent
contagion , in which a successful speculative attack on one currency leads to attacks on others.
A monetary regime in which the domestic currency is backed 100% by a foreign currency
currency board
When a central bank buys its currency in the foreign exchange market,
it loses international reserves.
A rise in the expected future exchange rate shifts the demand for domestic assets to the ________ and causes the domestic currency to_________.
right, appreciate
A rise in the expected trade barriers shifts the demand for domestic assets to the ________ and causes the domestic currency to_________.
right, appreciate
The revenue a government receives by issuing money:
seignorage
In a fixed exchange rate regime, when the domestic currency becomes undervalued, in order to keep the exchange rate at par the central bank must
sell domestic currency which leads to a gain of international reserves.
The immediate exchange of bank deposits in the foreign exchange market:
spot exchange rate
If the demand for a country's exports falls at the same time that tariffs on imports are raised, will the country's currency tend to appreciate or depreciate in the long run? The effect on the country's currency is
uncertain
A financial crisis occurs when:
a particularly large disruption to information flows occurs in financial markets
A financial crisis occurs when:
a particularly large disruption to information flows occurs in financial markets.
The Dodd-Frank Act of 2010 is the most comprehensive:
financial reform legislation since the Great Depression.
Critics of the IMF contend that its bail-out of the Mexican economy in the mid-1990s set the stage for the Asian crisis of the late 1990s because
foreign lenders expected to be bailed out if things went wrong.
If the current account balance is minus$510 billion and the capital account balance is $500 billion, then the official reserve transactions balance is
-10
How can a bursting of an asset-price bubble in the stock market trigger a financial crisis?
A. A reduction in asset prices causes lenders to become more cautious and reduce the amount of loans they make B. A reduction in asset prices causes borrowing firms to have less to lose so they are willing to take on additional risk C. A reduction in asset prices causes a serious deterioration in borrowing firms' balance sheets D. All of the above are correct!!!
Which of the following is associated with asymmetric information in a financial crisis?
A. Adverse selection can occur if lenders must select from a pool of bad credit risks. B. There is a lack of information about one or more of the parties involved in a transaction. C. Moral hazard could occur when only borrowers know if the funds will be used to finance high-risk activities. D. All of the above are correct.!!!!!
Which of the following is not a factor that commonly initiates financial crises?
A. The increased uncertainty that occurs when a major financial institution fails. B. Asset-price booms and busts. !!!!!!C. Increases in government regulations that make it harder to manage the risks of financial assets.!!!!!!!!!! .D. The mismanagement of financial liberalization and innovation.
Why is the originate-to-distribute business model subject to the principal-agent problem?
A. The more volume the broker originates, the more he or she makes B. The mortgage broker has little incentive to ensure the borrower is credit-worthy, since loans will be sold as mortgage-backed securities C. Once the mortgage broker earns his or her fee, the broker does not care if the borrower makes good on his payment D. All of the above are correct!!!!!!
Which of the following is not a factor that commonly initiates financial crises?
A.!!!!!!!! Increases in government regulations that make it harder to manage the risks of financial assets. Your answer is correct.!!!!! B. The increased uncertainty that occurs when a major financial institution fails. C. The mismanagement of financial liberalization and innovation. D. Asset-price booms and busts.
For each of the following, identify whether they increase or decrease the current account balance:
An American citizen's purchase of an airline ticket from Air France will decrease the current account balance. A Japanese citizen's purchase of California oranges will increase the current account balance. $50 million of foreign aid to Honduras will decrease the current account balance. A worker in California who sends money to his parents in Mexico will decrease the current account balance. The services an American accounting firm provides to a German firm will increase the current account balance.
If government spending increases, describe how monetary policymakers would respond (if at all) to stabilize economic activity. Assume the economy starts at a long-run equilibrium.
An increase in government spending increases aggregate demand, so monetary policymakers would pursue an autonomous tightening of monetary policy to stabilize economic activity.
What are some of the disadvantages of China's pegging of the yuan to the dollar?
An increase in the Chinese monetary base and money supply can produce high inflation. Many countries have threatened to erect trade barriers against Chinese goods.
What are some of the disadvantages of China's pegging of the yuan to the dollar?
An increase in the Chinese monetary base and money supply can produce high inflation. Many countries have threatened to erect trade barriers against Chinese goods. Your
When the U.S. dollar depreciates, what happens to exports and imports in the United States?
As the U.S. dollar depreciates, domestic goods become cheaper and imported goods become more expensive , thus domestic consumers and foreigners will buy more of the U.S.-produced goods. Hence, U.S. exports will increase and U.S. imports will decrease
What is the key advantage of dollarization over other forms of exchange-rate targeting?
Avoidance of speculative attacks
Identify the similarities between the United States' experiences during the Great Depression and the financial crisis of 2007-2009. (Check all that apply.)
Both episodes were preceded by sharp increases in asset prices Credit spreads widened the availability of credit declined during both episodes.
What are the five areas included in the Dodd-Frank Act of 2010?
Consumer protection, resolution authority, systemic risk regulation, Volcker rule, and derivatives.
Why do credit spreads rise during financial crises?
Credit spreads rise because asymmetric information problems increase, making it more difficult to judge the risk of potential borrowers.
The official reserve transactions balance equals
Current account + capital account
__________ occurs when a substantial unanticipated decline in the price level sets in, leading to a further deterioration in a firm's net worth because of the increased burden of indebtedness.
Debt deflation
The price of one currency in terms of another:
Exchange rate
"If autonomous spending falls, the central bank should lower its inflation target in order to stabilize inflation." Is this statement true, false, or uncertain? Explain your answer.
False. If the central bank pursues stabilization policy, it can stabilize both inflation and output simultaneously with an autonomous easing of policy.
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.
The exchange rate for forward transactions:
Forward exchange rate
Why did the exchange rate peg lead to difficulties for the countries in the ERM when German reunification occurred?
Germany raised interest rates, which also raised interest rates in ERM countries, slowing growth and increasing unemployment.
Suppose the country imports most of the goods included in the basket of goods and services considered in the calculation of the consumer price index (CPI).
Given the information, the country's inflation rate is likely to increase
Choose the components of the shadow banking system. (Check all that apply.
Hedge funds. Investment banks. Money market funds.
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. B. 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. C. 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. D. All of the above are correct.!!!!!
Suppose the Federal Reserve sells dollars in the foreign exchange market but conducts an offsetting open market operation to sterilize the intervention. If the Federal Reserve sells dollars in the foreign exchange market but conducts an offsetting open market operation to sterilize the intervention, what will be the effect on international reserves, the money supply, and the exchange rate? Based on the information given above, which of the following statements are likely to be true?
International reserves are likely to increase. The exchange rate is likely to remain the same.
What are the key advantages of exchange-rate targeting as a monetary policy strategy?
It is simple and clear. It mitigates the time-inconsistency problem. It helps keep inflation under control.
The idea that the prices of identical goods should be identical throughout the world:
Law of one price
How can the S&L crisis be blamed on the principal-agent problem ? As a result, politicians and regulators __________________________, thereby increasing the cost of the S&L bailout.
Politicians and regulators, who are known as the agents, have not had the same incentives to minimise costs of deposit insurance as do the taxpayers, who are known as the principals . relaxed capital standards, removed restrictions on holdings of risky assets, and engaged in regulatory forbearance
In the mid- to late 1970s, the yen appreciated relative to the dollar, even though Japan's inflation rate was higher than America's. What does this imply about Japanese productivity?
Productivity in Japan rose faster than in the United States during this period.
Restrictions on the quantity of foreign goods that can be imported
Quotas
The price of domestic goods relative to the price of foreign goods denominated in the domestic currency:
Real exchange rate
Why is it important for the U.S. government to have resolution authority?
Resolution authority allows the government to quickly takeover a failing firm.
Which of the following is not a principal-agent problem resulting from the originate-to-distribute LOADING... 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.
Taxes on imported goods:
Tariffs
During the last two decades, this agency has acted like an international lender of last resort to cope with financial instability:
The International Monetary Fund (IMF).
Suppose the Mexican central bank chose to peg the peso to the U.S. dollar and commit to a fixed peso/dollar exchange rate. Explain how the peg must be maintained if a shock in the U.S. economy forces the Fed to pursue contractionary monetary policy.
The Mexican central bank needs to sell foreign assets and buy domestic peso currency.
If nominal interest rates in America rise but real interest rates fall, predict what will happen to the U.S. exchange rate.
The U.S. exchange rate will depreciate
A given country is currently running a current account deficit of $450 billion but the overall balance of payments is equal to $0. Which of the following must be true?
The capital account is in surplus by an amount of $450 billion
If a country's par exchange rate was undervalued during the Bretton Woods fixed exchange rate regime, what kind of intervention would that country's central bank be forced to undertake?
The central bank would need to sell domestic currency and buy foreign assets. This would cause the domestic money supply to increase
From 2009 to 2011, the economies of Australia and Switzerland suffered relatively mild effects from the global financial crisis. At the same time, many countries in the euro area were hit hard with high unemployment and burdened with unsustainably high government debts. How should this affect the euro/Swiss franc and euro/Australian dollar exchange rates?
The currencies will appreciate against the euro because the demand for euro-denominated assets will decrease.
What is a credit spread?
The difference between interest rates on loans to households and businesses and interest rates on completely safe assets such as U.S. Treasury bonds.
What does this say about the ability of central banks to address domestic economic problems while maintaining a pegged exchange rate?
The domestic central bank is forced to import the monetary policy of the pegging country. There is no scope for domestic monetary policy stabilization.
In March 2009, the Federal Reserve announced a quantitative easing program designed to lower intermediate and longer-term interest rates. What effect should this have on the dollar/euro exchange rate?
The euro will appreciate relative to the dollar because demand for assets denominated in U.S. dollars will fall.
Suppose the president of the United States announces a new set of reforms that includes a new anti-inflation program. Assuming the announcement is believed by the public, what will happen to the exchange rate for the U.S. dollar?
The exchange rate will appreciate
The IMF does not enjoy a great reputation in many countries that were recipients of IMF loans or bailouts. Which of the following is likely to be a reason that many citizens were not happy with the role played by the IMF
The loans provided by the IMF forced the recipient nations to increase the domestic interest rate, and citizens had to cope with the harsh burden of the crisis.
Suppose the Federal Reserve purchases $10,000,000 worth of foreign assets. If the Federal Reserve purchases the foreign assets with $10,000,000 in currency, show the effect of this open market operation using T-accounts. (Use a minus sign to indicate a decrease in assets or liabilities, if any.) Federal Reserve System Assets Foreign assets (international reserves) $ 10 million Liabilities Currency in circulation $ 10 million
The monetary base increases by $10 million.
If the Federal Reserve purchases the foreign assets by selling $10,000,000 in T-bills, show the effect of this open market operation using T-accounts. (Use a minus sign to indicate a decrease in assets or liabilities, if any.) Assets Foreign assets (international reserves) $ 10 million Government bonds $ negative 10 million Liabilities Currency in circulation $ 0 million
The monetary base remains unchanged.
The Fed's purchase of dollars has two effects. First, it reduces the Fed's holding of international reserves. Second,
The money supply decreases
If the price level recently increased by 23% in England while falling by 5% in the United States, what must be the new exchange rate if PPP holds? Assume that the current exchange rate is 0.55 pound per dollar.
The new exchange rate must be 0.71 pound per dollar. https://www.chegg.com/homework-help/financial-markets-and-institutions-9th-edition-chapter-15-problem-13qp-solution-9780134520421?trackid=2aa0fa136d6e&strackid=f4741c85df29&ii=2
Which of the following are likely to be the effects of the devaluation of a country's currency on the country's imports and exports? (Select all that apply.)
The quantity of imports is likely to decrease. Exports are likely to become cheaper.
The New Zealand dollar to U.S. dollar exchange rate is 1.39, and the British pound to U.S. dollar exchange rate is 0.61. If you find that the British pound to New Zealand dollar were trading at 0.48, what would be the riskless profit per U.S. dollar invested?
The riskless profit is $ 0.10 per U.S. dollar invested https://www.chegg.com/homework-help/new-zealand-dollar-us-dollar-exchange-rate-136-british-pound-chapter-15-problem-7qp-solution-9780133427073-exc
If the Indian government unexpectedly announces that the tariffs on foreign goods will be higher one year from now, what will happen to the value of the Indian rupee today?
The rupee will appreciate today.
If the Canadian dollar to U.S. dollar exchange rate is 1.26 and the British pound to U.S. dollar exchange rate is 0.64, what must be the Canadian dollar to British pound exchange rate?
The spot exchange rate is 1.97 Canadian dollars per pound. https://www.chegg.com/homework-help/the-economics-of-money-banking-and-financial-markets-business-school-edition-4th-edition-chapter-20-problem-18ap-solution-9780133860375?trackid=fcb44d7c4686&strackid=f59df9fe0e3e&ii=1
The theory that exchange rates between any two countries will adjust to reflect changes in the price levels of the two countries:
Theory of purchasing power parity
Which of the following is a correct statement about the Dodd-Frank Act of 2010?
The Dodd-Frank Act created a new independent agencylong dashthe Consumer Financial Protection Bureaulong dashthat is funded and housed within the Federal Reserve
Advances in computer technology and new statistical techniques led to the development of subprime mortgages.
True
"If a country wants to keep its exchange rate from changing, it must give up some control over its money supply." Is this statement true, false, or uncertain?
True. Necessary interventions in the foreign exchange market will affect the money supply.
When is exchange-rate targeting likely to be a sensible strategy for industrialized countries?
When monetary policy suffers from the time-inconsistency problem.
When is exchange-rate targeting likely to be a sensible strategy for emerging market countries?
When the credibility of anti-inflation policies are in question.
If American auto companies make a breakthrough in automobile technology and are able to produce a car that gets 200 miles to the gallon, what will happen to the U.S. exchange rate? The U.S. exchange rate will
appreciate
If a strike takes place in France, making it harder to buy French goods, what will happen to the value of the U.S. dollar? The dollar will
appreciate
An increase in the value of a currency:
appreciation
If Mexicans go on a spending spree and buy twice as much French perfume, Japanese TVs, English sweaters, Swiss watches, and Italian wine, what will happen to the value of the Mexican peso? The value of the Mexican peso will
depreciate
A fall in the value of a currency:
depreciation
If nominal interest rates in America rise but real interest rates fall, predict what will happen to the U.S. exchange rate. The U.S. exchange rate will
depreicate
If a country's central bank eventually runs out of international reserves when it attempts to keep the currency from depreciating, it cannot keep its currency from depreciating, and a
devaluation must occur, in which the par exchange rate is reset at a lower level.
The adoption of a sound currency, like the U.S. dollar, as a country's money:
dollarization
Fixing the value of the domestic currency to the value of another currency:
exchange rate peg
A monetary policy strategy designed to provide a strong nominal anchor to promote price stability through pegging of its currency:
exchange rate targeting
The Economist magazine is famous for its publication of the Big Mac indexlong dasha table of Big MacTM prices in different countries around the world. The use of the Big Mac allows for a highly standardized product sold throughout the world.
https://www.chegg.com/homework-help/questions-and-answers/economist-magazine-famous-publication-big-mac-indexlong-dash-table-big-mactm-prices-differ-q13700769
The Economist magazine is famous for its publication of the Big Mac indexlong dasha table of Big MacTM prices in different countries around the world. The use of the Big Mac allows for a highly standardized product sold throughout the world. Given the following abbreviated table: Country PriceBig Mac China 10,000 yuan U.K. pound1.25 U.S. $2.50 Suppose that the exchange rate between China and the U.K. is: 15,000 yuan = pound1.00 and that the Big MacTM could be used as a standardized commoditylong dasheasily transported and not perishable. Complete the following:
https://www.chegg.com/homework-help/questions-and-answers/economist-magazine-famous-publication-big-mac-table-big-mactm-prices-different-countries-a-q24581820?trackid=5e3cab233dbc&strackid=a2f4311120e4&ii=1
The following data are given: Et = yen105 = $1.00 Et+1 = yen103 = $1.00 iU.S. = 15% If the interest parity condition is expected to hold, interest rates in Japan should equal 13.10
https://www.chegg.com/homework-help/questions-and-answers/following-data-given-et-yen-105-100-et-1-yen-103-100-ius-14-interest-parity-condition-expe-q28447060
Given the exchange rates and prices of a digital music player (produced in the United States) on the following two dates: Date Exchange Rate Price of a Digital Music Player June 30, 2005 yen120 = $1.00 $119 June 30, 2006 yen110 = $1.00 $119
https://www.chegg.com/homework-help/questions-and-answers/given-exchange-rates-prices-digital-music-player-produced-united-states-following-two-date-q27996725
Using the line drawing tool, show the effect of an increase in the foreign interest rate i Superscript Upper F. Properly label your new line. Carefully follow the instructions above, and only draw the required object.
https://www.chegg.com/homework-help/questions-and-answers/suppose-increase-capital-stock-1-using-line-drawing-tool-show-effect-change-labor-market-p-q34443117?trackid=666c738e947d&strackid=2cae8315a8aa&ii=3
A case for capital inflow controls can be made because these inflows:
may cause a lending boom and lead to excessive risk taking.
A criticism of the activities of the IMF is that it creates a serious ________ problem because depositors and other creditors of banking institutions expect that they will be protected if a crisis occurs.
moral hazard
What is an advantage of currency boards over a monetary policy that uses only an exchange-rate target?
Inflation-fighting credibility.
