Money and Banking Test #2
If the required reserve ratio is 3%, an initial demand deposit made in a bank of $100,000 can result in an expansion in the money supply of $1,300,000 $3,000,000 $3,333,000 $3,500,000
$3,333,000
During World War I, the cost of living in the United States shot up 62%. Using more effective economic measures, the cost of living in the United States during World War II, from 1940 to 1945, increased by what percent? 40% 30% 20% 10%
20%
Which of these are among the primary responsibilities of the Federal Reserve? Conducting monetary policy and printing US currency Repaying the federal government debt and enforcing financial market regulations Conducting monetary policy and acting as the fiscal agent of the US Treasury Repaying the federal government debt and setting market interest rates
Conducting monetary policy and acting as the fiscal agent of the US Treasury
The rise of Savings & Loans following World War II played a key role in the post-war __________ boom. savings employment stock market housing
housing
Which of the following would be considered an asset on a bank's balance sheet? A consumer loan Demand deposits Loans from other banks Savings accounts
A consumer loan
The increasing average debt burden of American households beginning in the mid-1990s coincided with which of these other facts An increase in the cost of living, counteracted only in part by an increase in financial Market oversight An increase in the cost of living, counteracted only in part by an increase in real wage growth An increase in real rage growth, but a relaxation or elimination of many Financial Market regulations. A decrease in real wage growth, combined by the elimination of many Financial Market regulations
A decrease in real wage growth, combined by the elimination of many Financial Market regulations
If bankers have reason to feel optimistic about the future, they may become very eager to loan money. If insufficient regulations are in place, this could most likely cause what? Very little change in the short run, as higher interest rates will simply compensate. A credit card scroll which will reduce household consumption and business investment spending, leading to a decline in real output. A higher percentage of loans in default as riskier borrowers are attracted to easy loans. A credit crunch as riskier borrowers take out loans.
A higher percentage of loans in default as riskier borrowers are attracted to easy loans.
Eight times a year, the Bank of Canada announces the key policy rates for the nation. These key rates refer to what? Rate of inflation Rate of growth of the money supply Overnight interest rate Rate of economic growth
Overnight interest rate
Which of these statements best describes the function of banks as a part of the aggregate economy? Banks take deposits and make loans. Banks create or reduce the amount of money available in the economy. Banks reduce moral hazard. Banks lend money to those business firms most in need of it.
Banks create or reduce the amount of money available in the economy.
Which of these statements is most true of the function of banks? Banks are a safe way to save, and savers earn high interest. Banks lend money and help with the problem of symmetric information. Banks play a key role in creating money, and they help with the problem of adverse selection. Banks lend money and help with the problem of free-riders.
Banks play a key role in creating money, and they help with the problem of adverse selection.
Which of these describes an example of asymmetric information in the bond market? Bond issuers have longer-term goals than bond buyers. Bond issuers have better insight about their future profitability than bond buyers. Bond issuers and bond buyers have different experiences in the bond market. Bond issuers are more conservative about the future than bond buyers.
Bond issuers have better insight about their future profitability than bond buyers.
Refer to Figure 7-1. The initial equilibrium in the loanable funds market in Etopia is at A. If the banks in Etopia begin to see an upsurge in deposits, this will result in a new equilibrium at what point? Initially, point B with an increase in the interest rate, then point D with a decrease in the interest rate Point B with an increase the interest rate Point C with no change in the interest rate Point D with a decrease in the interest rate
Point D with a decrease in the interest rate
Under the Burgess-Riefler doctrine, a low level of bank borrowing and low nominal interest rates were considered to be evidence of __________ monetary policy. contractionary tight easy neutral
easy
Low nominal interest rates can indicate an economy suffering from deflation. either a sufficient money supply or an economy suffering from deflation. a sign of sufficient liquidity in the financial system. an economy in hard times but poised to move into better times
either a sufficient money supply or an economy suffering from deflation.
The two major goals of Canadian monetary policy are __________ and __________. flexible exchange rates; economic growth flexible exchange rates; inflation control inflation control; economic growth economic growth; low unemployment
flexible exchange rates; inflation control
The three governing bodies of the (ECB) are the open market committee, executive board, and governing council governing council, general council, and executive board governing council, general council, and executive committee executive board, general council, and monetary authority
governing council, general council, and executive board
The entity responsible for making the monetary policy decisions in the European Central Bank is the president of the ECB. governing council. general council. executive board.
governing council.
An example of asymmetric information in financial markets is that, in equity markets, directors __________ than shareholders. have a better sense of future profitability have a different rate of time preference are less optimistic about the future are less certain about the future
have a better sense of future profitability
In the early twentieth century, the business scene in America was transformed by the formation of trusts. Business trusts are __________ integrated ownership structures. vertically diagonally horizontally backwards
horizontally
Financial deregulation in the 1980s ultimately led to dramatic growth of Savings & Loan institutions. big profits for Savings & Loan institutions. the Savings & Loan crisis and the end of the Savings & Loan industry. a housing boom.
the Savings & Loan crisis and the end of the Savings & Loan industry.
Currently, the power of the Federal Reserve rests with an elected board of governors of the Federal Reserve. the chair of the Federal Reserve and a board of six governors. the chair of the Fed and the board of the New York Federal Reserve Bank. 24 member banks.
the chair of the Federal Reserve and a board of six governors.
The Federal Reserve district banks are primarily responsible for interacting with the state governments within their districts, tracking the flow of money in and out of their districts, and tracking the flow of commerce in and out of their districts. the check clearing system, supervising and examining banks in their districts, and interacting with state governments within their districts. the check clearing system, supervising examining banks in their districts, and keeping track of their economy in their districts. supervising and examining banks in their districts, keeping track of the economy in their districts, and tracking the flow of money in and out of their districts.
the check clearing system, supervising examining banks in their districts, and keeping track of their economy in their districts.
The Bank of Japan's ability to respond to the global financial crisis that began in 2007 was limited by the control exerted on the Bank of Japan by the central government. high interest rates in Japan. a bloated balance sheet, which was a result of its response to a financial crisis in Japan in the late 1990s. lack of coordination between the Bank of Japan and the US Federal Reserve Bank.
a bloated balance sheet, which was a result of its response to a financial crisis in Japan in the late 1990s.
In Vance's homeowner's insurance policy, it states that he is required to pay out-of-pocket the first $5,000 for any homeowner's insurance claim that he submits before the insurance company will reimburse for any loss. This is an example of using a restrictive covenant to mitigate the problem of moral hazard. incentives to overcome the principal-agent problem. screening to overcome the adverse selection problem. a deductible to try to mitigate the problem of moral hazard.
a deductible to try to mitigate the problem of moral hazard.
The business of banking solves the problem of moral hazard. a liquidity mismatch with savers desiring illiquidity and borrowers desiring liquid loans. a liquidity mismatch with savers desiring liquidity and borrowers desiring illiquid loans. adverse selection.
a liquidity mismatch with savers desiring liquidity and borrowers desiring illiquid loans.
Liquidity is the term that has which of these meanings? a measure of the ease with which one asset be converted into another asset, usually money the measure of the ease with which one can use money to purchase goods a measure of the ease with which one can borrow money a measure of the ease in which one can get out of debt to become a lender
a measure of the ease with which one asset be converted into another asset, usually money
If the public's confidence in the banking system is shaken, it may cause a run on banks. moral hazard. adverse selection. an increase in banking regulation.
a run on banks.
Cleo is hired as the CEO of Wolfstarter Company, a publicly owned corporation. After she is hired, she authorizes the purchase of a company limousine to chauffeur her around town, purchases a skybox at the stadium of the local NFL team, and provides herself with a company-paid membership at the local country club. This behavior could be an example of adverse selection. the free-rider problem. the principal-agent problem. undisclosed information.
the principal-agent problem.
In the early stages of the 2007 financial crisis, the Fed introduced term auction lending to increase market interest rates. to stabilize inflation rates. to increase the amount of liquidity in the financial system. to decrease the amount of liquidity in the financial system.
to increase the amount of liquidity in the financial system.
When not responding to global financial meltdowns, the main goal of the monetary policy of the Bank of Japan is to ensure employment stability. to pursue price stability. to pursue economic growth. to eliminate debt to other nations.
to pursue price stability.
At its inception and during its early days, the power of the Federal Reserve bank lay mostly with the board of governors housed in the Treasury Department. in the New York Federal Reserve Bank. with the 12 independent regional Federal Reserve banks. in the commercial banks that became members of the Federal Reserve system.
with the 12 independent regional Federal Reserve banks.
Which of the following qualifies as a liability to a bank? A business loan A mortgage Demand deposits A Treasury bond
Demand deposits
Which of these is not a likely result if banks hold onto excess reserves? The economy may enter into a recession. Demands for loans may increase, but lending will be insufficient. Demand for loans will increase, and business activity will increase. Consumers and businesses will not be able to get loans as easily as before.
Demand for loans will increase, and business activity will increase.
The Panic of 1907 was triggered by excessive speculation in the stock market, excessively tight lending by Banks and trust, and excessively restrictive regulation of financial markets. excessively loose lending by banks and trust, a need to do vert cash to San Francisco following the 1906 earthquake, and excessively restrictive regulation of financial markets. a need to divert cash to San Francisco following the 1906 earthquake, government intervention that broke up many of the major trust, and a lack of effective oversight of financial markets. excessive speculation in the stock market, excessively loose lending by banks and trusts, and a lack of oversight of financial markets
Excessive speculation in the stock market, excessively loose lending by banks and trusts, and a lack of oversight of financial markets
In the early 1980s, Paul Volcker used an easy monetary policy to bring inflation under control. True False
False
The Federal Reserve is part of the US Treasury. True False
False
The US government did not use actual wage and price controls to control inflation during World War II. True False
False
Very risky investments in the 1980s were largely limited to the so-called "junk bonds" sold at that time. True False
False
Following the Great Depression, the power of the Fed shifted to the New York Federal Reserve Bank. Federal Open Market Committee. board of governors of the Federal Reserve. secretary of the treasury.
Federal Open Market Committee.
In a 2003 analysis of the Federal Reserve's role in the stock market collapse in October of 1929, Allan Meltzer concluded that the federal government's action to intervene in the financial system in October of 1929 delayed the onset of the Great Depression. Federal Reserve acted appropriately and quickly in reaction to the events in October of 1929. federal government and the Federal Reserve effectively coordinated their response to the events in October of 1929. Federal Reserve followed the wrong policy doctrine and thus contributed to the onset of the Great Depression.
Federal Reserve followed the wrong policy doctrine and thus contributed to the onset of the Great Depression.
How did business firms respond to the stock market crash of 1929 and the subsequent Depression? In general, business firms raised prices slightly to make up for decreased sales; when this was not successful, they stopped borrowing from banks. In general, business firms cut prices to stimulate sales; when this was not successful, they stopped borrowing from banks. In general, business firms began to borrow more money from banks in an attempt to increase production and stimulate sales. In general, business firms began to borrow more money from banks in an effort to simply stay in business.
In general, business firms cut prices to stimulate sales; when this was not successful, they stopped borrowing from banks.
In order to fund World War II, the United States followed the policy prescription of John Maynard Keynes Friedrich von Hayek Adam Smith Milton Friedman
John Maynard Keynes
The ownership structures previously called trusts are more commonly known today by what name? Monopolies International corporations Corporations Governments
Monopolies
The principal of a school hires Daniel to teach eighth grade students. One goal the principal has is to prepare the students to do well on standardized tests, as he will be judged based on the results of those tests. Daniel prefers to teach in a more creative way, so the students learn a lot, but perform poorly on their standardized tests. This is an example of what problem? Adverse selection Moral hazard Free-riding Adverse hazard
Moral hazard
Which of these categories is the largest asset on the Federal Reserve's balance sheet—by far? Gold Gold, silver, and bitcoin Repurchase agreements Securities
Securities
Initially, the US Federal Reserve was created by Congress for what primary function? Serve as a lender of last resort Print all currency for the US economy Be a repository of all gold deposits in the US financial system Serve as the chief monitor of economic activity in the US economy
Serve as a lender of last resort
In the early twentieth century, which of the following US industries were dominated by trusts? Banking, shipping, and publishing Steel, railroads, and banking Publishing, steel, and oil Oil, banking, and agriculture
Steel, railroads, and banking
What innovation did the Federal Housing Administration develop that helped make mortgage loans more accessible? The 20-year, adjustable rate mortgage The 30-year, fixed-rate mortgage The 30-year, 50% down payment mortgage The guaranteed interest rate mortgage
The 30-year, fixed-rate mortgage
Which of these statements is true of the board of governors of the Fed? The Board of Governors is appointed by the chair and serves a four-year term The Board of Governors consists of six members plus the chair; the term length for members is 14 years. The Board of Governors consists of six members; the length term is four years The Board of Governors is elected once every eight years by the citizens of the United States
The Board of Governors consists of six members plus the chair; the term length for members is 14 years.
The acquisition of a public or private company that is financed largely by debt is referred to as a leveraged buyout, or LBO. Which of these statements is true of the LBO craze of the 1980s? The amount of the purchase price that could be funded by debt was legally capped at 40%. The amount of the purchase price funded by debt was typically less than 50%. The amount of the purchase price funded by debt was as high as 90%. The amount of the purchase price funded by debt was legally capped at 70%
The amount of the purchase price funded by debt was as high as 90%.
The position of chair of the Federal Reserve is filled in what way? The chair of the Fed is elected by a vote of the members of Congress. The chair of the Fed is elected by a congressional committee of economic experts. The chair of the Fed is appointed by the president of the United States and confirmed by the House of Representatives and the Senate. The chair of the Fed is appointed by the president of the United States and confirmed by the US Senate.
The chair of the Fed is appointed by the president of the United States and confirmed by the US Senate.
Which of these is currently true for the chair of the Federal Reserve? The chair position is a term of just two years and is non-renewable. The chair position requires a background in economics or finance; the four-year term is renewable. The chair position requires a background in banking and finance; two-year term is nonrenewable The chair position has no formal qualifications; the four-year term is renewable
The chair position has no formal qualifications; the four-year term is renewable
What problem may occur if an economy has too few banks or none at all? The economy will support nearly the same standard of living as banks. The economy will be subject to periods of high unemployment alternating with periods of high employment but very high inflation. The economy will be underdeveloped, with a possible increase in unemployment and business failures. The economy may "overheat" and inflation may become a problem.
The economy will be underdeveloped, with a possible increase in unemployment and business failures.
Rachel goes for a job interview and knows a lot about the job she is applying for. The woman who interviews her is filling in for another employee and knows very little about Rachel. We might say the woman conducting the interview is likely to have what kind of situation? The interviewer is in a situation of moral hazard, since Rachel may turn out to be a poor employee. The interviewer is facing adverse selection, since she knows nothing about Rachel. The interviewer has systemic information, since she can ask probing questions of Rachel. The interviewer has asymmetric information as she knows less about Rachel than Rachel knows of herself.
The interviewer has asymmetric information as she knows less about Rachel than Rachel knows of herself.
Stagflation began to appear in the US economy in what time period? The late 1950s The late 1960s The 1970s The 1980s
The late 1960s
Which of these was a lesson that economists learned from the battle with the stagflation in the late 1970s and early 1980s. The money supply matters and has a very real impact on economic activity Unemployment rates and inflation rates High inflation rates are more devastating to a society than high unemployment rates Interest rates are more important than the money supply at a national level
The money supply matters and has a very real impact on economic activity
When the Federal Reserve was created in response to the Panic of 1907, it operated under a doctrine meant to correct the previous problems that led to the panic. Which of these statements best names and describes that doctrine? The gold standard doctrine meant that central banks would only lend money to commercial banks if the commercial banks had gold as collateral. The real bills doctrine meant that central banks should lend money to commercial banks with collateral only if those banks, in turn, would support "real" but not speculative economic activity. The real bills doctrine meant that central banks should lend money to commercial banks when the commercial banks had paper bills as collateral. The gold standard doctrine meant that commercial banks would have little incentive to engage in speculative activities.
The real bills doctrine meant that central banks should lend money to commercial banks with collateral only if those banks, in turn, would support "real" but not speculative economic activity.
When the Federal Reserve was created in 1913, what were its two primary purposes? To regulate the financial sector of the US economy and maintain the gold standard. To print money (real bills) and lend only to banks committed to investment in "real" economic activity. To regulate the financial sector and be a "lender of last resort" to commercial banks. To maintain the gold standard and be a "lender of last resort" to commercial banks
To maintain the gold standard and be a "lender of last resort" to commercial banks
Deductibles are one way insurance companies protect themselves from careless drivers. True False
True
The Consumer Financial Protection Bureau (CFPB), launched in 2011, is housed under the Federal Reserve. True False
True
The Financial Services Act of 2012 made it clear that the Bank of England is now the main regulator of British financial markets. True False
True
The expansion of the "junk bond" market in the 1980s was one factor that allowed for the rapid increase in the number of leveraged buyouts True False
True
The primary responsibility of all central banks is monetary policy True False
True
In 1968, Congress passed a key piece of legislation to protect consumers called the __________ Act. Fair Credit Reporting Fair Credit Billing Truth in Lending Truth in Savings
Truth in Lending
The bond rating system, in which companies like Moody's and Standard & Poor's provide ratings for a company's default risk, is one way to deal with symmetric information adverse hazard adverse selection moral selection
adverse selection
The loan application process that banks require potential borrowers to go through is an attempt to deal with adverse hazard. moral selection. free-riders. adverse selection.
adverse selection
When the parties to a transaction have different levels of knowledge about each other and/or the nature and implications of the transaction, it is said that there exists __________ information. asymmetric symmetric adverse ad hoc
asymmetric
Holly goes to her bank to take out a loan, and the bank agrees to the loan on the condition that Holly maintain a balance of $1,000 in her savings account with the bank. This is an example of a bank using deductible as a way to mitigate the problem of moral hazard compensating balance as a way to mitigate the problem of moral hazard compensating balances as a way to mitigate the problem of adverse selection restrictive covenant as a way to mitigate moral hazard
compensating balance as a way to mitigate the problem of moral hazard
During World War II, US policymakers feared inflation would result from the dramatic increase in wartime spending. In order to prevent that inflation, US policymakers cut the money supply, implemented wage and price controls, and rationed many commodities. increased interest rates, issued war bonds, and implemented wage and price controls. implemented wage and price controls, issued war bonds, and rationed many commodities. cut the money supply, increased interest rates, and rationed many commodities.
implemented wage and price controls, issued war bonds, and rationed many commodities.
During World War II, the US government financed the dramatic increase in wartime spending by decreasing tax rates and selling war bonds. increasing tax rates and selling war bonds. increasing tax rates and purchasing war bonds. increasing tax rates and increasing the money supply.
increasing tax rates and selling war bonds.
The biggest change in the Federal Reserve's balance sheet between March 2007 and May 2013 was the __________ on the __________ side of the balance sheet. increase in gold; asset jump in depository institution deposits; liability increase in currency outstanding; liability decrease in repurchase agreements; asset
jump in depository institution deposits; liability
The responsibilities of the European Central Bank include monetary policy, foreign exchange operations, and maintenance of the payment system. management of gold reserves, monetary policy, and foreign exchange operations. holding in management of official foreign reserves of euro-area countries, monetary policy, and management of economic growth in Eurozone countries. management of economic growth in Eurozone countries, monetary policy, and foreign exchange operations
monetary policy, foreign exchange operations, and maintenance of the payment system.
Petra has an automobile accident and finds that as a result her auto insurance premium will increase by 25%. This is an example of an adjustable premium that insurance companies often use as a mechanism to combat short-sightedness. adverse selection. free-riders. moral hazard.
moral hazard.
Imagine that Roland goes to his bank and deposits $10,000 in cash into his savings account. The bank, wanting to use those funds to generate revenue for itself, will look to make a loan with this cash. An important determinant of how much of that $10,000 the bank can lend is the interest rate the bank is paying Roland on his deposit balance. bank's net worth. required reserve ratio. interest rate the bank will charge on the loan that it makes.
required reserve ratio.
