Money and Banking Multiple Choice
If the Fed uses the federal funds rate as a policy instrument, then increases in the demand for reserves will lead to an (increase/decrease) in the level of reserves. If the Fed uses the level of reserves as a policy instrument, then increases in the demand for reserves will lead to an (increase/decrease) in the federal funds rate.
increase increase
The debt-deflation process is the process of (Increasing/Decreasing) bankruptcies and defaults that can increase the severity of an economic downturn. The debt-deflation process contributed to the severity of the Great Depression by (Increasing/Decreasing) the real interest rate and the real value of debts, which (Increased/Decreased) the burden on borrowers and led to (Less/More) loan defaults.
Increasing Increasing Increasing More
Consider the following data: Currency $100 billion Bank reserves $400 billion Checkable deposits $800 billion Time deposits $1,200 billion Excess reserves $40 billion Part 2 Calculate the values for the currency-to-deposit ratio, the ratio of total reserves to deposits, the monetary base, the M1 money multiplier, and the M1 money supply. The currency-to-deposit ratio is ______. (Enter your response rounded to two decimal places.) The ratio of total reserves to deposits is ______. (Enter your response rounded to two decimal places.) The monetary base is $_____ billion. (Enter your response as an integer.) The M1 money multiplier is ______. (Enter your response rounded to two decimal places.) The M1 money supply is $______billion. (Enter your response as an integer.)
.13 .5 500 1.79 895
Calculate the value of the money multiplier in each of the following situations: Banks hold no excess reserves, the required reserve ratio is 100%, and households and firms hold currency and deposits in equal amounts. The value of the money multiplier is ________. (Enter your response as a whole number.) Part 2 The required reserve ratio is 0, banks hold reserves equal to the value of their deposits, and households and firms hold half as much in currency as in deposits. The value of the money multiplier is ________. (Enter your response as a whole number.) Part 3 The required reserve ratio is 0, households and firms hold three times as much in currency as in deposits, and banks hold reserves equal to one-quarter the value of their deposits. The value of the money multiplier is ____. (Round your response to two decimal places.)
1 1 1.23
Consider the following data: Currency $710 billion Checkable deposits $560 billion Bank reserves $560 billion Part 2 a. Calculate the values for the currency-to-deposit ratio, the ratio of total reserves to deposits, the monetary base, the M1 money multiplier, and the M1 money supply. Part 3 The currency-to-deposit ratio is ______. (Enter your response rounded to two decimal places.) Part 4 The ratio of total reserves to deposits is _____. (Enter your response as an integer.) Part 5 The monetary base equals $________ billion. (Enter your response as an integer.) Part 6 The M1 money multiplier is ______. (Enter your response as an integer.) Part 7 The M1 money supply is $_______ billion. (Enter your response as an integer.) Part 8 b. Suppose that the ratio of total reserves to deposits changes from the value you calculated in part (a) to 2. (Assume that the currency-to-deposit ratio remains the same.) Now what is the value of the money multiplier? The money multiplier is _____. (Enter your response rounded to two decimal places.)
1.27 1 1270 1 1270 .7
Question content area Part 1 [Related to Solved Problem 13.1] Suppose that Bank of America pays a 4% annual interest rate on checking account balances while having to meet a reserve requirement of 10%. Assume that the Fed pays Bank of America an interest rate of 0.25% on its holdings of reserves and that Bank of America can earn 8% on its loans and other investments. How do reserve requirements affect the amount that Bank of America can earn on $1,000 in checking account deposits? Ignore any costs Bank of America incurs on the deposits other than the interest it pays to depositors. The 10% reserve requirement reduces the amount Bank of America can earn on $1,000 by $________ (Enter your answer rounded to two decimal places.) Part 2 Is the opportunity cost to banks of reserve requirements likely to be higher during a period of high inflation or during a period of low inflation? A. The opportunity cost to banks of reserve requirements would likely be higher during a period of lower inflation when nominal interest rates on loans are lower. B. The opportunity cost to banks of reserve requirements would likely be higher during a period of high inflation when nominal interest rates on loans are lower. C. The opportunity cost to banks of reserve requirements would likely be higher during a period of lower inflation when nominal interest rates on loans are high. D. The opportunity cost to banks of reserve requirements would likely be higher during a period of high inflation when nominal interest rates on loans are high.
7.75 D. The opportunity cost to banks of reserve requirements would likely be higher during a period of high inflation when nominal interest rates on loans are high.
How is the European Central Bank (ECB) organized? (Check all that apply.) A. Board members are appointed by member countries' governments, based on the recommendation of the council of Ministers of Economics and Finance, after consulting the European Parliament and the Governing Council of the ECB. B. Policy decisions made by the ECB must be unanimously approved by the governments of member countries. C. The ECB has an executive board of six members, with one of its members serving as president. D. The governance of the ECB includes the governors of each of the member national central banks. Part 2 What special problems does the ECB confront? A. The ECB is required to employ separate interest rate policies for each of the member nations. B. The ECB must function with a highly centralized structure. C. The decentralized organization of the ECB, with the governors of the national central banks holding a majority of the votes, makes it harder to achieve a consensus during a crisis.. D. The ECB must coordinate the use of multiple currencies. Part 3 What difficulties did the ECB encounter during the financial crisis of 2007-2009? A. The ECB encountered the same difficulties as every other central bank—namely, the combination of higher inflation coupled with higher unemployment. B. The ECB had trouble accepting policy directions from the U.S. Federal Reserve. C. New members joined the EMU, requiring the ECB to harmonize old members' monetary policies with new members' monetary policies. D. The ECB encountered difficulty conducting a common monetary policy for countries experiencing different economic conditions. Part 4 What difficulties did the ECB encounter during the 2020 Covid-19 pandemic? A. The ECB was unwilling to employ any monetary policy since inflation was already at its 2% target rate. B. The ECB dropped its 2% inflation target in order to increase employment, causing inflation rates to increase exponentially. C. The ECB encouraged member countries to stop implementing expansionary fiscal policy because it limited the effectiveness of monetary policy. D. The ECB realized the effectiveness of monetary policy was limited and urged member countries to employ more expansionary fiscal policy.
A. Board members are appointed by member countries' governments, based on the recommendation of the council of Ministers of Economics and Finance, after consulting the European Parliament and the Governing Council of the ECB. C. The ECB has an executive board of six members, with one of its members serving as president. D. The governance of the ECB includes the governors of each of the member national central banks. C. The decentralized organization of the ECB, with the governors of the national central banks holding a majority of the votes, makes it harder to achieve a consensus during a crisis. D. The ECB encountered difficulty conducting a common monetary policy for countries experiencing different economic conditions. D. The ECB realized the effectiveness of monetary policy was limited and urged member countries to employ more expansionary fiscal policy.
Is it easier for a central bank to be independent in a high-income country or in a low-income country? A. It is often difficult for a central bank to act independently in a low-income country. B. Low-income countries rarely have central banks. C. The independence of a central bank does not depend on the level of a country's income. D. It is often difficult for a central bank to act independently in a high-income country. Part 2 What implications does your answer have for what the average inflation rate is likely to be in high-income countries as opposed to low-income countries? A. Research has shown that the more independent a central bank is, the lower the inflation rate will be. Thus, one would expect the average inflation rate in less-developed countries to be higher than in industrial countries. B. Research has shown that the rate of inflation does not depend on the level of the central bank's independence. C. Research has shown that the more independent a central bank is, the lower the inflation rate will be. Thus, one would expect the average inflation rate in less-developed countries to be lower than in industrial countries. D. The average inflation rate will be higher in low-income countries, but only because of the limited ability of the economy to expand production.
A. It is often difficult for a central bank to act independently in a low-income country. A. Research has shown that the more independent a central bank is, the lower the inflation rate will be. Thus, one would expect the average inflation rate in less-developed countries to be higher than in industrial countries.
What are the changes to the Fed under the Dodd-Frank Act? (Check all that apply.) A. Ordering the Government Accountability Office to audit the emergency lending programs the Fed carried out during the financial crisis. B. Requiring class A directors of the Federal Reserve banks to participate in the election of bank presidents. C. Making the Fed a member of the new Financial Stability Oversight Council. D. Requiring the Fed to be more transparent about its monetary policy targets. E. Designating a Fed vice chairman for regulatory supervision.
A. Ordering the Government Accountability Office to audit the emergency lending programs the Fed carried out during the financial crisis. C. Making the Fed a member of the new Financial Stability Oversight Council. E. Designating a Fed vice chairman for regulatory supervision.
What are the main arguments for the Fed's independence? (Check all that apply.) A. Monetary policy is too important to be left to politicians, who are not economists and have their own political interests at stake. B. Only an independent central bank can deal with a financial crisis without causing an increase in unemployment and inflation. C. It would be less democratic for elected officials to control monetary policy. D. An independent Fed makes a political business cycle less likely. Part 2 What are the main arguments against the Fed's independence? (Check all that apply.) A. Monetary policy is too important to be left to politicians, who are not economists and have their own political interests at stake. B. It would be more democratic for elected officials to control monetary policy. C. Only an independent central bank can deal with a financial crisis without causing an increase in unemployment and inflation. D. The public is unable to hold Fed officials accountable for their policies, unlike elected officials.
A. Monetary policy is too important to be left to politicians, who are not economists and have their own political interests at stake. D. An independent Fed makes a political business cycle less likely. B. It would be more democratic for elected officials to control monetary policy. D. The public is unable to hold Fed officials accountable for their policies, unlike elected officials.
A columnist writing in the Wall Street Journal observed: "Franklin D. Roosevelt's March 1933 inaugural line 'that the only thing we have to fear is fear itself' was inspiring, but wrong. There was plenty to fear, not least the deflation that then gripped the nation." Prices fall when a country experiences deflation, so isn't deflation good for consumers? A. No, borrowers would be hurt by the higher real interest rates and higher real value of debts that deflation causes. B. Yes, allowing the price level to fall is necessary before an economic recovery can begin. C. Yes, deflation decreases prices, so when prices are falling, the purchasing power of money increases. D. It depends. The lower price level is always good for consumers as long as it doesn't lead to bank runs. Part 2 If nominal interest rates remain unchanged during a period of deflation, then when inflation rates are (Increasing/Decreasing), the real interest rate in the economy will (Decrease/increase/stay the same). Part 3 Was deflation during the early 1930s good or bad for firms? A. It was good for firms because the lower price level effectively increased consumer spending. B. It was bad for firms that were borrowers because it effectively raised interest rates. C. It was good for firms that were borrowers because it effectively lowered interest rates. D. Uncertain, as the outcome depends on how consumers responded to the lower prices of the firms.
A. No, borrowers would be hurt by the higher real interest rates and higher real value of debts that deflation causes. B. It was bad for firms that were borrowers because it effectively raised interest rates.
In the first volume of his history of the Federal Reserve System, Allan Meltzer titled one of his chapters "Under Treasury Control, 1942-1951." Source: Allan H. Meltzer, A History of the Federal Reserve, Volume I: 1913-1951, Chicago: University of Chicago Press, 2003, Ch. 7. Which of the following statements are true and help explain why Meltzer considered the Fed to have been under Treasury control during those years (Select all that apply) Part 2 A. The Treasury acted on the behalf of Presidents Roosevelt and Truman. B. The Treasury assumed some control over the Fed to help finance wartime deficits. C. The Treasury encouraged the Fed to engage in pegging of the interest rate. D. The Treasury did not agree with the Fed's decision
A. The Treasury acted on the behalf of Presidents Roosevelt and Truman. B. The Treasury assumed some control over the Fed to help finance wartime deficits. C. The Treasury encouraged the Fed to engage in pegging of the interest rate.
What are the reasons banks demand reserves? (Check all that apply.) A. To meet their legal obligation to hold required reserves. B. To hold excess reserves to meet their long-term liquidity needs. C. To make money by earning interest on reserve balances. D. To hold excess reserves to meet their short-term liquidity needs. Part 2 Why does an increase in the federal funds rate decrease the quantity of reserves demanded? As the federal funds rate increases, the opportunity cost to banks of holding excess reserves (increases/decreases) because the return they could earn from lending out those reserves goes (up/down). Part 3 At what interest rate does the demand curve for reserves become perfectly elastic? A. At the interest rate the Fed pays on banks' reserve balances. B. At the discount rate the Fed sets. C. At the equilibrium federal funds rate. D. The demand curve for reserves never becomes perfectly elastic.
A. To meet their legal obligation to hold required reserves. D. To hold excess reserves to meet their short-term liquidity needs. increases up A. At the interest rate the Fed pays on banks' reserve balances.
In 2019, a Federal Reserve publication stated: "The Federal Reserve can no longer effectively influence the FFR by small changes in the supply of reserves." Is this statement true? A. Yes, since the 2007-2009 financial crisis, banks have held substantial excess reserves, so small changes in reserves by the Fed do not significantly influence the FFR. B. No, since the 2007-2009 financial crisis, the Fed has fixed the FFR to match the level of reserves held in the banking system. C. No, the FFR always reacts to the level of reserves, so any changes in reserves by the Fed will impact the FFR. D. Yes, since the 2007-2009 financial crisis, banks have stopped holding excess reserves altogether, so small changes in reserves have no impact on the FFR.
A. Yes, since the 2007-2009 financial crisis, banks have held substantial excess reserves, so small changes in reserves by the Fed do not significantly influence the FFR.
If Bear Stearns failed, for example, it would result in a wholesale dumping of mortgage securities and other assets onto a market that is frozen and where buyers are in hiding. This fire sale would force surviving institutions carrying the same types of securities on their books to mark down their positions. Source: Gretchen Morgenson, "Rescue Me: A Fed Bailout Crosses a Line," New York Times, March 18, 2008. Why did Bear Stearns almost fail? (Check all that apply.) A. because lenders lost faith in Bear's ability to pay back short-term loans B. because Bear liquidated assets in order to pay back long-term loans C. because lenders declined to renew Bear's short-term loans D. because lenders lost faith in Bear's ability to pay back long-term loans E. because Bear liquidated assets in order to pay back short-term loans Part 2 How did the Federal Reserve rescue Bear Stearns? The Federal Reserve arranged a buyout of Bear Stearns by A. Citibank. B. Lehman Brothers. C. Bank of America. D. JP Morgan Chase. Part 3 The debt-deflation process is the process of (decreasing/increasing) bankruptcies and defaults that can increase the severity of an economic downturn. Part 4 Does this process provide any insight into why the Federal Reserve rescued Bear Stearns? (Check all that apply.) A debt-deflation process A. would occur if Bear Stearns goes bankrupt and has to sell its assets. B. pushes up the price of those assets which other investment banks hold, thus worsening their balance sheets. C. does not provide any insight into why the Federal Reserve rescued Bear Stearns. D. pushes down the price of those assets which other investment banks hold, thus worsening their balance sheets, which in turn can accelerate bankruptcies.
A. because lenders lost faith in Bear's ability to pay back short-term loans C. because lenders declined to renew Bear's short-term loans E. because Bear liquidated assets in order to pay back short-term loans D. JP Morgan Chase. decreasing A. would occur if Bear Stearns goes bankrupt and has to sell its assets. D. pushes down the price of those assets which other investment banks hold, thus worsening their balance sheets, which in turn can accelerate bankruptcies.
What is the public interest view of the Fed's motivation? A. A theory of central bank decision making that holds that officials act in the best interests of the shareholders. B. A theory of central bank decision making that holds that officials act in the best interests of the public. C. A theory of central banking that holds that officials maximize the public's interest in (and attitude toward) the affairs of the monetary authority. D. A theory of central banking that holds that officials maximize their personal well-being rather than that of the general public. Part 2 What is the principal-agent view? A. A theory of central banking that holds that officials maximize their personal well-being rather than that of the general public. B. A theory of central bank decision making that holds that officials act in the best interest of the shareholders. C. A theory of central banking that holds that officials maximize the general public's well-being rather than their personal well-being. D. A theory of central bank decision making that holds that officials act in the best interest of the public. Part 3 How are the principal-agent view and the public interest view connected to the theory of the political business cycle? A. Under the both views the Fed lowers interest rates to stimulate the economy before an election to avoid conflict with groups that could limit its power and influence. B. These views are unrelated to the theory of the political business cycle. C. The political business cycle would be more likely with the public interest view where the Fed lowers interest rates to stimulate the economy before an election to avoid conflict with groups that could limit its power and influence. D. The political business cycle would be more likely with the principal-agent view where the Fed lowers interest rates to stimulate the economy before an election to avoid conflict with groups that could limit its power and influence.
B. A theory of central bank decision making that holds that officials act in the best interests of the public. A. A theory of central banking that holds that officials maximize their personal well-being rather than that of the general public. D. The political business cycle would be more likely with the principal-agent view where the Fed lowers interest rates to stimulate the economy before an election to avoid conflict with groups that could limit its power and influence.
What legislative change and financial innovations occurred after 1979 that changed M1 from representing a pure medium of exchange to also representing a store of value? (Check all that apply.) A. The shadow banking system was created by Congress to compete with traditional banks. B. Banks developed automated transfer of saving accounts, which move checkable deposit balances into higher-interest CDs each night and then back into checkable deposit balances in the morning. C. Banks developed sweep accounts, which move savings deposits of businesses into checkable deposits each morning and then move the funds back into savings deposits at the end of the day. D. Congress authorized NOW accounts on which banks can pay interest. Part 2 Why would this change in M1 break the short-run link between money and inflation? A. M1 became more a world currency than a currency for usage within the country. B. M1 became more a medium of exchange than a pure store of value. C. M1 narrowed significantly. D. M1 became more a store of value than a pure medium of exchange.
B. Banks developed automated transfer of saving accounts, which move checkable deposit balances into higher-interest CDs each night and then back into checkable deposit balances in the morning. D. Congress authorized NOW accounts on which banks can pay interest. D. M1 became more a store of value than a pure medium of exchange.
Explain whether you agree with the following observation: "Since March 2020, the required reserve ratio has been equal to 0, therefore any increase in the monetary base can lead to an infinite increase in the money supply." A. Agree. If the required reserve ratio equaled zero, the simple deposit multiplier would equal infinity, implying that multiple deposit expansion would go on forever, and the realistic money multiplier, which includes currency and excess reserve holdings, would also equal infinity. B. Disagree. If the required reserve ratio equaled zero, the simple deposit multiplier would equal infinity, implying that multiple deposit expansion would go on forever. However, the realistic money multiplier, which includes currency and excess reserve holdings, would not equal infinity even if the required reserve ratio equaled zero. C. Agree. If the required reserve ratio equaled zero, the simple deposit multiplier would equal zero, implying that multiple deposit expansion would go on forever, and the realistic money multiplier, which includes currency and excess reserve holdings, would also equal zero. D. Disagree. If the required reserve ratio was equal to zero, the simple deposit multiplier would be equal to zero too. Therefore, multiple deposit expansion would not go on forever.
B. Disagree. If the required reserve ratio equaled zero, the simple deposit multiplier would equal infinity, implying that multiple deposit expansion would go on forever. However, the realistic money multiplier, which includes currency and excess reserve holdings, would not equal infinity even if the required reserve ratio equaled zero.
In his memoirs, Herbert Hoover described the reaction of his Treasury Secretary to the Great Depression: First was the "leave it alone liquidationists" headed by Secretary of the Treasury Mellon, who felt that government must keep its hands off and let the slump liquidate itself. Mr. Mellon had only one formula: "Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate." Source: Herbert Hoover, The Memoirs of Herbert Hoover: Volume 3: The Great Depression, 1929-1941, New York: Macmillan, 1952, p. 30. What does "liquidate" mean in this context? A. Liquidate means to encourage struggling firms to expand. B. Liquidate means to let prices fall to their equilibrium level. C. Liquidate means to redistribute the assets and property of a business. D. Both A and B are correct. Part 2 Can these views help to explain the actions by the Fed during the early years of the Great Depression? A. Yes, to an extent, because the Federal Reserve was acting on the predominant economic model of the time, which said that the economy will self-adjust and any attempt to intervene will either do nothing or create negative consequences. B. Yes. The Fed and the government did absolutely nothing to help the economy during the Great Depression. C. No, these views don't help to explain the actions by the Fed. The Federal Reserve was acting on the predominant economic model of the time, which said that the economy needed government intervention in order to recover. D. There is not enough information to answer the question.
B. Liquidate means to let prices fall to their equilibrium level. A. Yes, to an extent, because the Federal Reserve was acting on the predominant economic model of the time, which said that the economy will self-adjust and any attempt to intervene will either do nothing or create negative consequences.
Does a bank have to be insolvent to experience a run? A. No, banks runs usually occur when banks lend out more money than they have in reserves B. No, bank runs are caused by bank panics, which can occur whether a bank is insolvent or not C. Yes, bank runs are cause by illiquidity, which can occur only if the bank is insolvent D. Yes, since this is the only time that depositors lose enough confidence in their banks and withdraw all their funds
B. No, bank runs are caused by bank panics, which can occur whether a bank is insolvent or not
Which from the following variables is most likely to be a goal of monetary policy? (Check all that apply.) A. Open market purchases B. Real GDP growth C. Federal funds rate D. Unemployment rate E. M1 F. Nonborrowed reserves G. Monetary base H. Discount rate I. M2 Which from the following variables is most likely to be an intermediate target of monetary policy? (Check all that apply.) A. Open market purchases B. Real GDP growth C. Federal funds rate D. Unemployment rate E. M1 F. Nonborrowed reserves G. Monetary base H. Discount rate I. M2 Which from the following variables is most likely to be an operating target of monetary policy? (Check all that apply.) A. Open market purchases B. Real GDP growth C. Federal funds rate D. Unemployment rate E. M1 F. Nonborrowed reserves G. Monetary base H. Discount rate I. M2 Which from the following variables is most likely to be a monetary policy tool? (Check all that apply.) A. Open market purchases B. Real GDP growth C. Federal funds rate D. Unemployment rate E. M1 F. Nonborrowed reserves G. Monetary base H. Discount rate I. M2
B. Real GDP growth D. Unemployment rate I. M2 E. M1 G. Monetary base F. Nonborrowed reserves C. Federal funds rate H. Discount rate A. Open market purchases
Suppose that the U.S. Constitution were amended to include the following: "Congress shall establish a central bank that will be responsible for conducting the monetary policy of the United States." What effect would such an amendment be likely to have on the Fed? (Check all that apply.) A. If such an amendment were enacted, the U.S. dollar would likely undergo a large depreciation. B. The Fed already serves the role described in the hypothetical amendment. C. The amendment would cause the making of monetary policy to be transferred from a private organization to a public agency. D. The amendment would likely have little effect on the Fed and would simply quiet dissenters who don't believe the Fed is constitutional.
B. The Fed already serves the role described in the hypothetical amendment. D. The amendment would likely have little effect on the Fed and would simply quiet dissenters who don't believe the Fed is constitutional.
What is the purpose of the Government in the Sunshine Act? A. The Government in the Sunshine Act, which required Congress to make all monetary policy meetings open to the public, was created to make monetary policy more transparent. B. The Government in the Sunshine Act, which required government agencies to post meetings before they happened, was created to promote public awareness. C. The Government in the Sunshine Act, which required the Fed to make all monetary policy meetings open to the public, was created to make monetary policy more transparent. D. The Government in the Sunshine Act, which required the FMOC to make all monetary policy meetings open to the public, was created to make monetary policy more transparent. Part 2 Was Fed Chairman Bernanke justified in evading the requirements of this act during the financial crisis of 2007-2009? A. Fed Chairman Bernanke was justified in evading the requirements of this act because secrecy was essential for stabilizing the financial crisis. B. Given the importance of FOMC meetings, he was not justified in evading the Sunshine Act. C. Because of the impact of the financial crisis on the public, it is not possible to justify in evading the Sunshine Act. D. Because the financial crisis was unfolding so quickly, one could argue that Bernanke was justified in evading the Sunshine Act.
B. The Government in the Sunshine Act, which required government agencies to post meetings before they happened, was created to promote public awareness. D. Because the financial crisis was unfolding so quickly, one could argue that Bernanke was justified in evading the Sunshine Act.
] In their book This Time Is Different, Carmen Reinhart and Kenneth Rogoff conclude: "An examination of the aftermath of severe postwar financial crises shows that they have had a deep and lasting effect on asset prices, output, and employment." Source: Carmen M. Reinhart and Kenneth S. Rogoff, This Time Is Different: Eight Centuries of Financial Folly, Princeton, NJ: Princeton University Press, 2009, p. 248. Part 2 Why should a recession connected with a financial crisis be more severe than a recession that did not involve a financial crisis? A. A recession that includes a financial crisis is generally more complex and has more severe consequences comma such as increasing asset prices and lending comma which affects the economy for a longer time period than a traditional recession. B. When financial institutions fail comma credit markets can be damaged comma and the amount of borrowing comma and hence economic activity comma can decrease comma further affecting real output. C. Both A and B are correct. D. None of the above. A recession connected with a financial crisis will be less severe than a recession that did not involve a financial crisis.
B. When financial institutions fail comma credit markets can be damaged comma and the amount of borrowing comma and hence economic activity comma can decrease comma further affecting real output.
According to an article in the Wall Street Journal, Congressman Jeb Hensarling of Texas, who was at the time chair of the House Financial Services Committee, criticized the Fed for paying banks an interest rate on their reserves that was higher than the federal funds rate. Briefly explain why the federal funds rate is typically lower than the interest rate the Fed pays banks on reserves. If the interest rate on reserves moves above the federal funds rate, then ________. A. banks would prefer to borrow from other banks instead of borrowing from the Fed B. banks would prefer to sit on their excess reserves instead of lending to other banks in the federal funds market C. the Fed would no longer be able to use the interest rate it pays on reserves to manage the federal funds rate D. banks would become unstable from lending out too much of their excess reserves in the federal funds market Part 2 Is it likely that the Fed would be able to set the interest rate it pays banks on reserves equal to the actual federal funds rate? A. No, because the Fed does not control the IOER—it only influences it through its policy decisions. B. Yes, the Fed was given this authority when Congress passed the Federal Reserve Act in 1913. C. No, because the Fed does not control the federal funds rate—it only influences it through its policy decisions. D. It depends on whether the Fed is pursuing expansionary or contractionary monetary policy.
B. banks would prefer to sit on their excess reserves instead of lending to other banks in the federal funds market C. No, because the Fed does not control the federal funds rate—it only influences it through its policy decisions.
A Federal Reserve publication states that: "The rate paid on ON RRP transactions acts as a floor for the" effective federal funds rate. What is the difference between the IOER and the rate on ON RRP? The IOER is the interest rate paid on ________, while the ON RRP is the interest rate paid on ________. A. the Fed's reserve balances; overnight repurchase agreements B. banks' reserve balances; overnight repurchase agreements C. overnight repurchase agreements; banks' reserve balances D. banks' excess reserves; banks' required reserves Part 2 Is every financial firm that can participate in ON RRP transactions with the Fed also eligible to receive the IOER? A. No, government-sponsored enterprises like Fannie Mae and Freddie Mac are not eligible to receive the IOER. B. No, only large commercial banks are eligible to receive the IOER. C. Yes, any financial firm that participates in ON RRP transactions is also eligible to receive the IOER. D. Uncertain, as eligibility depends on the size of the reserve balances being held with the Fed. Part 3 Why doesn't the IOER serve as a floor for the effective federal funds rate? A. Banks no longer want to hold very large levels of excess reserves. B. Financial firms not eligible to receive the IOER may be willing to lend at rates lower than the IOER. C. The Fed discontinued the IOER shortly after the 2007-2009 financial crisis. D. Financial firms receiving the IOER may be unwilling to lend to financial firms not eligible to receive the IOER. Part 4 How does the rate on ON RRP transactions serve as a floor for the federal funds rate? A. Financial firms receiving the ON RRP must agree to lend at rates at least 0% to 0.25% above the federal funds rate. B. The ON RRP represents the highest rate that banks are able to borrow short term, regardless of the lender. C. Financial firms receiving the ON RRP are typically unwilling to lend in the federal funds market at a lower rate. D. Similar to the IOER, the ON RRP doesn't actually serve as a floor for the effective federal funds rate.
B. banks' reserve balances; overnight repurchase agreements A. No, government-sponsored enterprises like Fannie Mae and Freddie Mac are not eligible to receive the IOER. B. Financial firms not eligible to receive the IOER may be willing to lend at rates lower than the IOER. C. Financial firms receiving the ON RRP are typically unwilling to lend in the federal funds market at a lower rate.
In a paper written in April 2010, looking back at the financial crisis, former Fed Chairman Alan Greenspan wrote: Some bubbles burst without severe economic consequences, the dotcom boom and the rapid run-up of stock prices in the spring of 1987, for example. Others burst with severe deflationary consequences. That class of bubbles ... appears to be a function of the degree of debt leverage in the financial sector, particularly when the maturity of debt is less than the maturity of the assets it funds. Source: Alan Greenspan, "The Crisis," April 15, 2010, p. 10. What does Greenspan mean by "debt leverage"? A. financing investments by issuing stocks B. borrowing and purchasing assets with borrowed funds C. purchasing other firms' derivatives D. purchasing assets with personal funds Part 2 Which of the following could be a negative implication if "the maturity of the debt is less than the maturity of the assets it funds"? A. It is possible that a company will face a situation when it has to pay the debt after it will get profit from the investments. B. If the debt is not renewed, or rolled over, the asset side of the balance sheet becomes unsustainable. C. A debt could be renewed on very bad conditions: lower costs, longer terms, etc. D. All of the above. Part 3 Does Greenspan's analysis provide insight into why the Fed during his tenure may have been reluctant to take action against asset bubbles? A. If the Fed followed Greenspan's analysis, their actions should have been sharply different. B. If Greenspan believes that most bubbles burst without severe economic consequences, then, yes, it would explain the Fed's actions. C. Bubbles always cause severe economic consequences. So, Greenspan's analysis is unsustainable. D. Greenspan's analysis doesn't provide insight into why the Fed during his tenure may have been reluctant to take action against asset bubbles.
B. borrowing and purchasing assets with borrowed funds B. If the debt is not renewed, or rolled over, the asset side of the balance sheet becomes unsustainable. B. If Greenspan believes that most bubbles burst without severe economic consequences, then, yes, it would explain the Fed's actions.
Given that inflation erodes the value of money, should the Federal Reserve pursue a goal of deflation? A. No, deflation erodes the value of money more quickly than inflation. B. No, deflation encourages consumers to delay consumption, which can cause the economy to contract. C. Yes, deflation lowers real interest rates, which benefits everyone. D. Yes, deflation increases the value of money, which encourages consumers to increase spending, resulting in faster growth. Part 2 Would deflation create some of the same problems as inflation in terms of the information communicated by price changes and the arbitrary redistribution of income? (Check all that apply.) A. Unanticipated deflation redistributes income just as unanticipated inflation does, with lower-income households losing purchasing power to higher-income households. B. Unanticipated deflation redistributes income just as unanticipated inflation does, but from borrowers to lenders rather than from lenders to borrowers. C. Deflation, just like inflation, complicates the ability to distinguish overall price changes from relative price changes, which determine resource allocation. D. Deflation does not create any problems for the economy. On the contrary, it helps spur economic growth, which benefits everyone. Part 3 Which groups would likely benefit from deflation? Which groups would likely be hurt? (Creditors/Borrowers) would likely gain from deflation and (creditors/borrowers) would likely lose.
B. No, deflation encourages consumers to delay consumption, which can cause the economy to contract. B. Unanticipated deflation redistributes income just as unanticipated inflation does, but from borrowers to lenders rather than from lenders to borrowers. C. Deflation, just like inflation, complicates the ability to distinguish overall price changes from relative price changes, which determine resource allocation. Creditors borrowers
David Wheelock of the Federal Reserve Bank of St. Louis describes the following episode at the beginning of the Great Depression: Following the stock market crash [of October 1929], the Federal Reserve Bank of New York used open market purchases [of Treasury securities] and liberal discount window lending [to commercial banks] to inject reserves into the banking system. . . . The Federal Reserve Board reluctantly approved the New York Fed's actions ex post, but many members expressed displeasure that the New York Fed had acted independently. Source: David C.Wheelock, "Lessons Learned? Comparing the Federal Reserve's Responses to the Crises of 1929-1933 and 2007-2009," Federal Reserve Bank of St. Louis Review, Vol. 92, No. 2, March/April 2010, pp. 97-98. What are the arguments for a Federal Reserve Bank operating independently? A. A regional Federal Reserve Bank's actions might exacerbate a crisis. B. A regional Federal Reserve Bank would be circumventing the checks and balances built into the system. C. A regional Federal Reserve Bank acting independently can act quickly to address regional issues. D. A regional Federal Reserve Bank acting independently can increase the stability of the entire banking system. Part 2 What are the arguments against a Federal Reserve Bank operating independently? (Check all that apply.) A. A regional Federal Reserve Bank acting independently can act quickly to address regional issues. B. A regional Federal Reserve Bank would be circumventing the checks and balances built into the system. C. A regional Federal Reserve Bank acting independently can increase the stability of the entire banking system. D. A regional Federal Reserve Bank's actions might exacerbate a crisis. Part 3 In the modern Fed, would it be possible for a Reserve Bank to act as the New York Fed did in 1929? A. Yes. In the modern Fed a Reserve Bank can use open market purchases and liberal discount window lending independently. B. No. In the modern Fed a Reserve Bank cannot conduct monetary policy independent from the FOMC and the Board of Governors. C. No. In the modern Fed a Reserve Bank is not able to use open market purchases and liberal discount window lending at all. D. Yes. In the modern Fed a Reserve Bank can act independently in case of a severe crisis in order to improve the economic situation.
C. A regional Federal Reserve Bank acting independently can act quickly to address regional issues. B. A regional Federal Reserve Bank would be circumventing the checks and balances built into the system. D. A regional Federal Reserve Bank's actions might exacerbate a crisis. B. No. In the modern Fed a Reserve Bank cannot conduct monetary policy independent from the FOMC and the Board of Governors.
The "fragility" of commercial banking means that A. banks borrow long to lend short and are relatively liquid on any given day B. Commercial banks tend to be larger banks that could be forced to shut down at any moment C. Bank borrow short to lend long and are relatively illiquid on any given day D. commercial banks tend to be similar banks that could be forced to shut down at any moment
C. Bank borrow short to lend long and are relatively illiquid on any given day
In academic research published before he entered government, Fed Chairman Ben Bernanke wrote: [In] a system without deposit insurance, depositor runs and withdrawals deprive banks of funds for lending; to the extent that bank lending is specialized or information sensitive, these loans are not easily replaced by nonbank forms of credit. Source: Ben S. Bernanke, Essays on the Great Depression, Princeton, NJ: Princeton University Press, 2000, p. 26. What does it mean to say that bank lending is "information sensitive"? A. Banks' lending is highly sensitive to the information about the interest rate. B. Savers can easily withdraw their deposits based on the information about the yield. C. Banks acquire information to decide if borrowers are creditworthy. D. None of the above. Part 2 Nonbank forms of credit A. are credits issued by the U.S. Treasury. B. are credits issued by the Fed. C. refer to credit from providers other than banks. D. refer to credits issued by one commercial bank to another commercial bank. Part 3 Why would bank lending being "information sensitive" make it difficult to replace with nonbank forms of credit? A. Providers of credit are able to provide risk assessment just as well as banks. B. Nonbanks have economies of scale or some other advantage in evaluating the riskiness of loans. C. Banks have economies of scale or some other advantage in evaluating the riskiness of loans. D. Both B and C are correct. Part 4 Does Bernanke's observation help to explain the role bank panics played in the severity of the Great Depression? A. When thousands of banks failed, it became difficult for their customers to obtain credit, thus exacerbating the severity of the Great Depression. B. No, Bernanke's observation doesn't help to explain the role bank panics played in the severity of the Great Depression. C. Yes, Bernanke's observation helps to explain the role bank panics played in the severity of the Great Depression. D. Both A and C are correct.
C. Banks acquire information to decide if borrowers are creditworthy. C. refer to credit from providers other than banks. C. Banks have economies of scale or some other advantage in evaluating the riskiness of loans. D. Both A and C are correct.
In a paper written in April 2010, looking back at the financial crisis, former Fed Chair Alan Greenspan argued: At least partly responsible [for the severity of the financial collapse] may have been the failure of risk managers to fully understand the impact of the emergence of shadow banking that increased financial innovation, but as a consequence, also increased the level of risk. The added risk had not been compensated by higher capital. Source: Alan Greenspan, "The Crisis," April 15, 2010, p. 21. How did the emergence of shadow banking increase the risk to the financial system? (Check all that apply.) A. Nonbank financial institutions are required to maintain the equivalent of reserve requirements. B. Nonbank financial institutions are not required to maintain the equivalent of reserve requirements even though, like traditional banks, they borrow long and lend short. C. In the event of a nonbank financial institution run, there is no equivalent of the FDIC. D. Nonbank financial institutions are not required to maintain the equivalent of reserve requirements even though, like traditional banks, they borrow short and lend long. Part 2 What does Greenspan mean that "the added risk had not been compensated by higher capital"? In order to compensate for the risk, Greenspan believes that nonbank financial institutions should have voluntarily A. increased the interest rate. B. decreased their debt. C. increased their capital. D. decreased excess reserves.
C. In the event of a nonbank financial institution run, there is no equivalent of the FDIC. D. Nonbank financial institutions are not required to maintain the equivalent of reserve requirements even though, like traditional banks, they borrow short and lend long. C. increased their capital.
What is the main problem with having a central bank that is not independent of the rest of the government? A. Less independent central banks tend to lead to higher unemployment. B. Research studies have shown that the most independent central banks had the highest average rates of inflation during the 1970s and 1980s. C. Less independent central banks tend to lead to higher inflation. An independent central bank can more freely focus on keeping inflation low. D. Less independent central banks tend to lead to lower interest rates.
C. Less independent central banks tend to lead to higher inflation. An independent central bank can more freely focus on keeping inflation low.
According to economist Alan Meltzer of Carnegie Mellon University, who has written about the history of the Federal Reserve: Tension between the [Federal Reserve] Board and the reserve banks began before the System opened for business. . . . [Paul] Warburg described the problem. Dominance by the Board would allow political considerations to dominate decisions about interest rates. Dominance by the reserve banks "would . . . reduce the Board to a position of impotence." Paul Warburg was one of President Wilson's initial appointments when the Federal Reserve Board began operations in 1914. Source: Allan H. Meltzer, A History of the Federal Reserve, Volume I: 1913−1951, Chicago: University of Chicago Press, 2003, p. 75. Why did Congress set up a system that had this tension between the Reserve Banks and the Federal Reserve Board? (Check all that apply.) A. Tension was created in order to make the Fed more centralized. B. Tension was necessary to improve the competitiveness of the U.S. banking system. C. This was all part of the organizational plan to prevent one faction of the banking system from having too much power. D. Tension was created to ensure that various interests would have input into the conduct of monetary policy. Part 2 Has the tension been resolved in the modern Fed? A. The board has much more power today, but the tension remains. B. The tension has been resolved by the Consumer Protection Act. C. The tension has been resolved by the FOMC. D. The tension has been resolved by the Dodd-Frank Act.
C. This was all part of the organizational plan to prevent one faction of the banking system from having too much power. D. Tension was created to ensure that various interests would have input into the conduct of monetary policy. A. The board has much more power today, but the tension remains.
Thomas Hoenig, former president of the Federal Reserve Bank of Kansas City, remarked about the Federal Reserve System that: "[I]t was designed as a public-private partnership, accountable to, and yet independent of, the government." Source: Thomas M. Hoenig, "Twelve Banks: The Strength of the Federal Reserve System," speech delivered at Copper Mountain, Colorado, September 15, 2006. Part 2 In what sense is the Federal Reserve System a "public-private partnership"? A. While owned by the government, private banks have a legal claim on the profits of the District banks. B. It is a partnership made up of both government and private entities. C. While authorized by the government, it is owned by private banks. D. While formed by private banks, it is owned by the government. Part 3 In what sense is the Federal Reserve System both accountable to the government and independent of it? A. Member banks have to complete annual government reporting requirements but are owned by private shareholders. B. The Board of Governors is the legal equivalent of a private corporation while the Federal Reserve Banks are government agencies. C. Regulatory requirements are set by the federal and state governments, but banks are owned by private shareholders. D. The Board of Governors is a federal government agency, while the Federal Reserve Banks are legally the equivalent of private corporations.
C. While authorized by the government, it is owned by private banks. D. The Board of Governors is a federal government agency, while the Federal Reserve Banks are legally the equivalent of private corporations.
An opinion column on barrons.com, discussing the conflict between President Trump and Fed Chair Jerome Powell, observed: "Leave aside the arguments over policy for a moment. Consider instead the Constitutional question of an unelected agency of government officials working to thwart the policies of elected officials." Is it correct to describe the Fed as "an unelected agency of government officials"? A. Yes, since members of the Fed are appointed by member banks and serve life-long terms, the quote is correct. B. No, similar to the president, members of the Fed are elected at the national level—they just serve longer terms. C. Yes, it is true that Fed officials are not elected, so in some sense the quote is correct. D. No, similar to members of Congress, members of the Fed are elected at the state level—they just serve longer terms. Part 2 What is the "Constitutional question" involved here? Is the existence of the Fed constitutional? A. The Constitution explicitly forbids establishing a central bank; however, there is still a debate whether the Federal Reserve System is a central bank or not. B. The Constitution does not directly discuss a central banking system; however, the Fed's constitutionality was confirmed by the Supreme Court. C. The Constitution explicitly calls for the establishment of a central bank; however, there is still a debate whether the Federal Reserve System is a central bank or not. D. The Constitution allows for the creation of a central banking system only if it remains fully independent of the government. The Supreme Court has upheld that the Fed meets this criteria. Part 3 If Congress agreed that the Fed was acting to "thwart the policies of elected officials," what actions could Congress take? A. Congress has no direct influence over the Fed, but it could influence the Fed by approving or rejecting new nominees to the Board of Governors. B. Congress could amend the Federal Reserve Act to change how the Fed operates or it could even abolish the Fed. C. Congress could exert considerable control over the Fed by limiting the funds sent to the Fed from the federal budget. D. Only the president has direct control over the Fed, so Congress must petition the president regarding any proposed changes.
C. Yes, it is true that Fed officials are not elected, so in some sense the quote is correct. B. The Constitution does not directly discuss a central banking system; however, the Fed's constitutionality was confirmed by the Supreme Court. B. Congress could amend the Federal Reserve Act to change how the Fed operates or it could even abolish the Fed.
Adam Posen, a member of the Bank of England's Monetary Policy Committee, was quoted as arguing in a speech that: Central banks' purchases of government debt . . . far from undermining their independence . . . should enhance their credibility. . . . Mr. Posen said, . . . "What matters for our independence is our ability to say no and to mean it, and to be responsible about when we choose to say yes." Source: Natasha Brereton, "BOE's Posen Defends ECB's Actions," Wall Street Journal, June 15, 2010. Why might purchasing government debt be seen as undermining a central bank's independence? A. If the Bank of England starts purchasing government debt, it may be interpreted as a sign that the government is forcing the Bank of England to monetize the debt. B. Purchasing government debt is almost like printing money. C. When the central bank purchases government debt, it serves as a way for the government to spend money without having to pay for it. D. All answers are correct. Part 2 What actions does a central bank need to have the independence to say "no" to? A central bank needs to be able to say no to actions that would harm the economy, like excessive inflation from buying government bonds. The statement above is A. true. B. false. Part 3 Why might a central bank sometimes want to say "yes" to the above actions? A. These actions may be positive in times of extreme economic circumstances. For instance, in the fall of 2010 the Federal Reserve undertook "quantitative easing," which was the purchase of government debt. The action flooded banks with excess liquidity. B. When these actions can put downward pressure on exchange rates, increasing exports to spur recovery. C. All answers are correct. D. When these actions can lower the cost of government borrowing in bad economic times.
D. All answers are correct. A. true. C. All answers are correct.
What is a lender of last resort? A. The Federal Reserve acts as a lender of last resort. B. Is an entity that seeks to stop a bank failure from turning into a bank panic by making sure solvent institutions can meet their depositors' withdrawal demands. C. A lender of last resort is an institution that serves as an ultimate source of credit to which banks can turn during a panic. D. All of the above. Part 2 How is being a lender of last resort connected to the too-big-to-fail policy? (Check all that apply.) A. The too-big-to-fail policy and the lender of last resort strive to promote "moral hazard" in the banking system. B. The too-big-to-fail policy and the lender of last resort strive to prevent systemic risk, where the failure of a few firms leads to the widespread failure of solvent banks. C. The too-big-to-fail policy and the lender of last resort have to provide liquidity to banks during bank panics. D. A lender of last resort is not connected to the too-big-to-fail policy.
D. All of the above. B. The too-big-to-fail policy and the lender of last resort strive to prevent systemic risk, where the failure of a few firms leads to the widespread failure of solvent banks. C. The too-big-to-fail policy and the lender of last resort have to provide liquidity to banks during bank panics.
What is "contagion"? What role does it play in bank panics? Contagion is when ____ A. a bank is only able to stabilize its balance sheet by buying securities. This can help prevent a bank panic B. The failure of one bank causes the failure of another bank it does business with. It is unrelated to a bank panic. C. one bank lends excess reserves to another bank. if there are not enough banks participating in the system, it can cause a bank panic D. The failure of one bank causes runs on other banks. If multiple banks experience ban runs, the result is a bank panic
D. The failure of one bank causes runs on other banks. If multiple banks experience ban runs, the result is a bank panic
The classic account of bank panics was published in 1879 by Walter Bagehot, editor of the Economist, in his book Lombard Street: "In wild periods of alarm, one failure makes many, and the best way to prevent the derivative failures is to arrest the primary failure which causes them." Source: Walter Bagehot, Lombard Street: A Description of the Money Market, New York: John Wiley, 1999 (first published 1873), p. 51. All of the following are reasons why one bank failure might lead to many bank failures, except: A. Depositors of other banks may become concerned that their banks might also have problems. B. Banks will be forced to sell loans and securities to raise money to pay off depositors. C. Depositors have an incentive to withdraw their money from their banks to avoid losing it should their banks be forced to close. D. If multiple banks have to sell the same assets, the prices of those assets are likely to rise. Part 3 What are the two main ways in which the government can keep one bank failure from leading to a bank panic? A. A central bank can act as a borrower of last resort and insure deposits. B. A central bank can act as a lender of last resort, and the government can insure deposits. C. A central bank can act as a borrower of last resort, and the government can insure deposits. D. A central bank can act as a lender of last resort and insure deposits.
D. If multiple banks have to sell the same assets, the prices of those assets are likely to rise. B. A central bank can act as a lender of last resort, and the government can insure deposits.
What is the simple deposit multiplier? A. It is the ratio of the amount of deposits created by banks to the amount of already existing reserves. B. It is the ratio of the amount of new reserves to the amount of deposits created by banks. C. It is the percentage of checkable deposits that the Fed specifies banks must hold as reserves. D. It is the ratio of the amount of deposits created by banks to the amount of new reserves. Part 2 If the Fed cuts the required reserve ratio from 8% to 6%, calculate the change in the value of the simple deposit multiplier. The simple deposit multiplier would (increase/decrease) by _____ (Round your response to two decimal places.)
D. It is the ratio of the amount of deposits created by banks to the amount of new reserves. Increase, 4.17
An article on bloomberg.com in 2020 noted that in Argentina, "Since the lockdown [imposed to slow the spread of Covid-19] was announced March 19, the monetary base has increased about 20% . . . . Up until the quarantine, the . . . monetary base had only grown 7% this year." What is the likeliest explanation for why the arrival in Argentina of the Covid-19 pandemic resulted in an increase in the country's monetary base? A. Its central bank was likely selling large amounts of government securities, causing its balance sheet to shrink. B. The government had likely decreased its fiscal spending to stabilize the economy, causing the monetary base to increase. C. The central bank had likely decreased the money supply to stabilize the economy, causing the monetary base to increase. D. Its central bank was likely purchasing large amounts of government securities, causing its balance sheet to expand.
D. Its central bank was likely purchasing large amounts of government securities, causing its balance sheet to expand.
[Related to the Making the Connection] A column in the Wall Street Journal mentions the famous billionaire investor "Warren Buffet, who in 1999 and early 2000 was widely derided as 'a dinosaur' and 'out of touch' for his refusal to buy technology stocks." Source: Jason Zweig, "When Does A Bubble Spell Trouble?" Wall Street Journal, January 10, 2014. Part 2 Why would anyone refer to an investor as out of touch if he wasn't investing in technology stocks in 1999 and early 2000? A. Investor expectations for technology stocks were based on the proven performance of long-term market leaders. B. Technology companies were generated huge profits at the time. C. Technology stocks were overvalued in what is known as a "bubble". D. Technology stocks were rising with the dot-com boom. Part 3 Given the subsequent crash of technology stocks, why might the Fed have not intervened during this period of time? A. It was difficult to determine whether an asset bubble existed. B. Buffet's changed his mind and bought technology stocks. C. The Fed determined no asset bubble existed. D. Professional investors were raising alarms.
D. Technology stocks were rising with the dot-com boom. A. It was difficult to determine whether an asset bubble existed.
Former Federal Reserve Chair Ben Bernanke has observed that; "Even a bank that is solvent under normal conditions can rarely survive a sustained run." What does Bernanke mean by "solvent under normal conditions"? A. The value of a bank's assets is less than the value of its liabilities, so its net worth, or capital, is positive. B. The value of a bank's assets is less than the value of its liabilities, so its net worth, or capital, is negative. C. The value of a bank's assets is more than the value of its liabilities, so its net worth, or capital, is negative. D. The value of a bank's assets is more than the value of its liabilities, so its net worth, or capital, is positive. What does he mean by a "sustained run"? Why can't a bank by itself survive a sustained run? A. By "sustained run," Bernanke means a process by which simultaneous deposits result in a bank closing. A bank cannot by itself survive a sustained run because it does not have enough reserves to match the deposits and its assets are long term and not easily liquidated. B. By "sustained run," Bernanke means a bank run that lasts for a significant period of time. A bank cannot by itself survive a sustained run because it does not have enough reserves to match the deposit withdrawals and its assets are long term and not easily liquidated. C. By "sustained run," Bernanke means a process by which simultaneous devaluation of assets result in a bank closing. A bank cannot by itself survive a sustained run because it does not have enough reserves to match the deposit withdrawals and its assets are short term and easily liquidated. D. By "sustained run," Bernanke means a bank run that lasts for a short period of time. A bank cannot by itself survive a sustained run because it does not have enough reserves to match the deposit withdrawals and its assets are short term and easily liquidated.
D. The value of a bank's assets is more than the value of its liabilities, so its net worth, or capital, is positive. B. By "sustained run," Bernanke means a bank run that lasts for a significant period of time. A bank cannot by itself survive a sustained run because it does not have enough reserves to match the deposit withdrawals and its assets are long term and not easily liquidated.
An article in the New York Times quoted former Fed Chairman Alan Greenspan as arguing in 2010: "The global house price bubble was a consequence of lower interest rates, but it was long-term interest rates that galvanized home asset prices, not the overnight rates of central banks, as has become the seemingly conventional wisdom." Source: Sewell Chan, "Greenspan Concedes That the Fed Failed to Gauge the Bubble," New York Times, March 18, 2010. A house price bubble A. means that the decline in the housing market caused a decrease not only in spending on residential construction but also affected markets for furniture and appliances. B. means that asset prices have decreased below the point that could be justified by fundamental evaluation. C. means that asset prices have increased beyond the point that could be justified by property appraisers. D. occurs when house prices move beyond their fundamental values. Part 2 Why would long-term interest rates have a closer connection to house prices than overnight interest rates? A. Mortgage companies generally markup mortgages 2−3% above the 10−year Treasury bond yield. B. Housing purchases are typically short-term investments. C. The Fed can control and change long-term interest rates more easily than short-term interest rates. D. The average holding of a house is 30 years. Part 3 Why would it matter to Greenspan whether low long-term interest rates were more responsible for the housing bubble than low short-term interest rates? A. Mortgage-backed securities are usually short-term loans. B. Buying a house is linked with short-term borrowings, which were insured by mortgage-backed securities. C. To lessen the Federal Reserve's responsibility under Greenspan's watch as Chairman for causing, at least partially, the housing bubble with low interest rates. D. All of the above.
D. occurs when house prices move beyond their fundamental values. A. Mortgage companies generally markup mortgages 2−3% above the 10−year Treasury bond yield. C. To lessen the Federal Reserve's responsibility under Greenspan's watch as Chairman for causing, at least partially, the housing bubble with low interest rates.
Place the following in sequence, from what the Fed has the most influence on to what the Fed has the least influence on: policy goals, policy tools, policy instruments, intermediate targets. From the most influence to the least influence:
Policy tools Policy instruments Intermediate targets Policy Goals
Use T-accounts to show the effect of the following actions on the balance sheets of the Fed and the banking system: Part 2 The Fed increases discount loans by $2 billion. Discount Loans, an (asset/liability), (increases/decreases) by $2 billion. Reserves, an (asset/liability), (increases/decreases) by $2 billion. Part 3 The Fed carries out a $2 billion open market sale. Discount Loans, (asset/liability), (increases/decreases) by $2 billion. Reserves, (asset/liability), (increases/decreases) by $2 billion. Part 4 The Fed buys a new information technology system for the Federal Reserve Bank of Atlanta from DeShawn's Computer Services for $1 million. Discount Loans, (asset/liability), (increases/decreases) by $1 million. Reserves, (asset/liability), (increases/decreases) by $1 million.
asset, increases liability, increases asset, decreases liability, decreases asset, increases liability, increases
The U.S. Mint describes the demand for the gold, silver, and platinum coins it produces as being dependent on the prices of these metals as commodities. In addition, the Mint notes: "These commodity prices are, in turn, dependent on variables such as . . . [1] perceived strength as a safe-haven asset . . . and [2] earnings potential from other commodities or investments." Briefly explain whether these two factors help account for the surge in demand for gold coins in 2020. The more these metals are perceived as safe-haven assets, the (less/more) investors will want to purchase them during uncertain times, like those experienced during the Covid-19 pandemic. As the earnings potential from other commodities or investments increases, the demand for these precious metals will likely (increase/decrease).
more decrease