Money and banking final

You have savings accounts at two separately FDIC-insured banks. At one of the banks your account has a balance of $200,000. At the other bank the account balance is $60,000. If both banks fail, you will receive A) $250,000. B) $60,000. C) $260,000. D) $200,000.

$260,000

You have savings accounts at two separately FDIC-insured banks. At one of the banks your account has a balance of $200,000. At the other bank the account balance is $60,000. You find out the banks are going to merge. If this happens and the merged bank fails, you would receive A)$250,000. B)$60,000. C)$260,000. D)$200,000.

A) $250,000

Over very long periods, U.S. real economic growth has averaged around A)3 percent per year. B)1 percent per year. C)5 percent per year. D)7 percent per year.

A) 3 percent per year.

In the U.S., the authority to issue currency is held by the A) Federal Reserve. B) U.S. Treasury. C) Office of the Comptroller of the Currency. D) U.S. Mint.

A) Federal Reserve.

Which one of the following statements is true? A)Printing currency can be a profitable venture for a government. B)Printing currency, while necessary, is a losing venture for a government. C)Printing too much money usually leads to lower prices. D)In the modern economy the amount of money created has no effect on prices.

A) Printing currency can be profitable venture for a government.

The relationship between stability and economic growth is best summarized by which one of the following statements? A)Stability results in higher output growth rates. B)Inflation volatility results in higher output growth rates. C)There is no correlation between the volatility in growth rates and annual output growth. D)The more volatile the growth rate, the higher is the annual output growth.

A) Stability results in higher output growth rates.

The central bank for the euro area tries to achieve accountability and transparency through A)a standard numerical objective for inflation over the medium term. B)a specific target for unemployment and economic growth. C)following the monetary policy guidance of the European Parliament. D)a specific target for the dollar euro exchange rate.

A) a standard numerical objective for inflation over the medium term.

The interest rate the Fed charges for secondary credit is A)above the primary discount rate. B)below the market federal funds rate. C)below the primary discount rate. D)equal to the market federal funds rate.

A) above the primary discount rate.

Beginning in July of 2018, President Donald Trump openly and frequently criticized the Federal Reserve and its Chairman Jay Powell. Blatantly undermining the independence of the Fed in this way would likely A)add a risk premium, driving down prices of U.S. assets. B)cause the Fed to change course and move in the opposite direction of Trump's wishes. C)result in the Fed carrying out the monetary policy recommended by President Trump. D)illustrate the strength of the U.S. economy and encourage investment from abroad.

A) add a risk premium, driving down prices of U.S. assets.

Interest rate volatility is a problem because it A) adds to uncertainty, thereby diminishing an investment. B) decreases risk. C) can impact productivity in a positive way. D) can make financial decisions less difficult.

A) adds to uncertainty, thereby diminishing an investment.

Currently the requirement of holding a non-interest-bearing reserve account at the Fed must be met by A)all banks, member or not. B)only member banks. C)member banks and nonmember banks with over $100 million in assets. D)only nationally chartered banks.

A) all banks, member of not.

Each of the Reserve Banks has a president who is A)appointed by the bank's board of directors but approved by the board of governors. B)appointed by the board of governors but approved by the bank's board of directors. C)elected by the commercial banks in their district. D)selected from the Board of Directors.

A) appointed by the bank's board of directors but approved by the board of governors.

A bank supervisor examines the bank's portfolio of loans to see if the loans are being repaid in a timely manner. In terms of the CAMELS criteria, this would be part of rating the bank's A)asset quality. B)losses. C)management. D)earnings.

A) asset quality.

Reserve demand becomes horizontal at the IOER rate because A) banks will not make loans at less than the IOER rate. B) banks must earn more than the IOER rate to lend. C) the reserve supply is always set by the Fed so that the federal funds rate is greater than the IOER rate. D) the IOER rate is the upper bound of the target federal funds rate.

A) banks will not make loans as less than the IOER rate.

The stability of the financial system is enhanced by the ability of central banks to A)be a lender of last resort. B)provide loans to insolvent banks. C)provide deposit insurance. D)convert poorly run banks into branches of the central bank.

A) be a lender of last resort.

Most economists agree that a well-designed central bank would A)be independent of political pressure. B)make its policy actions difficult to interpret. C)be accountable only to other banks. D)be run by one key policy maker.

A) be independent of political pressure

One reason that financial regulations restrict the assets that banks can own is to A)combat the moral hazard that government safety nets provide. B)limit the growth rate of banks. C)prevent banks from being too profitable. D)keep banks from spending lavishly on perks for executives.

A) combat the moral hazard that government safety nets provide

Each of the following is a monetary policy action conducted by any of the regional Federal Reserve banks except which action? A)conducting open market operations from their banks B)participating in FOMC meetings C)participating in setting the discount rate D)making discount loans

A) conducting open market operations from their banks

Use the following formula for the Taylor rule target federal funds rate = natural rate of interest + current inflation + ½(inflation gap) +½(output gap) to determine what would happen if the inflation rate in the economy were to fall by 2percent below the target inflation rate. Then, the target federal funds rate would A)decrease by 3.0percent. B)remain at 2.5percent. C)decrease by 1.0percent. D)increase by 1.0percent.

A) decrease by 3.0 percent.

In the United States, loans made by Federal Reserve to banks are A)discount loans. B)reserves. C)discount loans and reserves. D)discount loans and foreign exchange reserves.

A) discount loans.

Which one of the following would not be considered an unconventional monetary policy tool? A)discount rate B)policy duration commitment C)quantitative easing D)credit easing

A) discount rate

Exchange rate stability is likely to be a more important goal for the central banks of A)emerging market economies than the central bank of the United States. B)the United States and Japan than most small developing countries. C)countries where exports and imports make up a small total of all economic activity. D)large, closed economies.

A) emerging market economies than the central bank of the United States.

Contagion is the A)failure of one bank spreading to other banks through depositors withdrawing of funds. B)phenomenon that if one bank loan defaults it will cause other bank loans to default. C)rapid contraction of investment spending that occurs when interest rates are increased by the Federal Reserve. D)rapid inflation that results from the printing of money.

A) failure of one bank spreading to other banks through depositors withdrawing of funds.

The interest rate that the FOMC currently chooses to control is the A)federal funds rate. B)30-year Treasury bond rate. C)discount rate. D)prime rate.

A) federal funds rate.

Under the purchase-and-assumption method of dealing with a failed bank, the FDIC A)finds another bank to take over the insolvent bank. B)takes over the day to day management of the bank. C)sells the failed bank to the Federal Reserve. D)sells off the profitable loans of the failed bank in an open auction.

A) finds another bank to take over the insolvent bank.

A moral hazard situation arises in the lender of last resort function because a central bank A) finds it difficult to distinguish illiquid from insolvent banks. B) usually will only make a loan to a bank after it becomes insolvent. C) usually undervalues the assets of a bank in a crisis. D) is the first place a bank facing a crisis will turn.

A) finds it difficult to distinguish illiquid from insolvent banks.

Governments employ three strategies to contain the risks created by government safety nets. These include each of the following, except which one? A)government taxation B)government regulation C)government supervision D)formal bank examination

A) government taxation

The specific goals of central banks include all of the following except which one? A) high stock prices B) low and stable inflation C) high and stable real growth D) a stable exchange rate

A) high stock prices

If the demand for reserves remains constant and the market federal funds rate is below the target rate, the Fed would A)increase the IOER (interest on excess reserves). B)decrease the IOER (interest on excess reserves). C)do nothing and let the market work. D)increase the supply of reserves.

A) increase the IOER (interest on excess reserves).

As the inflation rate A)increases, inflation becomes less stable. B)decreases, inflation becomes less stable. C)decreases, inflation becomes more volatile. D)increases, inflation becomes more stable.

A) increases, inflation becomes less stable.

The reason that a run on a single bank can turn into a bank panic that threatens the entire financial system is A)information asymmetries. B)moral hazard. C)the lack of regulation. D)the increased reliance on web-based funds transfers.

A) information asymmetries.

The moral hazard problem caused by government safety nets A)is greater for larger banks. B)is greater for smaller banks. C)is pretty constant across banks of all sizes. D)only exists for banks with high leverage ratios.

A) is greater for larger banks.

If the government did not offer the too-big-to-fail safety net, then A)large banks would be more disciplined by the potential loss of large corporate accounts. B)the moral hazard problem of insuring large banks would increase. C)the moral hazard problem of insuring large banks would not be affected. D)the FDIC deposit insurance limits would have to be raised.

A) large banks would be more disciplined by the potential loss of large corporate accounts.

Discount lending is part of the Fed's function of A)lender of last resort. B)open market operations. C)the government's bank. D)regulation of banking.

A) lender of last resort.

Each of the following items would appear as liabilities on the central bank's balance sheet except which one? A)loans B)currency C)the government's account D)accounts of the commercial banks

A) loans

Unconventional policy tools are useful when A)lowering the target interest rate to zero is not sufficient to stimulate the economy. B)conventional policy tools result in shifts in the economy that are too large. C)conventional policy tools support only growth in the economy. D) restrictive monetary policy is necessary.

A) lowering the target interest rate to zero is not sufficient to stimulate the economy.

The best way for a government to stop the failure of one bank from turning into a bank panic is to A)make sure solvent institutions can meet the withdrawal demands of depositors. B)declare a bank holiday until solvent banks can acquire adequate liquidity. C)limit the withdrawals of depositors. D)provide zero-interest rate loans to all banks regardless of net worth.

A) make sure solvent institutions can meet the withdrawal demand of depositors.

One reason for having a monetary policy framework is that it A) makes clear what specific goals the central bankers are pursuing. B) provides leeway for central bankers to change their goals without communicating the change and disrupting financial markets. C) provides central bankers the secrecy needed to perform their jobs effectively. D) can make goal setting vague enough so that the central bankers can always claim success.

A) makes clear what specific goals the central bankers are pursuing.

The means for assuring accountability and transparency A)may differ across the central banks of different countries. B)are the same for all successful central banks. C)involve setting specific numerical targets so there is no confusion as to what the goal is. D)are opposite to each other so that increasing one means decreasing the other.

A) may differ across the central banks of different countries.

If prices are not stable, A)money becomes less useful as a store of value. B)money performs better as a unit of account. C)it may be an inconvenience, but resources are still allocated efficiently. D)prices become highly useful for conveying information.

A) money becomes less useful as a store of value.

If Bank A sells a $100,000 U.S. Treasury bond to the Fed, Bank A's required reserves will A) not change. B) increase by $100,000. C) increase but by less than $100,000. D) decrease.

A) not change.

The measure for the actual rate of inflation used in the Taylor rule is the A) personal consumption expenditure index. B) GDP deflator. C) consumer price index. D) producer price index.

A) personal consumption expenditure index.

The reasons for the government to get involved in the financial system include each of the following, except which one? A)preserve a bank's monopoly position B)protect investors C)ensure stability of the financial system D)protect bank customers from monopolistic exploitation

A) preserve a bank's monopoly position

A long-standing goal of financial regulators has been to A)prevent banks from growing too big and powerful. B)minimize the competition that banks face. C)encourage banks to grow as large as possible. D)discourage small rural banks.

A) prevent banks from growing too big and powerful.

Many governments give their central bank control over issuing currency because A)printing currency can be profitable for a government, providing a strong incentive to print too much. B)having large amounts of currency can lead to lower rates of inflation. C)central banks use the profits from issuing currency to finance their operations. D)the only way to distribute currency to banks is through the central bank.

A) printing currency can be profitable for a government, providing a strong incentive to print too much.

The creation of the Federal Reserve in 1913 A)provided the opportunity for lender of last resort but not the guarantee that it would be used. B)guaranteed the Federal Reserve would always act as lender of last resort. C)eliminated bank panics in the United States. D)was in response to the Great Depression in the United States.

A) provided the opportunity for lender of last resort but not the guarantee that it would be used.

Credit unions are regulated by a combination of agencies, which includes A)state authorities. B)the Federal Reserve. C)the Federal Deposit Insurance Corporation. D)the Office of the Comptroller of the Currency.

A) state authorities.

One argument for an independent central bank is that A) successful monetary policy requires a long time horizon, usually well beyond the next election of most public officials. B) without independence, competent people would not take a position in a central bank. C) the central bank usually hires more competent individuals than the Treasury Department or other finance ministries. D) central bankers have a short-run focus that usually corrects problems faster.

A) successful monetary policy requires a long time horizon, usually well beyond the next election of most public officials.

When the Federal Reserve was unable to stem the bank panics of the 1930s, Congress responded by A)taking over the lender of last resort function and assigning this function to the U.S. Treasury. B)ordering the printing of tens of billions of dollars of additional currency. C)creating the FDIC and offering deposit insurance. D)declaring a bank holiday and closing banks for 30 days

A) taking over the lender of last resort function and assigning this function to the U.S. Treasury.

In the United States, monetary policymakers A)tend to have a long view while fiscal policymakers tend to ignore the long-run inflationary ramifications of their actions. B)focus most of their attention on the money supply and the exchange rate while fiscal policymakers tend to focus on inflation and unemployment. C)tend to focus less on pleasing constituents while fiscal policymakers are more willing to sacrifice the short run for the long run. D)observe monetary policy independence because it is enshrined in the U.S. Constitution.

A) tend to have a long view while fiscal policymakers tend to ignore the long-run inflationary ramifications of their actions.

The efficient allocation of resources requires A)that prices reflect the relative value of goods and services. B)that inflation not exceed three percent a year. C)deflation. D)prices to remain constant.

A) that prices reflect the relative value of goods and services.

Which one of the following is not involved in regulating savings banks and savings and loans? A) the Federal Reserve System B) the Comptroller of the Currency C) the Federal Deposit Insurance Corporation D) state authorities

A) the Federal Reserve system

The ability to create money means the central bank can control A)the availability of money and credit in a country's economy. B)tax revenue. C)the unemployment rate. D) government expenditures.

A) the availability if money and credit in a country's economy.

To make sure the U.S. President cannot unduly influence the Board of Governors A)the terms of the governors are staggered. B)the law prevents a president from appointing more than one governor. C)the terms of the governors are ten years long. D)only three governors can be replaced in any one year.

A) the terms of the governors are staggered.

One problem for the Federal Reserve regarding setting policy stems from the fact that A)there are multiple goals that may be inconsistent with each other. B)there are more policy instruments than goals. C)Congress sets very tight goal ranges that the central bankers must hit. D)the membership of its governing board changes so often.

A) there are multiple goals that may be consistent with each other.

The existence of a lender of last resort creates moral hazard for bank managers because A)they have an incentive to take too much risk in their operations. B)officials are likely to undervalue the bank's portfolio of assets. C)they are less likely to apply for a direct loan from the central bank. D)banks seek loans from the central bank only after exploring other options.

A) they have an incentive to take too much risk in their operations.

Central bank accountability means that central bankers A)will report on the progress of goals that are established by politicians. B)are not accountable to any elected officials. C)are only accountable to the banks in their respective countries. D)must hold press conferences to explain their monetary policy views.

A) will report on the progress of goals that are established by politicians.

You hold an FDIC-insured savings account at your neighborhood bank. Your current balance is $275,000. If the bank fails you will receive A)$275,000. B)$250,000. C)$100,000. D)$125,000.

B) $250,000

The Federal Reserve was created in A)1929. B)1913. C)1909. D)1945.

B) 1913.

In a survey of forecasters toward the end of the financial crisis of 2007-2009, forecast inflation rates for the next decade in the United States were A)0 percent. B)2 percent. C)4 percent. D)7 percent.

B) 2 percent.

Use the following formula for the Taylor rule to determine the target federal funds rate. target federal funds rate = natural rate of interest + current inflation + ½(inflation gap) +½(output gap) where the current rate of inflation is 4percent, natural rate of interest is 2percent, target rate of inflation is 2percent, and output is 3percent above its potential, the target federal funds rate is A) 7percent. B) 8.5percent. C) 5percent. D) 4.5percent.

B) 8.5 percent.

start chapter 15 The central bank in the United States is the A)Bank of America. B)Federal Reserve. C)U.S. Treasury. D)Bank of the United States.

B) Federal Reserve.

Savings banks and savings and loans are regulated by a combination of agencies, which includes the A)Federal Reserve System. B)Office of the Comptroller of the Currency. C)Securities and Exchange Commission. D)Internal Revenue Service.

B) Office of the Comptroller of the Currency.

Which one of the following statements is not true? A)Periods of growth above the potential level are periods of high employment. B)Periods of growth below the potential level are periods of low unemployment. C)Periods of growth above the potential level are periods of low unemployment. D)Periods of growth below the potential level are periods of high unemployment.

B) Periods of growth below the potential level are periods of low unemployment.

A time-consistent policy is one where A) actions are taken each month on the same day. B) a future policymaker lacks the opportunity or incentive to renege. C) there is means and motivation to break the commitment in the future. D) policymakers operate with complete discretion now and in the future.

B) a future policymaker lacks the opportunity or incentive to renege.

The Financial Crisis of 2007-08 occurred in three distinct phases which, in the order of occurrence, are A)a solvency crisis, a liquidity crisis, and government intervention. B)a liquidity crisis, a solvency crisis, and a recapitalization of the system. C)government intervention, a liquidity crisis, and a recapitalization of the system. D)a recapitalization of the system, a solvency crisis, and government intervention.

B) a liquidity crisis, a solvency crisis, and a recapitalization of the system.

The original Basel Accord was A) the basic set of guidelines the Federal Reserve applies in regulating domestic banks. B) a set of guidelines for basic capital requirements for internationally active banks. C) an agreement between state and federal regulators to try to have one standard set of guidelines for all banks. D) a set of guidelines applied only to international banks operating with U.S. boundaries.

B) a set of guidelines for a basic capital requirement for internationally active banks.

Today, most central banks announce their policy actions A)one year after the policy is put in place. B)almost immediately. C)within a three- to five-year "window". D)usually six months after the policy is put in place.

B) almost immediately.

As a result of government-provided deposit insurance, the ratio of assets to capital for commercial banks since the 1920s has A)just about doubled. B)almost tripled. C)not changed. D)decreased.

B) almost tripled.

The Federal Reserve's Fedwire system is used mainly to provide A)a means for foreign banks to transfer funds to U.S. banks. B)an inexpensive and reliable way for financial institutions to transfer funds to one another. C)an inexpensive way for individuals to pay their bills online. D)a means for the Treasury to collect tax payments.

B) an inexpensive and reliable way for financial institutions to transfer funds to one another.

The effective lower bound for nominal interest rates is A) zero. B) an unknown level below zero. C) a rate consistent with two percent inflation. D) a rate consistent with the full employment output level of economic activity.

B) an unknown level below zero.

Reserves are A)assets of the central bank and liabilities of commercial banks. B)assets of commercial banks and liabilities of the central bank. C)liabilities of commercial and central banks. D)assets and liabilities for the central bank.

B) assets of commercial banks and liabilities of the central bank.

The federal funds rate is the interest rate A) the Fed charges banks who borrow from it. B) banks charge each other for overnight loans on excess reserves held at the Fed. C) the U.S. Treasury charges banks that need emergency funds. D) the FDIC charges banks that need to borrow from it to meet depositor demands.

B) banks charge each other for overnight loans on excess reserves held at the Fed.

Banks serve essential functions in an economy, but their fragility arises from the fact that A) the government controls banks. B) banks provide liquidity to depositors. C) banks must screen and monitor borrowers. D) only healthy banks are immune to depositors' loss of confidence.

B) banks provide liquidity to depositors

The objectives set for the Fed by Congress are A) very specific, which adds to the Fed's accountability. B) by design, quite vague, allowing the Fed to really set its own goals. C) specific regarding inflation, but vague on all other goals. D) specific on the growth rate for the economy, but vague on all other objectives.

B) by design, quite vague, allowing the Fed to really set its own goals.

If a government were to find that it cannot raise taxes any further, and it cannot borrow any further from financial markets, the government A)cannot increase its spending any further. B)can increase spending by having the central banks purchase its bonds. C)is in default. D)can decrease the amount of money in circulation.

B) can increase spending by having the central banks purchase its bonds.

In the United States, monetary policy is formed by A)an individual advised by a close group of people. B)committee. C)the president and approved by Congress. D)the Chairman of the Federal Reserve and can only be overturned by the presidents of the Regional Federal Reserve Banks.

B) committee

The types of loans the Fed makes consist of each of the following, except which one? A)primary credit B)conditional credit C)seasonal credit D)secondary credit

B) conditional credit

To be independent, a central bank must have A) policies that can be overturned only by the president. B) control of its own budget. C) board members who are appointed for very short terms. D) the chairperson serve as a member of the president's cabinet.

B) controls of its own budget.

Operation Bernhard was a German operation to attack the United Kingdom by using A)German Panzers. B)counterfeit British pounds. C)tariffs and other trade barriers to limit British exports to Germany. D)sophisticated economic policy to discredit the British Parliament.

B) counterfeit British pounds.

Empirical research seems to verify that A)countries that have less independent central banks experience lower rates of inflation. B)countries with high rates of inflation seem to have central banks with low levels of independence. C)there is no relationship between the independence of central banks and rates of inflation. D)the rate of inflation seems to vary directly with the amount of central bank independence.

B) countries with high rates of inflation seem to have central banks with low levels of independence.

The ability to control inflation expectations is most closely related to a central bank's A) transparency. B) credibility. C) accountability. D) willingness to communicate.

B) credibility.

Which one of the following is a liability on the central bank's balance sheet? A) loans B) currency C) securities D) foreign exchange reserves

B) currency

One reason a bank's officer may be reluctant to write off a past-due loan is that it will A)increase the bank's liabilities. B)decrease the bank's assets and capital. C)increase the bank's liabilities and assets, requiring more capital to be held. D)make the bank's accounts less transparent.

B) decrease the bank's assets and capital

The government provides deposit insurance which protects A)large corporate deposit accounts in excess of the $250,000 deductible. B)depositors for up to $250,000 should a bank fail. C)the deposits of banks in their Federal Reserve accounts. D)the deposits that people have at federally chartered banks.

B) depositors for up to $250,000 should a bank fail.

The market for reserves derives from the fact that A)reserves pay a relatively high return. B)desired reserves do not always equal actual reserves. C)the Fed refuses to lend to banks. D)banks do not want excess reserves

B) desired reserves do not always equal actual reserves.

The purpose of the government's safety net for banks is to do each of the following, except which one? A) protect the integrity of the financial system B) eliminate all risk that investors face C) stop bank panics D) improve the efficiency of the economy

B) eliminate all risk that investors face

Policy responses were critical in arresting the Financial Crisis of 2007-08 and promoting recovery. The responses used include all of the following except which one? A)macro-prudential stress tests B)elimination of interest rate floors C)use of taxpayer funds to recapitalize the financial system D)introduction of unconventional tools such as quantitative easing

B) elimination of interest rate floors

Quantitative easing is A) statements today about policy targets in the future. B) expansion of the supply of aggregate reserves beyond the amount needed to maintain the policy rate target. C) asset purchases that shift the composition of the Fed's balance sheet. D) expansion of the demand for aggregate reserves to drive down the IOER.

B) expansion of the supply of aggregate reserves beyond the amount needed to maintain the policy rate target.

A central bank holds foreign exchange reserves for A) diversification purposes. B) foreign exchange interventions. C) safekeeping. D) diversification and safekeeping.

B) foreign exchange interventions.

On the morning of September 11, 2001, terrorists attacked the United States and caused enormous disruptions. In assessing the performance of the Fed and the impact on financial systems in hindsight, this is a story of A)inaction by the Federal Reserve. B)great success by the Federal Reserve. C)appropriate actions taken too late by the Federal Reserve. D)catastrophic outcomes due to a lack of backup systems at the Federal Reserve.

B) great success by the Federal Reserve.

When healthy banks fail due to widespread bank panics, those who are likely to be hurt are A)government regulators. B)households and small businesses. C)the FDIC. D)the Federal Reserve.

B) households and small businesses.

The FOMC controls the real interest rate A)if inflation changes quickly. B)if inflation doesn't change quickly. C)only if it adjusts the federal funds rate to match the changes in the rate of inflation. D)only on an annual basis.

B) if inflation doesn't change quickly.

In the United States, one problem with central bank independence is that A)it is almost impossible to obtain because Congress controls the budget of the Federal Reserve. B)in a representative democracy, monetary policymakers must be held accountable to the public. C)central bank independence has not produced favorable results. D)the central bank can control policy, but the U.S. Treasury controls the money supply.

B) in a representative democracy, monetary policymakers must be held accountable to the public.

In 1936, when the Fed doubled the reserve requirements, bank executives A)allowed their excess reserves to decline. B)increased excess reserves to the new proposed level in advance of the change in requirements. C)maintained the level of excess reserves desired by the Fed. D)increased lending from remaining reserves, causing inflation.

B) increased excess reserves to the new proposal level in advance of the change in requirements.

Stable inflation implies that A) the rate of inflation averaged over many years is zero. B) inflation is predictable. C) the rate of inflation conceals relative price changes. D) there are low rates of unemployment.

B) inflation is predictable.

The correlation between high rates of inflation and economic growth is A)direct; one brings about the other. B)inverse; high inflation usually means low economic growth. C)nonexistent; there is no correlation between these measures. D)direct at low rates of economic growth and inverse at high rates.

B) invers; high inflation usually means low economic growth.

The Chairman of the Board of Governors A)serves a four-year term that cannot be renewed. B)is appointed by the U.S. President, selected from the Board of Governors. C)serves the same four-year term as the U.S. President. D)serves an eight-year term.

B) is appointed by the U.S. President, selected from the Board of Governers.

The idea that central banks should be independent of political pressure is an idea that A)has been around since there were central banks. B)is relatively new. C)every central bank was founded upon. D)became quite popular in the early 1900s.

B) is relatively new.

Which one of the following is not a pillar of the latest Basel Accord? A)a revised set of minimum capital requirements B)it includes liquidity requirements in addition to capital requirements C)it supplements capital requirements based on risk-weighted assets with restrictions on leverage D)uniform international laws for bank regulation

B) it includes liquidity requirements in addition to capital requirements

During a bank crisis, A)officials at the Federal Reserve find it easy to sort out solvent from insolvent banks. B)it is important for regulators to be able to distinguish insolvent from illiquid banks. C)it is easy to determine the market prices of bank's assets. D)a bank will go to the central bank for a loan before going to other banks.

B) it is important for regulators to be able to distinguish insolvent from illiquid banks.

The government's too-big-to-fail policy applies to A)certain highly populated states where a bank run impacts a large percent of the total population. B)large banks whose failure would start a widespread panic in the financial system. C)large corporate payroll accounts held by some banks where many people would lose their income. D)banks that have branches in more than two states.

B) large banks whose failure would start a widespread panic in the financial system.

The 2016 elections in the United States A) brought increased political support for Dodd-Frank. B) led to resistance to Dodd-Frank becoming enshrined in law and regulatory changes. C) ushered in practitioners that supported the additional regulations accompanying Dodd-Frank. D) led to more nonbanks being designated as systemically important financial institutions (SIFIs). End of chapter 14

B) led to resistance to Dodd-Frank becoming enshrined in law and regulatory changes.

The acronym CAMELS, which is the criteria used by supervisors to evaluate the health of banks, includes all of the following except which one? A)asset quality B)losses C)management D)earnings

B) losses

In its role as bank for the U.S. government, the Federal Reserve performs all of the following services except which one? A) issuing new currency B) making discount loans C) maintaining the U.S. Treasury's bank account D) managing U.S. Treasury borrowings

B) making discount loans

One thing that is true about economic policy in the United States is that A)fiscal and monetary policy never conflict. B)monetary and fiscal policy need not, but may, conflict. C)monetary policy ultimately controls fiscal policy since the Fed controls the money supply. D)fiscal policy ultimately controls monetary policy since Congress can control the Fed's budget.

B) monetary and fiscal policy need not, but may, conflict.

Higher than expected inflation will increase the A)real interest rate borrowers pay on fixed rate mortgages. B)nominal amounts people need to save for retirement. C)real interest rate savers earn on fixed rate CDs. D)real interest rates both paid on mortgages and earned on CDs.

B) nominal amounts people need to save for retirement.

An economic rationale for government protection of small investors, in particular, is that A)large investors can better afford losses. B)often small investors cannot adequately judge the soundness of their bank. C)there is inadequate competition to ensure a bank is operating efficiently. D)banks are often run by unethical managers who might exploit small investors.

B) often small investors cannot adequately judge the soundness of their bank.

The supervision of banks includes A)requiring bank officers to attend classes on an annual basis. B)on-site examinations of the bank. C)extensive background checks of all bank officers. D)requiring banks to file monthly reports on their revenues, expenses, and profits.

B) on-site examinations of the bank.

The Fed will make a discount loan to a bank during a crisis A)no matter what condition the bank is in. B)only if the bank is sound financially and can provide collateral for the loan. C)but if the bank doesn't have collateral the interest rate is higher. D)only if the bank would fail without the loan.

B) only if the bank is sound financially and can provide collateral for the loan.

The Federal Reserve's policy regarding announcing its policy decisions has A)always been to announce it immediately because this was part of the original Federal Reserve Act of 1913. B)only recently gone to immediate announcement; until 1994 these policy decisions were secret. C)been to release the decisions immediately since its early failure at preventing the Great Depression. D)changed so that now the Fed does not release its decisions publicly.

B) only recently gone to immediate announcement; until 1994 these policy decisions were secret.

Do depositors of a failed bank generally prefer that the FDIC use the "payoff method" or the "purchase-and-assumption method" for dealing with the failed bank? Depositors would: A) be indifferent between the two since the impacts on depositors are the same in both methods. B) prefer the purchase and assumption method since deposits over $250,000 will also be protected. C) prefer the payoff method since they will have access to their funds earlier. D) prefer the payoff method since it is typically seamless for the depositor.

B) prefer the purchase and assumption method since deposits over $250,000 will also be protected.

In principle, banks are like any other business such that new ones could open up and others close every year. It is problematic, however, if banks fail at the same rate as, say, restaurants because banks A) are too big to fail. B)provide access to the payments system. C)generate much of the tax revenue in the community. D)are typically run by prominent community members.

B) provide access to the payment system.

In its role as the bankers' bank, a central bank performs each of the following except which one? A) providing loans during times of financial distress B) providing deposit insurance C) overseeing commercial banks and the financial system D) managing the payments system

B) providing deposit insurance

Which one of the following incentives promotes more risk of moral hazard? A) eliminating protection of financial institutions that are "too-big-to-fail" B) raising the deposit insurance limit C) allowing smaller financial institutions to fail D) increasing restrictions on lender-of-last-resort loans.

B) raising the deposit insurance limit

A primary goal of central banks is to A)reduce the idiosyncratic risk that impacts specific investments. B)reduce systematic risk. C)keep stock and bond prices high. D)keep inflation rates high.

B) reduce systematic risk.

As a portion of total assets measured in billions of dollars, the largest asset on the Fed's balance sheet is A) gold. B) securities. C) foreign exchange reserves. D) loans.

B) securities.

How many members are on the Board of Governors of the Federal Reserve System? A)twelve, one for each district B)seven C)nine D)fourteen

B) seven

During the financial crisis of 2007-2009 in the United States it was revealed that the function of a lender of last resort had not kept pace with the evolving financial system because A) financial intermediaries had grown sufficiently large so as not to need a lender of last resort. B) shadow banks lacked access to the financial resources available through the lender of last resort. C) banks were sufficiently linked to one another that the need for a lender of last resort had diminished. D) banks had become sufficiently diversified so as to be able to provide for their own liquidity.

B) shadow banks lacked access to the financial resources available through the lender of last resort.

One reason it took so long to have a central bank in the United States is that A)it was not needed. B)states feared centralization of power. C)state currencies worked fine. D)the primarily agrarian economy made it difficult for financial difficulties to become widespread.

B) states feared centralization of power.

Which one of the following would be categorized as an unconventional monetary policy tool? A)the interest rate on excess reserves (IOER) B)targeted asset purchases C)federal funds rate target range D)deposit rate

B) targeted asset purchases

The three branches of the Federal Reserve System include each of the following, except which one? A)the Board of Governors. B)the Federal Deposit Insurance Corporation. C)the Federal Open Market Committee. D)the twelve regional Federal Reserve Banks.

B) the Federal Deposit Insurance Corporations.

Which one of the following is (are) not a permanent voting member(s) on the FOMC? A)the seven Governors of the Fed B)the Secretary of the Treasury C)the President of the Federal Reserve Bank of New York D)the chair of the Board of Governors

B) the Secretary of the Treasury

One way the Fed can inject reserves into the banking system is to increase A) the size of the Fed's balance sheet through purchasing securities. B) the discount rate. C) loans to nonbank corporations. D) the size of the Fed's balance sheet through selling securities.

B) the discount rate.

If your stockbroker gives you bad advice and you lose your investment, A)the government will reimburse you just as it would reimburse depositors if a bank fails. B)the government will not reimburse you for the loss because you are not protected from bad advice by your stockbroker. C)you can recoup your losses through FDIC insurance since these losses would be covered. D)your investment would only be covered by FDIC insurance if the stockbroker was employed by a bank.

B) the government will nor reimburse you for the loss because you are not protected from bad advice by your stockbroker.

Successful monetary policy relies most on A) luck. B) the institutional environment. C) having an ample supply of highly qualified people. D) knowledgeable citizens who know how to react to the policy.

B) the institutional environment.

One lesson learned from the bank panics of the early 1930s is that A)the lender of last resort function almost guarantees that bank panics are a thing of the past. B)the mere existence of a lender of last resort will not keep the financial system from collapsing. C)only the U.S. Treasury can be a true lender of last resort. D)the financial system will collapse without a lender of last resort.

B) the mere existence of a lender of last resort will not keep the financial system from collapsing

Potential output depends on all of the following except which one? A)technology B)the number of firms in the economy C)the size of the capital stock D)the number of people who can work

B) the number of firms in the economy

Financial regulators set capital requirements for banks. One characteristic about these requirements is that A)every bank will have to hold the same level of capital. B)the riskier the asset holdings of a bank, the more capital it will be required to have. C)the more branches a bank has, the more capital it must have. D)the amount of capital required is inversely related to the amount of assets the bank owns.

B) the riskier the asset holding of a bank, the more capital it will be required to have.

Regulators and supervisors of banks are challenged by all of the following except which one? A)globalization of financial services B)the use of new financial instruments that shift risk without shifting ownership C)technological innovation D)reinforcement by Congress of functional and geographic barriers in banking

B) the use of the new financial instruments that shift risk without shifting ownership

Central banks often find that A)they can efficiently pursue all of their goals simultaneously. B)there are tradeoffs that make pursuing all of their goals simultaneously impossible. C)the goal(s) they pursue will be determined by their profitability. D)they must keep their goals secret or else they cannot be attained.

B) there are tradeoffs that make pursuing all of their goals simultaneously impossible.

One of the unique problems that banks face is that A)they hold liquid assets to meet illiquid liabilities. B)they hold illiquid assets to meet liquid liabilities. C)they hold liquid assets to meet liquid liabilities. D)both their assets and their liabilities are illiquid.

B) they hold illiquid assets to meet liquid liabilities.

Consider the following graph. If the Fed increases the IOER from IOER Rate0 to IOER Rate1, they are implementing what type of policy? A)expansionary monetary policy to increase lending throughout the economy B)tighter monetary controls where there is an increase in the rate at which banks are willing to lend C)loosening of controls such that banks are less aggressively bidding for funds to deposit with the Fed D)no change in monetary policy since reserve supply is so high that the market federal funds rate will be unchanged

B) tighter monetary controls where there is an increase in the rate t which banks are willing to lend

A good monetary policy instrument is A) observable only to monetary policy officials. B) tightly linked to monetary policy objectives. C) controllable and rigid. D) difficult to change.

B) tightly linked to monetary objectives.

What is needed in order to keep inflation low over the long run? A)fiscal policy that dominates monetary policy B)time consistency of both monetary and fiscal policy C)primacy of monetary policy regardless of fiscal policy D)restrictive monetary policy coupled with expansionary fiscal policy

B) time consistency of both monetary and fiscal policy

Banks are required to disclose certain information for all of the following reasons except which one? A) to enable regulators to more easily assess the financial condition of banks B) to allow financial market participants to penalize banks that carry additional risk C) to allow customers to more easily compare prices for services offered by banks D) to create uniform prices for standard bank services

B) to allow financial market participants to penalize banks that carry additional risk

Federal funds loans are A) secured loans between banks and the Fed. B) unsecured loans. C) collateralized loans between banks. D) guaranteed by the FDIC.

B) unsecured loans

Financial regulators A)do everything possible to encourage competition in banking. B)work to prevent monopolies but also work to prevent strong competition in banking. C)discourage competition in banking. D)prefer banks to have monopoly power in their geographic markets.

B) work to prevent monopolies but also work to prevent strong competition in banking.

If the required reserve rate is 10 percent and banks do not hold any excess reserves and there are no changes in currency holdings, a $1 million open market purchase by the Fed will result in deposit creation of A)$9 million. B)$90 million. C)$10 million. D)$900,000.

C) $10 million.

In 2018, the average daily volume on the Federal Reserve's Fedwire system was A)$28 billion. B)$280 billion. C)$2.8 trillion. D)$280 million.

C) $2.8 trillion.

At a growth rate of 6 percent an economy will double in size in A)7 years. B)14 years. C)12 years. D)6 years.

C) 12 years

The need for a lender of last resort was identified as far back as A)the start of the Great Depression in 1929. B)1913, when the Federal Reserve was created. C)1873, by British economist Walter Bagehot. D)1776, by the first U.S. Secretary of the Treasury, Alexander Hamilton.

C) 1873, by British economist Walter Bagehot.

The components of the formula for the Taylor rule include each of the following, except which one? A) target federal funds rate B) current inflation rate C) 30-year U.S. Treasury bond rate D) inflation gap

C) 30-year U.S. Treasury bond rate

As of 2018, the four largest commercial banks held what share of total deposits at U.S. commercial banks? A)73 percent. B)50 percent. C)36 percent. D)25 percent.

C) 36 percent.

What is the difference between solvency and liquidity for a bank? A) Nothing. These are different words for the same concept. B)Solvency is enough to stop a bank run, but liquidity is not. C)A solvent bank has a positive net worth while a bank with liquidity means that the bank has sufficient reserves and immediately marketable assets to meet withdrawal demands. D)Solvency means that the bank has enough cash on hand to meet withdrawal requests while liquidity means that the bank has access to enough cash to meet withdrawal requests within a specified time period.

C) A solvent bank has positive net worth while a bank with liquidity means that the bank has sufficient reserves and immediately marketable assets to meet withdrawal demands.

The Chairman of the FOMC is the A) Secretary of the Treasury. B) Vice Chairman of the Board of Governors. C) Chairman of the Board of Governors. D) President of the New York Fed.

C) Chairman of the Board of Governers.

The Fed's independence can only be revoked by A)the U.S. President. B)the Secretary of the Treasury. C)Congress. D)changing the U.S. Constitution.

C) Congress.

Monetary policy in the United States is under the control of the A)U. S. Treasury. B)President. C)Federal Reserve. D)U.S. Senate.

C) Federal Reserve.

How was the Dodd-Frank Act of 2010 relatively inefficient? A)It promoted competition among financial institutions that were too big to fail. B)It failed to adopt least-cost mechanisms to make the financial system more resilient. C)It aimed to reduce systemic risk instead of addressing risk in particular areas of the financial system. D)It imposed increased capital requirements to reduce distortions arising from the government safety net and "too-big-to-fail."

C) It aimed to reduce systematic risk instead of addressing risk in particular areas of the fianncial system.

The government regulates bank mergers, sometimes denying the proposed merger. Often the reason given for the denial is to protect small investors. What are small investors being protected from? A)Larger banks are more likely to take greater risk and may fail. B)In order to pay for the merger, the bank may seek higher returns and put depositors' funds at greater risk. C)Mergers can increase the monopoly power of banks, and the bank may seek to exploit this power by raising prices and earning unwarranted profits. D)Bank runs hurt larger banks more than smaller banks.

C) Mergers can increase the monopoly power of banks, and the bank may seek to exploit this power by raising and earning unwanted profits.

On the Federal Reserve's balance sheet, securities would include A) private and public debt. B) mainly U.S. Treasury and municipal bonds. C) U.S. Treasury securities. D) bonds issued by commercial banks.

C) U.S. Treasury securities

Most central banks of industrialized countries have monetary policy formed by A)an individual, usually the minister of finance. B)their version of Congress. C)a committee made up of members of their central bank. D)an individual, usually the person heading the central bank at the time.

C) a committee made up of members of their central bank.

A bank run involves A)illegal activities on the part of the bank's officers. B)a bank being forced into bankruptcy. C)a large number of depositors withdrawing their funds during a short time span. D)a bank's return on assets being below the acceptable level.

C) a large number of depositors withdrawing their funds during a short time span.

Vault cash is A) equal to the total amount of reserves and is an asset of the central bank. B) not reserves but is a liability of the central bank. C) a part of reserves and an asset of commercial banks. D) not reserves but is an asset of central banks.

C) a part of reserves and an asset of commercial banks.

Which of the following does NOT tend to precede a financial crisis? A)an abrupt downturn in the business cycle B)decreases in liquidity C)a reduction in systemic risk D)too much easy credit

C) a reduction in systematic risk

Keeping interest rates stable is A)the most important goal for a central bank. B)a key goal, because stable interest rates will result in all other goals being achieved. C)a secondary goal for central banks. D)not a goal of the central bank.

C) a secondary goal for central banks.

The financial system is inherently more unstable than most other industries due to the fact that A)in banking, customers disappear at a slower rate than in other industries so the damage is done before the real problem is identified. B)banks deal in paper profits, not in real profits. C)a single firm failing in banking can bring down the entire system unlike in most other industries. D)there is less competition in banking than in many other industries.

C) a single firm failing in banking can bring down the entire system unlike in most other industries.

The monetary policy framework is A) the law that created the Federal Reserve System. B) the idea that central banks should be interconnected across countries. C) a way to prioritize and implement the central bank's objectives when they are in conflict. D) a growing belief that there should be one central bank headquartered at the World Bank.

C) a way to prioritize and implement the central bank's objectives when they are in conflict

The number of central banks that exist in the world today is A) less than 10. B) about 250. C) about 180. D) over 50 but less than 100.

C) about 180.

Most economists agree that the target rate of inflation for central banks should be A)between 7 and 9 percent. B)less than zero. C)above zero for fears of deflation. D)something over 3 but less than 6 percent.

C) above zero for fears of deflation.

The actions of central banks around the world A)are most extreme in developing economies. B)are politically controversial during financial crises. C)are vital to the day-to-day operation of any modern economy. D)affect citizens of modern economies only during times of financial crisis.

C) are vital to the da-to-day operation of any modern economy.

Targeted asset purchases are A) statements today about policy targets in the future. B) expansion of the supply of aggregate reserves beyond the amount needed to maintain the policy rate target. C) asset purchases that shift the composition of the Fed's balance sheet. D) asset purchases that increase the reserves held by the federal government.

C) asset purchases that shift the composition of the Fed's balance sheet.

The financial crisis of 2007-2009 has made which one of the following regulatory goals a top priority for government? A)disclosure of accounting information B)enforcement of minimum capital requirements C)avoidance of systemic risk D)promotion of competition

C) avoidance of systematic risk

Setting an explicit numerical inflation target is most associated with the goal(s) of A) transparency. B) accountability. C) both transparency and accountability. D) neither transparency nor accountability; it's about moral hazard.

C) both transparency and accountability.

The central bank has the ability to create money, which means that it A)can control the availability of money but not the availability of credit in the economy. B)can make loans only when other institutions can. C)can impact the rate of inflation. D)has an objective to maximize its profit.

C) can impact the rate of inflation.

Compared to an independent central bank, elected officials are likely to A)favor long-run stability over short-term prosperity. B)sacrifice short-term growth to keep future inflation low. C)choose monetary policies that are overly accommodative. D)prefer interest rates to vary more often.

C) choose monetary policies that are overly accommodative

One function of modern central banks is to A)control securities markets. B)control the government's budget. C)control the availability of money and credit. D)manage fiscal policy.

C) control the availability of money and credit.

If the lender of last resort function of the government is to be effective in working to minimize a crisis, it must be A)reserved only for those banks that are most deserving. B)used on a limited basis. C)credible, with banks knowing they can get loans quickly. D)only available during economic downturns.

C) credible, with banks knowing they can get loans quickly

Central banks around the world A) saw the Financial Crisis of 2007-2009 coming and tried to prevent it. B) saw the Financial Crisis of 2007-2009 coming but could not prevent it. C) did not see the Financial Crisis of 2007-2009 coming and were not able to prevent it. D) did not see the Financial Crisis of 2007-2009 coming but had processes in place to prevent it.

C) did not see the Financial Crisis of 2007-2009 coming and were not able to prevent it.

Which one of the following would give the most importance to the goal of exchange rate stability? A)large, closed economies B)the United States and Japan and other developed countries C)emerging market countries where exports and imports are central to the structure of the economy D)Europe

C) emerging market countries where exports and imports are central to the structure of the economy

The Federal Reserve failed to keep the financial system operational during the 1930s because it A) kept the discount window open. B) provided too much liquidity to banks. C) failed to recognize the link between changes in the Fed's balance sheet and the growth rate of money. D) failed to supply enough cash to the economy, and commercial bank accounts at the Fed plummeted.

C) failed to recognize the link between changes in the Fed's balance sheet and growth rate of money.

One negative consequence of regulatory competition is that A)it is expensive. B)financial institutions are over-regulated at a cost to customers. C)financial institutions often seek out the most lenient regulator. D)it minimizes competition.

C) financial institutions often seek out the most lenient regulator.

The problem for a central bank setting a zero-inflation policy would be that A) there is risk of high employment. B) it is impossible to have zero inflation. C) firms would have to cut the nominal wage to reduce the real wage. D) economic growth would also have to be zero.

C) firms would have to cut the nominal wage to reduce the real wage.

The Fed's revenue comes A)from congressional appropriation. B)from the Department of Commerce. C)from internally generated funds from interest on securities it holds and fees charged to banks for payments system services. D)solely from taxes placed on member banks.

C) from internally generated funds from interest on securities it holds and fees charged to banks for payments system services.

Under the purchase-and-assumption method, the FDIC usually finds it A) can sell the failed bank for more than the bank is actually worth. B) can sell the bank at a price equaling the value of the failed banks assets. C) has to sell the bank at a negative price since the bank is insolvent. D) cannot sell the bank and almost always has to revert to the payoff method for dealing with a failed bank.

C) has to sell the bank at a negative price since the bank is insolvent.

Empirical evidence points to the fact that financial crises A)are newsworthy but have no impact on economic growth. B)in more advanced economies lead to less public debt as a percent of GDP. C)have a negative impact on economic growth for years. D)can have a positive impact on economic growth as weak borrowers are weeded out

C) have a negative impact on economic growth for years

The specific goals of central banks include each of the following except which one? A)high and stable real growth B)low and stable inflation C)high levels of exports D)low and stable unemployment

C) high levels of exports

The monetary base is also known as A)M1. B)M2. C)high-powered money. D)free reserves.

C) high-powered money.

Since the Federal Reserve was created, it has A)averted all financial panics that could have plagued the U.S. economy. B)averted a few financial panics but not most. C)improved its skill at securing financial stability. D)proved to be much better at preventing international panics than domestic ones.

C) improved its skill at securing financial stability.

Which one of the following is evidence of the link between persistent increases in public debt and slower long-run growth? A)fiscal dominance B)a declining equilibrium real interest rate C)increased concern about debt sustainability D)a budget surplus that is less than the risk premium times the level of debt

C) increased concern about debt sustainability

From 1979 to 1982, the Fed targeted bank reserves as the monetary policy tool. One side effect of this strategy was that A)the inflation rate increased to over 18 percent in 1983. B)many banks failed that otherwise may not have. C)interest rates rose very high. D)inflation remained high for most of the 1980s.

C) interest rates rose very high.

Everything else equal, if the growth rate of a country exceeds its sustainable rate, the central bank A)will keep interest rates low to keep the momentum. B)will now identify this new rate as the sustainable rate and try to maintain it. C)is likely to raise interest rates to slow the rate of growth. D)is likely to lower the interest rate thinking a slowdown is coming to offset this boom.

C) is likely to raise interest rates to slow the rate of growth.

All of the following are true about central bank independence except that it A) is usually given at the pleasure of governments. B) can be eliminated by governments in a time of crisis. C) is usually guaranteed by a country's constitution. D) can be subverted by the actions of fiscal policymakers.

C) is usually guaranteed by a country's constitution.

In terms of economic growth, the central bank would like to A) have the maximum growth rate possible. B) keep the growth rate averaging zero. C) keep the economy close to its potential or sustainable rate of growth. D) balance every recession with a boom.

C) keep the economy close to its potential or sustainable rate of growth.

What matters most during a bank run is the A)number of loans outstanding. B)solvency of the bank. C)liquidity of the bank. D)size of the bank's assets.

C) liquidity of the bank.

The main asset held by a central bank in its role as the bankers' bank is A) foreign exchange reserves. B) currency. C) loans. D) securities

C) loans.

During the financial crisis of 2007-2009 the U.S. Federal Reserve used its powers in all but which one of the following ways? A)lending to nonbanks B)accepting very illiquid collateral against its loans C)lowering bank reserve requirements D)lowering its policy rate to zero

C) lowering bank reserve requirements

In its role as the bankers' bank, the Federal Reserve performs all of the following services except which one? A)collecting and making available data on business conditions B)making discount loans C)managing U.S. Treasury borrowings D)clearing paper checks and transferring funds electronically

C) managing U.S. Treasury borrowings

Bank mergers require government approval because banking officials want to make sure that the A)merger will create a larger bank. B)merged bank will be a monopoly. C)merged bank will be more profitable. D)merger will not result in regulatory competition.

C) merged bank will be more profitable.

Which one of the following is the best analogy? Inflation is like a A) pound having more ounces. B) day having more hours. C) minute having fewer seconds. D) mile having more feet.

C) minute having fewer seconds.

The operational components required for truly independent central banks include A)a budget controlled by Congress. B)the ability to have policies reversed by Congress or the president. C)monetary policies that cannot be reversed by anyone outside of the central bank. D)the chairperson of the bank being answerable only to the president.

C) monetary policies that cannot be reversed by anyone outside of the central bank.

During the 2007-2009 financial crisis, which one of the following temporarily became the largest component of assets on the Fed's balance sheet? A) foreign exchange reserves B) U.S. Treasury securities C) mortgage-backed securities D) loans

C) mortgage-backed securities

It is difficult for depositors to know the true health of banks because A) regulations prohibit banks making their financial statements publicly available. B) the financial statements of banks are too difficult for most people to understand. C) most of the information on bank loans is private and based on sophisticated models. D) banking is competitive and financial records of banks are not divulged to prevent competitor banks from having an advantage.

C) most of the information on bank loans is private and based on sophisticated models.

Considering state chartered banks, A) most elect to join the Federal Reserve System. B) those with assets exceeding $100 million must join the Federal Reserve System. C) most elect not to join the system. D) only those that join the system must abide by reserve requirements.

C) mot elect not to join the system.

Member banks of the Federal Reserve System include A)only nationally chartered banks. B)all state chartered banks with assets exceeding $100 million. C)nationally chartered banks and state chartered banks that decide to join. D)nationally chartered banks and all state chartered banks.

C) nationally chartered banks and state charted banks that decide to join.

Prior to 1980, A)member banks of the Federal Reserve did not have to hold non-interest-bearing reserve deposits at the Fed. B)nonmember banks had to hold non-interest-bearing reserve deposits at the Fed. C)nonmember banks did not have to hold non-interest-bearing reserve deposits at the Fed. D)all banks, member or not, had to hold non-interest-bearing reserve deposits at the Fed.

C) nonmember banks did not have to hold non-interest-bearing reserve deposits at the Fed.

Consider a $2 billion open market purchase of U.S. Treasury securities by the Federal Reserve. The banking system's balance sheet will specifically show A)only an increase in liabilities of $2 billion. B)only a decrease in assets of $2 billion. C)no net change in assets or liabilities, only a change in the composition of assets with securities decreasing and reserves increasing by $2 billion, respectively. D)no net change in assets or liabilities, only a change in the composition of assets with securities increasing and reserves decreasing by $2 billion, respectively.

C) not net change in asset or liabilities, only a change in the composition of assets with securities decreasing and reserves increasing by $2 billion, respectively

Banking regulations prevent banks from A)holding more than 10 percent of their assets in common stock of companies. B)owning corporate jets. C)owning common stocks of corporations. D)building big office buildings.

C) owning common stocks or corporations.

Which one of the following best describes the payoff method used by the FDIC to address the insolvency of a bank? The FDIC A)pays the owners of the bank for the losses they would otherwise face. B)pays off all depositors the balances in their accounts so no depositor suffers a loss, though the owners of the bank may suffer losses. C)pays off the depositors up to the current $250,000 limit, so it is possible that some depositors will suffer losses. D)takes all of the assets of the bank, sells them, pays off the liabilities of the bank in full, and then replenishes their fund with any remaining balance.

C) pays of the depositors up to the current $250,000 limit, so it is possible that some depositors will suffer losses.

To say monetary policy is transparent implies that A) anyone could figure out what the correct policy should be. B) monetary policy should not be so difficult that most people couldn't understand it. C) policy makers offer plausible explanations for their decisions along with supporting data. D) when faced with the same problem, policymakers will always react the same way.

C) policy makers offer plausible explanations for their decisions along with supporting data.

In today's world, the goal of financial stability means A)no institution should fail. B)competition should be eliminated. C)preventing large-scale financial catastrophes. D)creating one mega regulatory agency.

C) preventing large-scale financial catastrophes.

The primary objective of most central banks in industrialized economies is A)high securities prices. B)low unemployment. C)price stability. D)a strong domestic currency.

C) price stability.

The autonomy of modern central banks means that governments cannot increase their spending by A)raising taxes. B)issuing bonds. C)printing money. D)either issuing bonds or printing money; both represent debt.

C) printing money.

Ceteris paribus, which one of the following business practices increases the possibility of a bank run? Banks A)must maintain a positive net worth. B)pay interest on accounts that meet certain requirements. C)promise to satisfy withdrawal requests on a first-come, first-served basis. D)keep cash at the ready in a vault in order to meet depositors' withdrawal requests.

C) promise to satisfy withdrawal request on a first-come, first-served basis.

To obtain a discount loan from the Fed, a commercial bank must A)show that it will fail if it does not obtain the loan. B)prove that the loan will be used to make loans. C)provide collateral. D)agree to more frequent examinations.

C) provide collateral.

Prior to the financial crisis of 2007-2009 banks did all of the following except which one to bulk up their profit? A) bought or sponsored hedge funds B) traded securities for customers C) purchased equities for their own account D) colluded to fix benchmark interest rates

C) purchased equities for their own account

Implicit government support for "too-big-to-fail" banks A)increases the scrutiny of the bank's risk by large corporate depositors. B)increases the risk that depositors will flee at the first sign of uncertainty. C)reduces the risk faced by depositors with accounts exceeding $250,000. D)reduces the moral hazard problem of insuring large banks.

C) reduces the risk faced by depositors with accounts exceeding $250,000.

The fact that banks can be either nationally or state chartered creates A)opportunities to avoid regulation altogether. B)a cooperative regulatory framework. C)regulatory competition. D)redundant regulation by more than one agency.

C) regulatory competition.

The FOMC A) sets the federal funds rate. B) uses the discount rate is its primary policy tool. C) sets the target federal funds rate range. D) sets the dealer's spread as the difference between the target and actual federal funds rate.

C) sets the target federal funds rate range.

Central banks are in a position to control risk in the economy because they control A)the unemployment rate. B)the economy's real growth rate. C)short-term interest rates. D)tax rates.

C) short-term interest rate.

Primary credit extended by the Fed is A) for banks needing long-term loans to work out financial problems. B) the highest interest rate loans offered by the Fed. C) short-term, usually overnight loans. D) loans offered at the prime interest rate for periods exceeding 30 days but less than one year.

C) short-term, usually overnight loans.

The real power in the FOMC lies with A) the President of the New York Fed Bank. B) the System Open Market Manager. C) the Chairman of the Board of Governors. D) no single individual; all participants have an equal share of the power.

C) the Chairman of the Board of Governors.

The interest rate changes that result from the FOMC meetings can only be altered by A)Congress. B)the Secretary of the Treasury during an economic crisis. C)the FOMC. D)by the U.S. President during a time of crisis.

C) the FOMC.

The first phase of the Financial Crisis of 2007-08 began when A)the Fed provided support to a solvent, but illiquid, nonbank. B)Bear Stearns collapsed due to toxic assets held in hedge funds. C)the French bank BNP Paribas suspended redemptions from three mutual funds invested in U.S. subprime mortgage debt. D)Lehman Brothers failed after holding on to large positions in subprime and other lower-rated mortgage tranches when securitizing the underlying mortgages.

C) the French bank BNP Paribus suspended redemptions from three mutual funds invested in U.S. subprime mortgage debt.

Which one of the following regulates commercial banks as well as savings banks and savings and loans? A)the Federal Reserve System B)the Securities and Exchange Commission C)the Office of the Comptroller of the Currency D)the Internal Revenue Service

C) the Office of the Comptroller of the Currency

The Federal Reserve System is composed of A) five branches with clear responsibilities. B) six branches with overlapping responsibilities. C) three branches with overlapping responsibilities. D) twelve branches with clear responsibilities.

C) three branches with overlapping responsibilities.

Which one of the following was not a goal of the Dodd-Frank Act of 2010? A)to anticipate and prevent financial crises by limiting systemic risk B)to end "too big to fail" C)to promote competition D)to reduce moral hazard

C) to promote competition

The daily reserve supply curve is A)upward-sloping. B)downward-sloping. C)vertical. D)horizontal.

C) vertical.

The Federal Reserve Bank of New York is unique from other Reserve banks because it is A)the only regional Bank that serves just one state. B)the only regional Bank located in a financial center. C)where the Federal Reserve System's portfolio is managed. D)the oldest and therefore the largest.

C) where the Federal Reserve Systesm's portfolio is managed.

Bank failures tend to occur most often during periods of A)stock market run ups when, like many companies, banks tend to be overvalued. B)high inflation when the fixed rate loans of many banks cause their real returns to decrease. C)recessions when many borrowers have a difficult time repaying loans and lending activity slows. D)wars and other civil unrest.

C. recessions when many borrowers have a difficult time repaying loans and lending activity slows.

You have two savings accounts at an FDIC-insured bank. You have $225,000 in one account and $40,000 in the other. If the bank fails, you will receive A)$225,000. B)$40,000. C)$115,000. D)$250,000.

D) $250,000

Bank A has checkable deposits of $100 million, vault cash equaling $1 million and deposits at the Fed equaling $14 million. If the required reserve rate is ten percent, what is the maximum amount Bank A could lend? A)$85 million B)$15 million C)$14 million D)$5 million

D) $5 million

If required reserves are expressed by RR, the required reserve rate by rD, and deposits by D, the simple deposit expansion multiplier is expressed as A) R D × D. B) (1/r D )D. C) RR × D. D) 1/r D.

D) 1/r D.

Which one of the following is not an important addition made to the Basel Accords by Basel III in 2010? A)It supplements capital requirements based on risk-weighted assets with restrictions on leverage. B)It introduces three buffers over and above capital requirements itself. C)It adds a liquidity requirement that compels banks to hold a quantity of high-quality liquid assets. D)It ends the too-big-to-fail problem.

D) It ends the too-big-to-fail problem

Which one of the following is not a positive effect of the Basel Accord? A) It forced regulators to change the way they thought about bank capital. B) It promoted a more uniform international system. C) It provided a framework that less developed countries could use to improve the regulation of their banks. D) It provided a system to differentiate between bonds based on their systemic risk.

D) It provided a system to differentiate between bonds based on their systematic risk.

Fiscal policymakers may actually welcome some inflation for all of the following reasons except which one? A) It potentially raises tax revenues. B) It reduces the real value of the national debt allowing governments to "default" on a portion of their debt. C) Interest payments tend to be fixed so the real interest payments are reduced. D) It weakens the independence of the central bank.

D) It weakens the independence of the central bank.

The Fed sells German bonds to commercial banks. Which one of the following best describes the impact on the Fed's and the banking system's balance sheets resulting from this transaction? A)The Fed's assets and liabilities increase. The banking system's assets and liabilities decrease. B)The Fed's assets and liabilities increase. For the banking system, the value of assets and liabilities do not change, only the composition of assets changes. C)The Fed's assets and liabilities do not change, only the compositions of the assets change. For the banking system, assets and liabilities increase. D)The Fed's assets and liabilities decrease. For the banking system, the value of assets and liabilities do not change, only the composition of assets changes.

D) The Fed's assets and liabilities decrease. For the banking system, the value of assets and liabilities do not change, only the composition of assets changes.

On November 20, 1985, the Bank of New York needed to use the lender of last resort function due to A)a run on the bank started by a rumor that the president of the bank embezzled tens of millions of dollars from the bank. B)a computer error caused the bank's records to wipe out the balances of all of its customers. C)a rumor that the bank was about to be taken over by FDIC due to insolvency. D)a computer error that made it impossible for the bank to keep track of its Treasury bond trades.

D) a computer error that made it impossible for the bank to keep track of its treasury bond trades.

Time consistency is critical for economic policy to be credible because A)people make decisions today with no regard for the future. B)the ability to update decisions over time is necessary for policy to be effective. C)it is not possible to improve outcomes by limiting discretion in future time periods. D)an effective policy is a strategy for the future, so it must be costly for policymakers to renege.

D) an effective policy is a strategy for the future, so it must be costly for policymakers to renege.

In the United Kingdom accountability and transparency for its central bank is achieved by setting A) a numerical target for unemployment each year. B) a numerical target for economic growth. C) numerical targets for economic growth and the exchange rate. D) an explicit numerical target for inflation.

D) an explicit numerical target for inflation.

Suppose the Federal Reserve purchases a U.S. Treasury bond for $1 million by writing a check. When the check returns, the Fed's balance sheet will show A)an increase in assets and a decrease in liabilities of $1 million. B)only an increase in assets of $1 million. C)only an increase in liabilities of $1million. D)an increase in assets and liabilities of $1 million.

D) an increase in assets and liabilities of $1 million.

The federal government is concerned about the health of the banking system for many reasons, the most important of which may be that A)banks are where government bonds are traded. B)a significant number of people are employed in the banking industry. C)many people earn the majority of their income from interest on bank deposits. D)banks are of great importance in enabling the economy to operate efficiently.

D) banks are of great importance in enabling the economy to operate efficiently.

The government is "lender of last resort" to which one of the following groups? A)large manufacturing firms that employ thousands of people B)depositors—by insuring depositors' balances in banks that fail C)developing countries that are trying to build their financial systems D)banks that experience sudden deposit outflows

D) banks that experience sudden deposit outflows

Banks can effectively choose their regulators by deciding whether to A)be a private or public corporation. B)align with the U.S. Office of Thrift Supervision. C)purchase FDIC insurance or to forgo the coverage. D)be chartered at the national or state level.

D) be charted at the national or state level.

Deflation causes financial disruption when A)bank balance sheets swell as more borrowing occurs. B)problems of asymmetric information decrease as borrowers' net worth rises. C)borrowers are attracted to new financing with better terms for business and residential loans. D)borrowers have invested in real assets whose value declines while loan payments stay the same.

D) borrowers have invested in real assets whose values declines while loan payments stay the same.

The interest rate decisions made by the Federal Open Market Committee A)can be overridden by the president. B)can be overridden by the Secretary of the Treasury. C)can be overridden by the U.S. Senate by a two-thirds majority. D)cannot be overridden by anyone outside of the Federal Reserve.

D) cannot be overridden by anyone outside of the Federal Reserve.

Whenever central bankers face more than one goal, the policy framework requires A)central bankers to always focus on inflation first. B)central bankers to focus on all goals, no matter what. C)economic growth to be the top priority. D)central bankers to make their priorities clear.

D) central bankers to make their priorities clear.

The 1990s saw inflation fall and real growth increase in the United States and in many other countries. This is partially attributed to all of the following except which one? A)technological innovation B)redesign of many central banks C) central banks becoming better at their jobs D)central banks focusing more on exchange rates in a global environment

D) central banks focusing more on exchange rates in a global environment

The monetary base is the sum of A) reserves and M2. B) M1 and reserves. C) currency in the hands of the public, reserves, and M1. D) currency in the hands of the public and reserves in the banking system.

D) currency in the hands of the public and reserves in the banking system.

In the United States, the Federal Reserve is asked to A)deliver on a specific inflation target set by Congress. B)meet an explicit target for economic growth. C)meet a specific target for unemployment each year. D)deliver price stability as one of a number of objectives.

D) deliver price stability as one of a number of objectives.

Rumors of a bank failing, even if not true, can become a self-fulfilling prophecy because A)customers will not want to obtain loans from this bank. B)equity investors will not be able to sell the bank's stock. C)regulators will scrutinize the bank heavily looking for something wrong. D)depositors will rush to the bank to withdraw their deposits and the bank under normal conditions would not have sufficient liquid assets on hand.

D) depositors will rush to the bank to withdraw their deposits and the bank under normal conditions would not have sufficient liquid assets on hand.

Central bank statements in developed countries A) are similar both in length and in the speed with which policy changes are announced. B) differ both in length and in the speed with which policy changes are announced. C) are similar in length but differ in the speed with which policy changes are announced. D) differ in length but are similar in the speed with which policy changes are announced.

D) differ in length but re similar in the speed with which policy changes are announced.

The Fed can control A) the amount of reserves, but cannot control the monetary base. B) the composition of the monetary base, but cannot affect the market interest rate. C) the size of the monetary base but not the price of its components. D) either the size of the monetary base or the price of its components.

D) either the size of the monetary base or the price of its components.

Governments supervise banks mainly to do each of the following, except which one? A)reduce the potential cost to taxpayers of bank failures B)ensure that banks are following the regulations set out by banking laws C)reduce the moral hazard risk D)eliminate all risk faced by depositors and investors.

D) eliminate all risk faced by depositors and investors.

The rationale for the existence of central banks is mainly that A)financial markets lack transparency. B)they are needed for the supervision of banks. C)financial intermediation cannot occur without a central bank. D)financial systems are prone to periods of extreme volatility.

D) financial systems are prone to periods of extreme volatility.

Since the 1920s, the ratio of assets to capital has more than doubled for commercial banks. Many economists believe this is the direct result of A) lower quality management in banks. B) the increase in branch banking. C) allowing banks to offer nonbank services. D) government-provided deposit insurance.

D) government-provided deposit insurance.

For fiscal policymakers, one of the results of an independent central bank is that A) to finance government spending, the Treasury has to order more currency from the central bank. B) fiscal policymakers always have to borrow to increase spending. C) fiscal policymakers cannot borrow unless the Federal Reserve prints more money. D) increased government spending has to be financed with either higher taxes or increased government borrowing.

D) increased government spending has to be financed with either higher taxes or increased government borrowing.

The government's providing of deposit insurance and functioning as the lender of last resort has significantly A)decreased the incentive for bank managers to take on risk. B)increased the amount of regulation of banks required, but has had no effect on bank's incentive to take on risk. C)increased the incentive for banks to take on risk, but has had no effect on the amount of regulation of banks required. D)increased the amount of regulation of banks required and increased the incentive for banks to take on risk.

D) increased the amount of regulation of banks required and increased the incentive for banks to take on risk.

There is a strong consensus among economists that monetary policy is more effective when it is formulated A) by an individual rather than a committee. B) in secrecy without the reasoning behind it being revealed for many years. C) in a manner that keeps financial markets guessing. D) independently of political pressure.

D) independently of political pressure.

The main problem from inflation as seen by most economists is that A)inflation raises prices more than wages. B)inflation harms lenders more than it benefits borrowers. C)during periods of inflation some prices fall. D)inflation creates risk.

D) inflation creates risk.

One monopoly that modern central banks have is in A) regulating commercial banks. B) making loans to banks. C) issuing U.S. Treasury securities. D) issuing currency.

D) issuing currency.

As of January, 2019, the interbank loans that appear on banks' balance sheets represent about what proportion of bank capital? A)33 percent B)10 percent C)3 percent D)less than 1 percent

D) less than 1 percent

Discount loans are A) initiated by the Federal Reserve. B) made when banks need relatively small amounts of cash for the long term. C) made when banks need relatively large amounts of cash for the long term. D) made when banks need relatively small amounts of cash for the short term.

D) made when banks need relatively small amounts of cash for the short term.

The Board of Governors of the Fed performs each of the following functions except which one? A) analyzing financial and economic conditions B) setting the reserve requirement C) approving bank merger applications D) making discount loans

D) making discount loans

One reason given for more central bankers releasing decisions publicly is that A)for monetary policy to work, people must be taken by surprise. B)most people do not understand monetary policy so it really doesn't do any harm to release the decisions publicly. C)it gives central banks across the world a chance to coordinate their policies. D)monetary policy is more effective when households and businesses can understand and anticipate it.

D) monetary policy is more effective when households and businesses can understand and anticipate it.

The CAMELS ratings are A)made public monthly to the financial markets so people can judge the relative quality of banks. B)published once a quarter in banking journals issued by the Federal Reserve. C)included in the annual report of publicly owned banks. D)not made public.

D) not made public.

Today, reserve requirements are A)set in a way that makes reserve demand highly unpredictable. B)changed whenever the target federal funds rate is changed. C)changed instead of making changes in the discount rate. D)not often used as a direct tool of monetary policy.

D) not often used as a direct tool of monetary policy.

Unconventional monetary policy tools include all of the following, except which one? A)quantitative easing B)forward guidance C)targeted asset purchases D)reserve requirement

D) reserve requirement

All of the following are consequences of an economy operating above its potential level except which one? A)high rates of inflation B)high interest rates C)low unemployment D)stable prices

D) stable prices

The first test of the Federal Reserve as lender of last resort occurred with the A)attack on Pearl Harbor by the Japanese. B)widespread failures of Savings and Loans in the 1980s. C)introduction of flexible exchange rates in the United States in 1971. D)stock market crash in 1929.

D) stock market crash in 1929.

The principal tool the Fed uses to keep the federal funds rate close to the target is A)the required reserve rate. B)discount lending. C)open market operations. D)the IOER (interest rate on excess reserves).

D) the IOER (interest rate on excess reserves).

The Reserve Banks of the Federal Reserve System are owned by A)the taxpayers in their districts. B)the U.S. Treasury. C)the Board of Governors. D)the commercial banks in their districts.

D) the commercial banks in their districts.

When the Fed makes a discount loan, the impact on the banking system's balance sheet is A) an increase in liabilities with no change in assets. B) an increase in assets and a decrease in liabilities. C) a decrease in assets and an increase in liabilities. D) the same as that of an open market purchase.

D) the same as that on an open market purchase.

One reason customers do not care about the quality of their bank's assets is that A)most people cannot distinguish an asset from a liability. B)the quality of a bank's assets changes almost daily. C)they assume the bank only has high quality assets. D)there is deposit insurance which protects deposits even if the bank fails.

D) there is deposit insurance which protects deposits even if the banks fails.

A monetary policy framework is used to clarify all of the following except which one? A)the likely response when policy goals are in conflict with one another B)the goal that is currently receiving the most attention C)how goals will be measured D)why zero inflation is not desirable

D) why zero inflation is not desirable

The Federal Reserve didn't always communicate its actions to the public like it does today. As recently as the mid-1990s, secrecy ruled. Why do you think the Fed and most central banks now are more public about their actions and the reasons for them? End chapter 15

In principles of economics we learn that information enables prices to adjust faster and if prices adjust markets are more efficient. In a sense that is what is happening here. If the central bank is going to be a stabilizing force it should provide information on a timely basis so that financial markets can adjust faster and minimize the volatility that otherwise would occur. Rapid adjustment in financial and other markets speeds the response of the economy to monetary policy, making it more effective.