Money and Banking Final Lesson 8- 16

Which of the following statements is an example of the Fed's conditional commitment policy?

"The exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, and inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee's 2 percent longer-run goal."

The Dodd-Frank legislation of 2010 permanently increased the federal deposit insurance to

$250,000.

FIRREA increased the core-capital leverage requirement for thrift institutions from 3% to

8%.

Activists of the policies believe that

All of these.

________ in the expected future domestic exchange rate causes the demand for domestic assets to shift to the right and the domestic currency to ________, everything else held constant.

An increase; appreciate

Of the following, which would be the last choice for a bank facing a reserve deficiency?

Call in loans.

Which investment bank filed for bankruptcy on September 15, 2008 making it the largest bankruptcy filing in U.S. history?

Lehman Brothers

A well-capitalized financial institution has ________ to lose if it fails and thus is ________ likely to pursue risky activities.

More; less

________ is a process of bundling together smaller loans (like mortgages) into standard debt securities.

Securitization

The price of a barrel of oil doubled between 2007 and the middle of 2008. To make matters worse, a financial crisis hit the U.S. economy starting in August of 2007. Which of the following is an appropriate description of the mechanism that would have ensued?

Shifts in both the AD and the AS curve would have ensued in the short-run but as long as neither shock had an impact on potential output, ultimately unemployment will have been unaffected in the long run.

Assume that the following are the predicted inflation rates in these countries for the year: 2% for the United States, 3% for Canada; 4% for Mexico, and 5% for Brazil. According to the purchasing power parity and everything else held constant, which of the following would we expect to happen?

The Brazilian real will depreciate against the U.S. dollar.

With the followings is NOT one of the reasons why quantitative easing in and of itself will not necessarily be stimulative?

The asset purchase program involves only the purchase of long-term government securities.

The financial panic of 1907 resulted in such widespread bank failures and substantial losses to depositors that the American public finally became convinced that

a central bank was needed to prevent future panics.

Suppose the U.S. economy is producing at the natural rate of output. An appreciation of the U.S. dollar will cause ________ in real GDP in the short run and ________ in inflation in the long run, everything else held constant. (Assume the appreciation causes no effects in the supply side of the economy.)

a decrease; a decrease

When the economy suffers a permanent negative supply shock and the central bank responds by changing the autonomous component of monetary policy to keep inflation at the target inflation rate, then

aggregate demand curve shifts leftward.

Funds held in ________ are subject to reserve requirements.

all checkable deposits

An increase in productivity in a country will cause its currency to ________ because it can produce goods at a ________ price, everything else held constant.

appreciate; lower

Depositors have a strong incentive to show up first to withdraw their funds during a bank crisis because

banks operate on a sequential service constraint.

Measuring the sensitivity of bank profits to changes in interest rates by multiplying the gap times the change in the interest rate is called

basic gap analysis.

When a bank suspects that a $1 million loan might prove to be bad debt that will have to be written off in the future the bank

can set aside $1 million of its earnings in its loan loss reserves account.

The government institution that has responsibility for the amount of money and credit supplied in the economy as a whole is the

central bank.

The Fed's support of the Depository Institutions Deregulation and Monetary Control Act of 1980 stemmed in part from its

concern over declining Fed membership.

If the First National Bank has a gap equal to a negative $30 million, then a 5 percentage point increase in interest rates will cause profits to

decline by $1.5 million.

Everything else held constant, a decrease in net exports ________ aggregate ________.

decreases; demand

Everything else held constant, an autonomous monetary policy tightening ________ aggregate ________.

decreases; demand

When the European System of Central Banks uses main refinancing operations, it is similar to the Federal Reserve using

defensive open market operations.

If Treasury deposits at the Fed are predicted to increase, the manager of the trading desk at the New York Fed bank will likely conduct ________ open market operations to ________ reserves.

defensive; inject

Nonactivists of policies contend that a policy of shifting the aggregate ________ curve will be costly because it produces ________ volatility in both the price level and output.

demand; more

Anything that increases the demand for foreign goods relative to domestic goods tends to ________ the domestic currency because domestic goods will only continue to sell well if the value of the domestic currency is ________, everything else held constant.

depreciate; lower

The major provisions of the Competitive Equality Banking Act of 1987 include

directing the Federal Home Loan Bank Board to continue to pursue regulatory forbearance.

Regulations designed to provide information to the marketplace so that investors can make informed decisions are called

disclosure requirements.

The process in which people seeking higher-yielding securities take their funds out of the banking system thus restricting the amount of funds banks can lend is called

disintermediation.

If aggregate output is below the natural rate level, nonactivists of policies would recommend that the government

do nothing.

When Americans or foreigners expect the return on ________ assets to be high relative to the return on ________ assets, there is a ________ demand for dollar assets, everything else held constant.

dollar; foreign; higher

The regulatory system that has evolved in the United States whereby banks are regulated at the state level, the national level, or both, is known as a

dual banking system.

The Federal Open Market Committee usually meets ________ times a year.

eight

The National Bank Act of 1863, and subsequent amendments to it

established the Office of the Comptroller of the Currency.

The Depository Institutions Deregulation and Monetary Control Act of 1980

established uniform reserve requirements for all banks.

The interest rate charged on overnight loans of reserves between banks is the

federal funds rate.

The Brexit vote in June 2016 resulted in higher expected trade barriers. The relative expected return on British (pound) assets therefore ________ and so the quantity demanded of pound assets ________ at any given exchange rate, shifting the demand curve for pound assets to the ________.

fell; declined; left

A major disruption in financial markets characterized by sharp declines in asset prices and firm failures is called a

financial crisis.

As in the United States, an important factor in the banking crises in Latin America was the

financial liberalization that occurred in the 1980s.

In an agreement to exchange dollars for euros in three months at a price of $0.90 per euro, the price is the

forward exchange rate.

Everything else held constant, in the market for reserves, when the federal funds rate is 3%, increasing the interest rate paid on excess reserves from 1% to 2%

has no effect on the federal funds rate.

The trend in recent years is that more and more governments

have been granting greater independence to their central banks.

Sweep accounts

have made reserve requirements nonbinding for many banks.

The Federal Open Market Committee's "balance of risks" is an assessment of whether, in the future, its primary concern will be

higher inflation or a weaker economy.

Positive spending shocks lead to ________ output ________.

higher; in the short run but not in the long run

Prior to the 1980s, S&Ls and mutual savings banks were restricted almost entirely to

home mortgages.

Agency problems in the subprime mortgage market included all of the following EXCEPT

homeowners could refinance their houses with larger loans when their homes appreciated in value.

Everything else held constant, a balanced budget increase in government spending (that is, an increase in government spending that is matched by an identical increase in net taxes) will

increase aggregate demand, but not by as much as if just government spending increases.

When the Fed wants to raise interest rates after banks have accumulated large amounts of excess reserves, it would

increase the interest rate paid on excess reserves.

Suppose that the European Central Bank enacts expansionary policy. Everything else held constant, this will cause the demand for U.S. assets to ________ and the U.S. dollar to ________.

increase; appreciate

According to aggregate demand and supply analysis, the rising oil prices coupled with the global financial crisis in 2007-2008 caused the unemployment rate to ________ and the level of real aggregate output to ________.

increase; decrease

In a world with few impediments to capital mobility, the domestic interest rate equals the sum of the foreign interest rate and the expected depreciation of the domestic currency, a situation known as the

interest parity condition.

A bank is insolvent when

its liabilities exceed its assets.

Banks engage in regulatory arbitrage by

keeping high-risk assets on their books while removing low-risk assets with the same capital requirement.

Everything else held constant, in the market for reserves, when the federal funds rate equals the discount rate, lowering the discount rate

lowers the federal funds rate.

Since depositors, like any lender, only receive fixed payments while the bank keeps any surplus profits, they face the ________ problem that banks may take on too ________ risk.

moral hazard; much

From before the financial crisis began in September of 2007 to when the crisis was over at the end of 2009, the huge expansion in the Fed's balance sheet and the monetary base did not result in a large increase in monetary supply because

most of it just flowed into holdings of excess reserve.

Suppose the U.S. economy is operating at potential output. A negative supply shock that is accommodated by an open market purchase by the Federal Reserve will cause ________ in real GDP in the long run and ________ in inflation in the long run, everything else held constant.

no change; an increase

An advantage to American banks from operating foreign branches is that Eurodollar deposits in offshore branches are

not subject to reserve requirements.

The recession caused by the global financial crisis was severe, but much smaller in magnitude than the Great Depression. because

of massive intervention by governments to prop up financial markets.

During the "Great Recession" unemployment rates in the United States increased to

over 10%.

Banks have attempted to maintain adequate profit levels by

pursuing new off-balance-sheet activities.

Bank capital has both benefits and costs for the bank owners. Higher bank capital ________ the likelihood of bankruptcy, but higher bank capital ________ the return on equity for a given return on assets.

reduces; reduces

Provisions in loan contracts that prohibit borrowers from engaging in specified risky activities are called

restrictive covenants

Net profit after taxes per dollar of assets is a basic measure of bank profitability called

return on assets.

If workers demand and receive higher real wages (a successful wage push), the cost of production ________ and the short-run aggregate supply curve shifts ________.

rises; leftward

Which of the following is most likely to lead to inflationary monetary policy?

rising unemployment

If mortgage brokers do not make a strong effort to evaluate whether the borrower can pay off a loan, this creates a

severe adverse selection problem.

The global financial crisis of 2007-2009 not only led to a worldwide recession, but also a ________ in the European nations that use the euro currency.

sovereign debt crisis

China is trying to move its banking system from being strictly ________ owned by having them issue shares overseas.

state

Everything else held constant, aggregate demand increases when

taxes are cut.

Policy makers cannot achieve both price stability and economic activity stability when facing

temporary supply shocks.

The belief that bank failures were regularly caused by fraud or the lack of sufficient bank capital explains, in part, the passage of

the National Bank Act of 1863.

Goal independence is the ability of ________ to set monetary policy ________.

the central bank; goals

Instrument independence is the ability of ________ to set monetary policy ________.

the central bank; instruments

Critics of the current system of Fed independence contend that

the current system is undemocratic.

The time it takes for the policy actually to have an impact on the economy is called

the effectiveness lag.

Recent research indicates that inflation performance (low inflation) has been found to be best in countries with

the most independent central banks.

The time it takes for policy makers to be sure of what the data are signaling about the future course of the economy is called

the recognition lag.

The legislative lag represents

the time it takes to pass legislation to implement a particular policy.

The ________ suggests that the most important factor affecting the demand for domestic and foreign assets is the expected return on domestic assets relative to foreign assets.

theory of portfolio choice

Because ________ are less liquid for the depositor than ________, they earn higher interest rates.

time deposits; savings accounts

Bank reserves include

vault cash and deposits at the Fed.

In order to ensure that borrowers have an ability to repay residential mortgages, the new consumer protection legislation requires lenders to do all of the following EXCEPT

verify that the borrower can read and understand a loan contract.

The Federal Reserve makes discount loans to banks, and similarly, the FHLBS makes loans to savings and loan institutions. The Fed loans are expected to be repaid ________ while the FHLBS loans are ________.

when the bank becomes solvent; to be repaid quickly

Everything else held constant, in the market for reserves, decreases in the interest rate paid on excess reserves affect the federal funds rate

when the funds rate equals the interest rate paid on excess reserves.

A major controversy involving the banking industry in its early years was

whether the federal government or the states should charter banks.