Macroeconomics Final Exam
Assume that the legally required reserve is 15 percent and commercial banks choose to hold additional excess reserves equal to 5 percent of any newly acquired deposits. Under these circumstances the monetary multiplier for the commercial banking system is:
5.0
Troubled Asset Relief Program (TARP)
A 2008 federal government program that authorized the US Treasury to loan up to $700 billion to critical financial institutions and other US firms that were in extreme financial trouble and therefore at high risk of failure
Monetary Policy
A central bank's charging of the money supply to influence interest rates and assist the economy in achieving price-level stability, full employment, and economic growth
Savings account
A deposit in a commercial bank or thrift institution on which interest payments are received; generally used for saving rather than daily transactions; a component of the M2 money supply
Commercial Banks
A firm that engages in the business of banking (accepts deposits, offers checking accounts, and makes loans)
Taylor Rule
A monetary rule proposed by economist John Taylor that would stipulate exactly how much the Federal Reserve System should change real interest rates in response to divergences of real GDP from potential GDP and divergences of actual rates of inflation from a target rate of inflation
M2
A more broadly defined money supply, equal to M1 plus noncheckable savings accounts (including money market deposit accounts), small time deposits (deposits of less than $100,000), and individual money market mutual find balances
Quantitative Easing
An open-market operation in which bonds are purchased by a central bank in order to increase the quantity of excess reserves held by commercial banks and thereby (hopefully) stimulating the economy by increasing the amount of lending undertaken by commercial banks; undertaken when interest rates are near zero and, consequently, it is not possible for the central bank to further stimulate the economy with lower interest rates due to the zero lower bound problem
Checkable Deposits
Any deposit in a commercial bank or thrift institution against which a check may be written
Legal Tender
Any form of currency by law that must be accepted by creditors (lenders) for the settlement of financial debt; A nation's official currency is legal tender within its own borders
Medium of Exchange
Any items sellers generally accept and buyers generally use to pay for a good or service; money; a convenient means of exchanging goods and services without engaging in barter
Excess Reserves
The amount by which a commercial bank's or thrift institution's actual reserves exceeds its required reserves; actual reserves minus required reserves
Asset Demand for Money
The amount of money people want to hold as a store of value; this amount varies inversely with the interest rate
Transactions Demands for Money
The amount of money people want to hold for use as a medium of exchange (to make payments); varies directly with Nominal GDP
Prime Interest Rate
The benchmark interest rate that banks use as a reference point for a wide range of loans to businesses and individuals
Financial Services Industry
The broad category of firms that provide financial products and services to help households and businesses earn interest, receive dividends, obtain capital gains, insure against losses, and plan for retirement. Includes commercial banks, thrift institutions, insurance companies mutual fund companies, person funds, investment banks, and securities firms
Zero Lower Bound Problem
The constraint placed on the ability of a central bank to stimulate the economy through lower interest rates by the fact that nominal interest rates cannot be driven lower than zero (because if interest rates were negative, people would be unwilling to put their money into banks due to the fact that deposit balances would decrease over time due to the negative interest rate)
Vault Cash
The currency a bank has on hand in its vault and cash drawers
Liquidity
The degree to which an asset can be converted quickly into cash with little or no loss of purchasing power; Money is said to be perfectly liquid, whereas other assets have lesser degrees of liquidity
Reserve Ratio
The fraction of checkable deposits that each commercial bank or thrift institution must hold as reserves at its local Federal Reserve Bank or in its own bank vault; also called the reserve requirement
Actual Reserves
The funds that a bank has on deposit at the Federal Reserve Bank plus any vault cash the bank has
Required Reserves
The funds that each commercial bank and thrift institution must deposit with its local Federal Reserve Bank (or hold as vault cash) to meet the legal reserve requirement; a fixed percentage of each bank's or thrift's checkable deposits
Cyclical Asymmetry
The idea that monetary policy may be more successful in slowing expansions and controlling inflation than in extracting the economy from severe recession
Federal Funds Rate
The interest rate that US banks and other depository institutions charge one another on overnight loans made out of their excess reserves
Discount Rate
The interest rate that the Federal Reserve Banks charge on the loans they make to commercial banks and thrift institutions
Wall Street Reform and Consumer Protection Act of 2010
The law that gave the authority to the Federal Reserve System (the Fed) to regulate all large financial institutions, created an oversight council to look for growing risk to the financial system, established a process for the federal government to sell off the assets of large failing financial institutions, provided federal regulatory oversight of asset-backed securities, and created a financial consumer protection bureau within the Fed
M1
The most narrowly defined money supply, equal to currency in the hands of the public and the checkable deposits of commercial banks and thrift institutions
Monetary Multiplier
The multiple of its excess reserves by which the banking system can expand checkable deposits and thus the money supply by making new loans (or buying securities); equal to 1 divided by the reserve requirement
Interest on Reserves
The payment by a central bank of interest on the deposits (required reserves plus excess reserves, if any) held by commercial banks at the central bank
Interest
The payment made for the use of (borrowed) money
Moral Hazard Problem
The possibility that individuals or institutions will change their behavior as the result of a contact or agreement. Example: A bank whose deposits are insured against losses may make riskier loans and investments
Securitization
The process of aggregating many individual financial debts, such as mortgages or student loans, into a pool and then issuing new securities (typically bonds) backed by the pool. The holders of the new securities are entitled to receive the debt payments made on the individual financial debts in the pool
Open-Market Operations
The purchases and sales of US government securities that the Federal Reserve System undertakes in order to influence interest rates and the money supply; one method by which the Federal Reserve implements monetary policy
Board of Governors
The seven-member group that supervises and controls the money and banking system of the United States; Also called the Federal Reserve Board
Other things equal, if the required reserve ratio was lowered: A. banks would have to reduce their lending. B. the size of the monetary multiplier would increase. C. the actual reserves of banks would increase. D. the Federal funds interest rate would rise
The size of the monetary multiplier would increase
Total Demand for Money
The sum of the transactions demand for money and the asset demand for money
The opportunity cost of holding money: A. is zero because money is not an economic resource. B. varies inversely with the interest rate. C. varies directly with the interest rate. D. varies inversely with the level of economic activity.
Varies directly with the interest rate
The asset demand for money: A. is unrelated to both the interest rate and the level of GDP. B. varies inversely with the rate of interest. C. varies inversely with the level of real GDP. D. varies directly with the level of nominal GDP.
Varies inversely with the rate of interest
A commercial bank has actual reserves of $50,000 and checkable deposits of $200,000, and the required reserve ratio is 20%. The excess reserves of the bank are:
$10,000
A commercial bank has checkable deposit liabilities of $400,000, reserves of $150,000, and a required reserve ratio of 25%. The amount by which a single commercial bank and the amount by which the banking system can increase loans are, respectively:
$50,000 and $200,000
Time Deposits
An interest-earning deposit in a commercial bank or thrift institution that the depositor can withdraw without penalty after the end of a specified period
Subprime Mortgage Loans
High-interest-rate loans to home buyers with above-average credit risk
Forward Commitment
A policy statement by a central bank indicating that it will continue to pursue a monetary policy action until a certain date is reached or until some particular threshold has been reached (for instance, the unemployment rate falling below 7%)
Thrift Institutions
A savings and loan association, mutual savings bank, or credit union
Liquidity Trap
A situation in a severe recession in which the central bank's injection of additional reserves into the banking system has little or no additional positive impact on lending, borrowing, investment, or aggregate demand
Unit of Account
A standard unit in which prices can be stated and the value of goods and services can be compared; one of the three functions of money
Balance Sheet
A statement of the assets, liabilities, and net worth of a firm or individual at some given time
Fractional Reserve Banking System
A system in which commercial banks and thrift institutions hold less than 100 percent of their checkable-deposit liabilities as reserves of currency held in bank vaults or as deposits at the central bank
Store of Value
An asset set aside for future use; one of the three functions of money
What is one significant characteristic of fractional reserve banking? A. Banks are not subject to "panics" or "runs." B. Banks use deposit insurance for loans to customers C. Bank loans will be equal to the amount of gold on deposit D. Banks can create money through lending their reserves
Banks can create money through lending their reserves
Token Money
Bills or coins for which the amount printed on the currency ears no relationship to the value or the paper or metal embodied within it; for currency still circulating, money for which the face value exceeds the commodity value
Mortgage-Backed Securities
Bonds that represent claims to all or part of the monthly mortgage payments from the pools of mortgage loans made by leaders to borrowers to help them purchase residential property
Which is considered a strength of monetary policy compared to fiscal policy? A. The ability to increase the budget deficit B. The ability to decrease the budget surplus C. Its protection from political pressure D. It is sluggish
Its protection from political pressure
When a check is cleared against a bank, it will lose: A. Cash and securities B. Checkable deposits and reserves C. Reserves and capital stock D. Loans and demand deposits
Checkable deposits and reserves
If the interest rate increases, there will be a(n): A. Decrease in the amount of money held as assets B. Decrease in the transactions demand for money C. Increase in the transactions demand for money D. Increase in the amount of money held as assets
Decrease in the amount of money held as assets
A newspaper headline reads: "Fed Cuts Federal Funds Rate for Fifth Time This Year." This headline indicates that the Federal Reserve is most likely trying to: A. Reduce inflation in the economy B. Raise interest rates C. Ease monetary policy D. Tighten monetary policy
Ease monetary policy
Restrictive Monetary Policy
Federal Reserve System action to reduce the money supply, increase interest rates, and reduce inflation; a tight money policy
Expansionary Monetary Policy
Federal Reserve System actions to increase the money supply, lower interest rates, and expand real GDP; an easy money policy
In recent years, the Fed often communicated its intentions to restrict or expand monetary policy by announcing a change in targets for the: A. Exchange rate B. Federal funds rate C. Prime interest rate D. Consumer price index
Federal funds rate
Near-Monies
Financial assets that are not themselves and medium of exchange but that have extremely high liquidity and thus can be readily converted into money; Includes noncheckable savings accounts, time deposits, and short-term US government securities plus savings bonds
Assume that Johnson deposits $350 of currency in his account in the XYZ bank. Later the same day Swanson negotiates a loan for $2,000 at the same bank. In what direction and by what amounts has the supply of money changed?
Increase by $2000
A contraction of the money supply: A. increases the interest rate and decreases aggregate demand. B. increases both the interest rate and aggregate demand. C. lowers the interest rate and increases aggregate demand. D. lowers both the interest rate and aggregate demand.
Increase the interest rate and decreases aggregate demand
If the amount of money demanded exceeds the amount supplied, the: A. demand-for-money curve will shift to the left. B. money supply curve will shift to the right. C. interest rate will rise. D. interest rate will fall.
Interest rate will rise
Money Market Deposit Account (MMDA)
Interest-bearing accounts offered by commercial banks and thrift institutions that invest deposited funds into a variety of short-term securities. Depositors may write checks against their balances, but there are minimum-balance requirements as well as limits on the frequency of check writing and withdrawals
Zero Interest Rate Policy (ZIRP)
Monetary policy in which a central bank sets nominal interest rates at or near zero percent per year in order to stimulate the economy
Money Market Mutual Funds
Mutual funds that invest in short-term securities. Depositors can write checks in minimum amounts or more against their accounts
Federal Reserve Notes
Paper money issued by the Federal Reserve Bank
Federal Reserve System
The US central bank, consisting of the Board of Governors of the Federal Reserve and the 12 Federal Reserve Banks, which controls the lending activity of the nation's banks and thrifts and thus the money supply; commonly referred to as the "Fed"
Federal Reserve Banks
The 12 banks chartered by the US government that collectively act as the central bank of the US. They set monetary policy and regulate the private banking system under the direction of the Board of Governors and the Federal Open Market Committee. Each of the 12 is a quasi-public bank and acts as a banker's bank in its designated geographic region
Federal Open Market Committee (FOMC)
The 12-member group within the Federal Reserve System that decides US monetary policy and how it is executed through open-market operations (in which the Fed buys and sells US government securities to adjust the money supply)
The level of GDP will tend to increase when: A. Reserve requirements are increased B. There is an increase in the discount rate C. The Federal Reserve buys government securities in the open market D. The Federal Reserve sells government securities in the open market
The Federal Reserve buys government securities in the open market