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money banking financial markets
Questions and Answers of
Money Banking Financial Markets
Explain why (just mathematically) if people hold relatively more cash—that is, the currency ratio k increases—the money supply multiplier gets smaller.
If US Treasury and administration officials decide they want to see the dollar rise in value against the euro, what will happen to the monetary base?a. It will increase as bank reserves decrease.b.
Explain how changes in the Treasury’s tax and loan account balance may affect the monetary base. “tax and loan accounts,” at commercial banks across the country.
If bank depositors hold more cash and fewer deposits, the monetary base does not change, only the composition of it does. Explain why.
Which of the following are included in the monetary base?a. Coins in circulationb. Currency in circulationc. Bank reservesd. All of the above
Explain why the Federal Reserve has more control over the monetary base when it uses open market operations than when it uses discount window lending.
Explain how the Federal Reserve’s conduct of an expansionary open market operation affects the monetary base.
If the ECB is pursuing an expansionary monetary policy, it will do which of the following?a. Lower the minimum reserve requirementsb. Lower the interest rate paid by its deposit facilityc. Purchase
Explain how the European Central Bank’s interest payments on the deposits commercial banks have at the ECB provides an interest rate floor for the interbank lending rate.
The European Central Bank uses reserve transactions in its version of open market operations. Explain to someone with no training in economics what reserve transactions are.
Monetization of public debt often leads to which economic problem?a. Inflationb. Unemploymentc. Stock market asset bubblesd. Falling commodity prices
President Abraham Lincoln funded the Union Army during the Civil War by a “monetization of public debt.” What did Lincoln do?
Explain why Keynes thought monetary policy during the Great Depression was like “pushing on a string.” Was it similar during the Great Recession of 2008–2009? Why or why not?
Fred is holding on to cash because he thinks interest rates will increase in the future and thus bond prices will decrease, making the future a good time to buy bonds. Keynes would say Fred is
Explain why targeting interest rates is so difficult for central banks if the demand for money is unstable.
Irving Fisher explained the demand for money using the quantity theory of money demand. Explain this concept to someone who has no training in economics.
What is the Federal Reserve trying to twist in its “Operation Twist”?a. The shape of the yield curveb. The size of the government’s budget deficitc. The level of profits banks earnd. The
Explain why the Federal Reserve went from emergency lending to quantitative easing.
During the crisis of 2007–2008, the Federal Reserve created an alphabet soup of emergency lending programs: TSLF, PDCF, AMLF, MMIFF, CPFF, and TALF, among others. Why did the Fed feel compelled to
During a credit crunch we can expect interest rates to:a. Decrease rapidly because of a significant increase in savings.b. Increase rapidly as the economy expands quickly.c. Decrease rapidly because
Explain why the stigma effect may be heightened during an economic slowdown.
Why did the Federal Reserve feel it was necessary to create the term auction facility?
If the Federal Reserve wants to increase the level of reserves in the banking system, it will undertake:a. A dynamic contractionary transaction.b. A defensive expansionary transaction.c. A dynamic
Explain the steps the Federal Reserve goes through when conducting a contractionary open market operation. When and why might the Federal Reserve do this?
Explain the steps the Federal Reserve goes through when conducting an expansionary open market operation. Who is affected and how?
The financial and economic system in Canada functioned very differently from financial systems in other Western countries. In what way was Canada’s experience different? a. Canada entered an
How is the structure of the Bank of Canada similar to that of the Federal Reserve? How is it different?
How is the structure of the ECB similar to that of the Federal Reserve? How is it different?
Critics of the Bank of Japan argue that it played a role in the global financial crisis. What do these critics argue?a. The Bank of Japan raised interest rates too quickly as the crisis was
In what ways are the Bank of Japan and the Bank of England significantly different from the Federal Reserve?
In what ways are the Bank of Japan and the Bank of England similar to the Federal Reserve?
The main purpose of term auction lending was to:a. Reduce the rate of inflation.b. Increase market interest rates. c. Reduce the amount banks borrow from the Fed.
In what ways did the Fed’s balance sheet change in response to the global financial crisis?
What does it mean that the Federal Reserve is the “fiscal agent” of the US government?
The FOMC meets to decide which of the following? a. Who should be selected as Fed Chair? b. How operations of the Fed should be changed c. Changes to monetary policy d. How best
The voting structure of the FOMC means that the Fed governors have more votes than the Federal Reserve bank presidents. Why do you think this is the case?
Some look at the structure of the Federal Reserve and come to the conclusion that it is “undemocratic.” Why do you think they come to this conclusion? Do you agree with them?
Changes to the structure of the Fed during the Great Depression included: a. Creation of the FOMC. b. Consolidation of power in the board of governors.c. Increasing the political
The Federal Reserve Bank of New York has a great deal of influence over financial markets to this very day. Yet the New York Fed is not as powerful as many wanted it to be in the early part of the
When the Fed was created, one of its main purposes was to maintain the gold standard. What does this mean?
Which of the following is not an assumption of the simple deposit multiplier?a. Banks always earn a profit.b. Banks hold no excess reserves.c. Consumers hold no cash.d. There is one required reserve
You read a story in the press that there are growing fears of a credit crunch. What impact might this have in terms of the simple deposit multiplier?
Explain how architecture may have been used to avoid bank runs.
According to the simple deposit multiplier, what happens if there is a deposit and the required reserve ratio is zero?a. The money supply grows forever.b. The money supply equals zero.c. The growth
If $100 million is withdrawn from the banking system, what would happen to the money supply, according to the simple deposit multiplier, if the required reserve ratio is 4%? What if the required
If $100 million is deposited into the banking system, what would happen to the money supply, according to the simple deposit multiplier, if the required reserve ratio is 4%? What if the required
Which of the following has the highest level of liquidity?a. The stock of a Fortune 100 corporationb. A bond issued by the US Governmentc. A bank checking accountd. A bank savings account
Explain how banks offer diversification to savers even if a depositor puts all of their funds into a single bank account.
Explain why economies without banks suffer from high search costs.
High deductibles are used in which financial market to help address the moral hazard problem?a. Equity marketb. Bond marketc. Insurance marketd. Bank deposit market
Explain how compensating balances help to resolve the moral hazard problem in bank lending.
What is the relationship between the principle–agent problem in corporate governance and the moral hazard problem?
Which government regulatory agency was created, in great part, to help overcome the adverse selection problem in equity markets?a. The Federal Reserveb. The United States Treasuryc. The Department of
It is often stated that “we live in an information age,” yet the adverse selection problem still exists. Why?
How does the existence of “free riders” help to perpetuate the adverse selection problem?
Akerlof changed the conditions of perfect competition by adding in what factor that often occurs in real life?a. Price differencesb. Time dimensionc. Uncertaintyd. Different sellers
CarMax offers a solution to the lemons problem in the used car market. What other ways might the lemons problem be resolved?
While Akerlof described adverse selection in the used car market, can you think of how adverse selection might arise in the labor market? Or even in dating?
If the economy is currently “overheating,” this means:a. actual GDP is higher than potential GDP.b. there is “too much” spending in the economy.c. inflation rates will probably increase in
Johnny believes input markets, such as financial markets, are inefficient. Use the aggregate supply and aggregate demand to explain why this leads Johnny to argue that government policy is needed to
Bobby believes input markets, such as financial markets, are efficient. Use aggregate supply and aggregate demand to explain why this leads Bobby to believe economic slowdowns will “end
If the cost of doing business for producers increases, which of the following occurs?a. The short-run aggregate supply curve becomes flat.b. The short-run aggregate supply curve shifts outward.c. The
Why is the long-run aggregate supply curve vertical? Why might the long-run aggregate supply curve move?
Explain the difference between movement along the short-run aggregate supply curve and shifts of the short-run aggregate supply curve.
Deep economic contractions, such as the Great Depression of the 1930s, are depicted in the Keynesian framework as which part of the aggregate supply curve?a. Verticalb. Horizontalc. Upward slopingd.
Why was an upward-sloping part of the aggregate supply curve added to Keynes’s original aggregate supply curve?
Explain to someone with no training in economics why the aggregate supply curve might be vertical at the full employment level of output.
If savings is greater than investment, what is the implication for aggregate demand?a. Actual spending is less than potential spending as a result of leakages.b. Actual spending is greater than
If the MPC is 0.7 and business investment spending decreases by $10, determine what will happen to total spending according to the spending multiplier.
If the MPC is 0.9 and consumption increases by $50 million, determine what will happen to total spending according to the spending multiplier.
What did Karl Marx consider to be the main economic problem that would ultimately cause the collapse of capitalism?a. High inflationb. Growing unemploymentc. Excessive government debtd. High interest
What is the Pigou effect and how does it result in a downward-sloping aggregate demand curve?
A movement along the curve is caused by a change in PRICE, when the demand curve shifts, a factor is causing the entire curve to shift outward (increasing) or to the left (decreasing)
Which of the following explain why Ronald Reagan and Paul Volcker agreed on economic policy?a. They were both from the same political party.b. They both wanted to focus on long-term outcomes, not
In the twenty-first century Paul Volcker is greatly respected, yet during the early 1980s he was one of the most disliked people in America. Why was Paul Volcker so disliked in the early 1980s? Why
Explain why economists in the 1960s were so perplexed about why stagflation had occurred.
Savings & Loan Associations were established to lend money to households so that the households could:a. purchase houses.b. fund their children’s education.c. afford to retire comfortably.d.
Bobby believes input markets, such as financial markets, are efficient. Use aggregate supply and aggregate demand to explain why this leads Bobby to believe economic slowdowns will “end
What roles did the US federal government and the Federal Reserve play in helping to expand the home mortgage market after World War II?
Rationing was used in the United States during World War II in part to:a. keep interest rates low.b. keep unemployment rate low.c. keep inflation rate low.d. keep the government budget deficit low.
During World War II there was relatively little inflation in the United States. Why was this the case?
There are three ways to finance a war. What are they? How were they used in the past?
When an economy is suffering from deflation, the nominal or market interest rates tend to:a. Increaseb. Decreasec. Become negatived. Equal zero
In 1907 J. Pierpont Morgan was able to help end a financial crisis in great part by restoring confidence. Why weren’t a different set of banker’s actions enough to stop the financial crisis in
Low interest rates may, or may not, signal that a central bank is pursuing an “expansionary” policy. Explain.
The Panic of 1907 was primarily ended thanks to the actions of:a. the Federal Reserve.b. President Teddy Roosevelt.c. J. Pierpont Morgan.d. Salmon P. Chase.
Augustus Heinze tried to corner the market for shares of United Copper. What does this mean? How did it help to trigger the Panic of 1907?
What role did Taylorism, or “scientific management,” play in the expansion of financial markets in the United States?
Under which theory might a steep yield curve suggest market participants are worried that inflation will increase in the future?a. Pure expectations theoryb. Term premium theoryc. Segmented market
Offer an explanation of how Operation Twist may have resulted in a flat yield curve.
Offer two different explanations for why an inverted yield curve might signal an economic slowdown is on the way.
Proponents of segmented market theory disagree with which of the following?a. Bonds are promises to repay with interest.b. Bonds with higher default risk pay higher yields.c. Bonds with lower prices
How would proponents of the term premium theory explain why a yield curve becomes more steep from one time period to the next?
According to the pure expectations theory, what is happening when the yield becomes more steep from one time period to the next? What does that tell you?
If Kari is the 35% income tax bracket and is thinking about buying a corporate bond that yields 2.5%, what yield must a muni bond pay to make her indifferent between the two bonds, ceteris paribus?a.
If Tommy is in the 15% income tax bracket and is considering buying a muni bond that yields 3%, what yield would a corporate bond have to pay to make him indifferent between the two bonds, ceteris
Do you think the preferential tax treatment of muni bonds should be eliminated? Or, should the tax benefit of muni bonds be reduced? Why or why not?
If the ex- ante real interest rate is less than the ex post real interest rate, which of the following happened?a. Actual inflation rate is less than the expected inflation rateb. Actual inflation
Explain why rapid changes in the rate of inflation, as well as inflationary expectations, make business investment decisions difficult.
Explain why business people should use the real interest rate instead of the nominal interest rate when making economic decisions.
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