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303 terms

Econ 303 Final

Dr. Nilufer
STUDY
PLAY
The concept of ________ is based on the common-sense notion that a dollar paid to you in the future is less valuable to you than a dollar today.
A) present value
The present value of an expected future payment ________ as the interest rate increases.
A) falls
An increase in the time to the promised future payment ________ the present value of the payment.
A) decreases
With an interest rate of 6 percent, the present value of $100 next year is approximately
C) $94.
If a security pays $55 in one year and $133 in three years, its present value is $150 if the interest rate is
B) 10 percent.
To claim that a lottery winner who is to receive $1 million per year for twenty years has won $20 million ignores the process of
D) discounting the future.
A credit market instrument that provides the borrower with an amount of funds that must be repaid at the maturity date along with an interest payment is known as a
A) simple loan.
A credit market instrument that requires the borrower to make the same payment every period until the maturity date is known as a
B) fixed-payment loan.
Which of the following are true of fixed payment loans?
B) Installment loans and mortgages are frequently of the fixed payment type.
A fully amortized loan is another name for
B) a fixed-payment loan.
A credit market instrument that pays the owner a fixed coupon payment every year until the maturity date and then repays the face value is called a
C) coupon bond.
A ________ pays the owner a fixed coupon payment every year until the maturity date, when the ________ value is repaid.
C) coupon bond; face
The ________ is the final amount that will be paid to the holder of a coupon bond.
C) face value
When talking about a coupon bond, face value and ________ mean the same thing.
A) par value
The dollar amount of the yearly coupon payment expressed as a percentage of the face value of the bond is called the bond's
A) coupon rate.
If a $5,000 coupon bond has a coupon rate of 13 percent, then the coupon payment every year is
A) $650.
An $8,000 coupon bond with a $400 coupon payment every year has a coupon rate of
A) 5 percent.
All of the following are examples of coupon bonds except
B) U.S. Treasury bills
A bond that is bought at a price below its face value and the face value is repaid at a maturity date is called a
D) discount bond.
A ________ is bought at a price below its face value, and the ________ value is repaid at the maturity date.
D) discount bond; face
A discount bond
B) pays the bondholder the face value at maturity.
Examples of discount bonds include
A) U.S. Treasury bills.
Which of the following are true for discount bonds?
B) The purchaser receives the face value of the bond at the maturity date.
The interest rate that equates the present value of payments received from a debt instrument with its value today is the
C) yield to maturity.
Economists consider the ________ to be the most accurate measure of interest rates.
C) yield to maturity.
For simple loans, the simple interest rate is ________ the yield to maturity.
C) equal to
If the amount payable in two years is $2420 for a simple loan at 10 percent interest, the loan amount is
C) $2000.
For a 3-year simple loan of $10,000 at 10 percent, the amount to be repaid is
D) $13,310.
If $22,050 is the amount payable in two years for a $20,000 simple loan made today, the interest rate is
A) 5 percent.
If a security pays $110 next year and $121 the year after that, what is its yield to maturity if it sells for $200?
B) 10 percent
The present value of a fixed-payment loan is calculated as the ________ of the present value of all cash flow payments.
A) sum
Which of the following are true for a coupon bond?
A) When the coupon bond is priced at its face value, the yield to maturity equals the coupon rate.
The price of a coupon bond and the yield to maturity are ________ related; that is, as the yield to maturity ________, the price of the bond ________.
D) negatively; rises; falls
The yield to maturity is ________ than the ________ rate when the bond price is ________ its face value.
B) greater; coupon; below
A $10,000 8 percent coupon bond that sells for $10,000 has a yield to maturity of
A) 8 percent.
Which of the following $1,000 face-value securities has the highest yield to maturity?
C) A 12 percent coupon bond selling for $1,000
Which of the following $5,000 face-value securities has the highest yield to maturity?
D) A 12 percent coupon bond selling for $4,500
Which of the following $1,000 face-value securities has the highest yield to maturity?
A) A 5 percent coupon bond with a price of $600
Which of the following $1,000 face-value securities has the lowest yield to maturity?
A) A 5 percent coupon bond selling for $1,000
Which of the following bonds would you prefer to be buying?
A) A $10,000 face-value security with a 10 percent coupon selling for $9,000
A coupon bond that has no maturity date and no repayment of principal is called a
A) consol.
The price of a consol equals the coupon payment
D) divided by the interest rate.
The interest rate on a consol equals the
D) coupon payment divided by the price.
A consol paying $20 annually when the interest rate is 5 percent has a price of
C) $400.
45) If a perpetuity has a price of $500 and an annual interest payment of $25, the interest rate is
B) 5 percent.
The yield to maturity for a perpetuity is a useful approximation for the yield to maturity on long-term coupon bonds. It is called the ________ when approximating the yield for a coupon bond.
A) current yield
The yield to maturity for a one-year discount bond equals the increase in price over the year, divided by the
A) initial price.
If a $10,000 face-value discount bond maturing in one year is selling for $5,000, then its yield to maturity is
D) 100 percent.
If a $5,000 face-value discount bond maturing in one year is selling for $5,000, then its yield to maturity is
A) 0 percent.
A discount bond selling for $15,000 with a face value of $20,000 in one year has a yield to maturity of
D) 33.3 percent.
The yield to maturity for a discount bond is ________ related to the current bond price.
A) negatively
In Japan in 1998 and in the U.S. in 2008, interest rates were negative for a short period of time because investors found it convenient to hold six-month bills as a store of value because
D) the bills were denominated in large amounts and could be stored electronically.
The ________ is defined as the payments to the owner plus the change in a security's value expressed as a fraction of the security's purchase price.
C) rate of return
Which of the following are true concerning the distinction between interest rates and returns?
A) The rate of return on a bond will not necessarily equal the interest rate on that bond.
The sum of the current yield and the rate of capital gain is called the
A) rate of return.
What is the return on a 5 percent coupon bond that initially sells for $1,000 and sells for $1,200 next year?
D) 25 percent
What is the return on a 5 percent coupon bond that initially sells for $1,000 and sells for $900 next year?
C) -5 percent
The return on a 5 percent coupon bond that initially sells for $1,000 and sells for $950 next year is
C) 0 percent.
Suppose you are holding a 5 percent coupon bond maturing in one year with a yield to maturity of 15 percent. If the interest rate on one-year bonds rises from 15 percent to 20 percent over the course of the year, what is the yearly return on the bond you are holding?
C) 15 percent
If the interest rates on all bonds rise from 5 to 6 percent over the course of the year, which bond would you prefer to have been holding?
A) A bond with one year to maturity
An equal decrease in all bond interest rates
B) increases the price of a ten-year bond more than the price of a five-year bond.
An equal increase in all bond interest rates
D) decreases long-term bond returns more than short-term bond returns.
Which of the following are generally true of bonds?
A) The only bond whose return equals the initial yield to maturity is one whose time to maturity is the same as the holding period.
Which of the following are generally true of all bonds?
B) Even though a bond has a substantial initial interest rate, its return can turn out to be negative if interest rates rise.
The riskiness of an asset's returns due to changes in interest rates is
D) interest-rate risk.
Interest-rate risk is the riskiness of an asset's returns due to
A) interest-rate changes.
Prices and returns for ________ bonds are more volatile than those for ________ bonds, everything else held constant.
B) long-term; short-term
There is ________ for any bond whose time to maturity matches the holding period.
A) no interest-rate risk
The ________ interest rate is adjusted for expected changes in the price level.
A) ex ante real
The ________ interest rate more accurately reflects the true cost of borrowing.
B) real
The nominal interest rate minus the expected rate of inflation
A) defines the real interest rate.
When the ________ interest rate is low, there are greater incentives to ________ and fewer incentives to ________.
C) real; borrow; lend
The interest rate that describes how well a lender has done in real terms after the fact is called the
A) ex post real interest rate.
The ________ states that the nominal interest rate equals the real interest rate plus the expected rate of inflation.
A) Fisher equation
If the nominal rate of interest is 2 percent, and the expected inflation rate is -10 percent, the real rate of interest is
D) 12 percent.
In which of the following situations would you prefer to be the lender?
B) The interest rate is 4 percent and the expected inflation rate is 1 percent.
In which of the following situations would you prefer to be the borrower?
D) The interest rate is 25 percent and the expected inflation rate is 50 percent.
If you expect the inflation rate to be 15 percent next year and a one-year bond has a yield to maturity of 7 percent, then the real interest rate on this bond is
D) -8 percent.
If you expect the inflation rate to be 12 percent next year and a one-year bond has a yield to maturity of 7 percent, then the real interest rate on this bond is
A) -5 percent.
If you expect the inflation rate to be 4 percent next year and a one year bond has a yield to maturity of 7 percent, then the real interest rate on this bond is
C) 3 percent.
The interest rate on Treasury Inflation Protected Securities is a direct measure of
A) the real interest rate.
Assuming the same coupon rate and maturity length, the difference between the yield on a Treasury Inflation Protected Security and the yield on a non-indexed Treasury security provides insight into
D) the expected inflation rate.
Assuming the same coupon rate and maturity length, when the interest rate on a Treasury Inflation Protected Security is 3 percent, and the yield on a non-indexed Treasury bond is 8 percent, the expected rate of inflation is
B) 5 percent.
Duration is
C) the average lifetime of a debt security's stream of payments.
Comparing a discount bond and a coupon bond with the same maturity,
B) the discount bond has the greater effective maturity.
The duration of a coupon bond increases
A) the longer is the bond's term to maturity.
All else equal, when interest rates ________, the duration of a coupon bond ________.
A) rise; falls
All else equal, the ________ the coupon rate on a bond, the ________ the bond's duration.
B) higher; shorter
If a financial institution has 50% of its portfolio in a bond with a five-year duration and 50% of its portfolio in a bond with a seven-year duration, what is the duration of the portfolio?
C) 6 years
An asset's interest rate risk ________ as the duration of the asset ________.
B) decreases; decreases
Depositors lack of information about the quality of bank assets can lead to ________.
A) bank panics
"The fact that banks operate on a ""sequential service constraint"" means that"
"C) depositors arriving first have the best chance of withdrawing their funds.
Depositors have a strong incentive to show up first to withdraw their funds during a bank crisis because banks operate on a
B) sequential service constraint.
Because of asymmetric information, the failure of one bank can lead to runs on other banks. This is the
D) contagion effect.
The contagion effect refers to the fact that
D) the failure of one bank can hasten the failure of other banks.
During the boom years of the 1920s, bank failures were quite
C) common, averaging about 600 per year.
To prevent bank runs and the consequent bank failures, the United States established the ________ in 1934 to provide deposit insurance.
A) FDIC
"The primary difference between the ""payoff"" and the ""purchase and assumption"" methods of handling failed banks is"
"B) that the FDIC guarantees all deposits when it uses the ""purchase and assumption"" method."
Deposit insurance has not worked well in countries with
A) a weak institutional environment.
When one party to a transaction has incentives to engage in activities detrimental to the other party, there exists a problem of
A) moral hazard.
Moral hazard is an important concern of insurance arrangements because the existence of insurance
A) provides increased incentives for risk taking.
When bad drivers line up to purchase collision insurance, automobile insurers are subject to the
B) adverse selection problem.
Deposit insurance is only one type of government safety net. All of the following are types of government support for troubled financial institutions except
A) forgiving tax debt.
Although the FDIC was created to prevent bank failures, its existence encourages banks to
A) take too much risk.
A system of deposit insurance
A) attracts risk-taking entrepreneurs into the banking industry.
The government safety net creates ________ problem because risk-loving entrepreneurs might find banking an attractive industry.
A) an adverse selection
Since depositors, like any lender, only receive fixed payments while the bank keeps any surplus profits, they face the ________ problem that banks may take on too ________ risk.
D) moral hazard; much
Acquiring information on a bank's activities in order to determine a bank's risk is difficult for depositors and is another argument for government ________.
A) regulation
The existence of deposit insurance can increase the likelihood that depositors will need deposit protection, as banks with deposit insurance
A) are likely to take on greater risks than they otherwise would.
In May 1991, the FDIC announced that it would sell the government's final 26% stake in Continental Illinois, ending government ownership of the bank that it had rescued in 1984. The FDIC took control of the bank, rather than liquidate it, because it believed that Continental Illinois
C) was too big to fail.
If the FDIC decides that a bank is too big to fail, it will use the ________ method, effectively ensuring that ________ depositors will suffer losses.
D) purchase and assumption; no
"Federal deposit insurance covers deposits up to $100,000, but as part of a doctrine called ""too-big-to-fail"" the FDIC sometimes ends up covering all deposits to avoid disrupting the financial system. When the FDIC does this, it uses the"
"B) ""purchase and assumption"" method."
The result of the too-big-to-fail policy is that ________ banks will take on ________ risks, making bank failures more likely.
D) big; greater
A problem with the too-big-to-fail policy is that it ________ the incentives for ________ by big banks.
A) increases; moral hazard
The too-big-to-fail policy
C) treats large depositors of small banks inequitably when compared to depositors of large banks.
Regulators attempt to reduce the riskiness of banks' asset portfolios by
A) limiting the amount of loans in particular categories or to individual borrowers.
A well-capitalized financial institution has ________ to lose if it fails and thus is ________ likely to pursue risky activities.
B) more; less
A bank failure is less likely to occur when
D) a bank has more bank capital.
The leverage ratio is the ratio of a bank's
C) capital divided by its total assets.
To be considered well capitalized, a bank's leverage ratio must exceed ________.
C) 5%
Off-balance-sheet activities
C) generate fee income but increase a bank's risk.
The Basel Accord, an international agreement, requires banks to hold capital based on
A) risk-weighted assets.
The Basel Accord requires banks to hold as capital an amount that is at least ________ of their risk-weighted assets.
B) 8%
Under the Basel Accord, assets and off-balance sheet activities were sorted according to ________ categories with each category assigned a different weight to reflect the amount of ________.
D) 4; credit risk
The practice of keeping high-risk assets on a bank's books while removing low-risk assets with the same capital requirement is know as
C) regulatory arbitrage.
Banks engage in regulatory arbitrage by
A) keeping high-risk assets on their books while removing low-risk assets with the same capital requirement.
Because banks engage in regulatory arbitrage, the Basel Accord on risk-based capital requirements may result in
D) increased risk taking by banks.
One of the criticisms of Basel 2 is that it is procyclical. That means that
A) banks may be required to hold more capital during times when capital is short.
Overseeing who operates banks and how they are operated is called ________.
A) prudential supervision
The chartering process is especially designed to deal with the ________ problem, and regular bank examinations help to reduce the ________ problem.
B) adverse selection; moral hazard
The chartering process is similar to ________ potential borrowers and the restriction of risk assets by regulators is similar to ________ in private financial markets.
A) screening; restrictive covenants
Banks will be examined at least once a year and given a CAMELS rating by examiners. The L stands for ________.
B) liquidity
The federal agencies that examine banks include
A) the Federal Reserve System.
Banks are required to file ________ usually quarterly that list information on the bank's assets and liabilities, income and dividends, and so forth.
A) call reports
Regular bank examinations and restrictions on asset holdings help to indirectly reduce the ________ problem because, given fewer opportunities to take on risk, risk-prone entrepreneurs will be discouraged from entering the banking industry.
B) adverse selection
The current supervisory practice toward risk management
C) evaluates the soundness of a bank's risk-management process.
Regulations designed to provide information to the marketplace so that investors can make informed decisions are called
A) disclosure requirements.
With ________, firms value assets on their balance sheet at what they would sell for in the market.
A) mark-to-market accounting
During times of financial crisis, mark-to-market accounting
A) requires that a financial firms' assets be marked down in value which can worsen the lending crisis.
Consumer protection legislation includes legislation to
A) reduce discrimination in credit markets.
An important factor in producing the subprime mortgage crisis was
A) lax consumer protection regulation.
Competition between banks
A) encourages greater risk taking.
Regulations that reduced competition between banks included
A) branching restrictions.
The ________ that required separation of commercial and investment banking was repealed in 1999.
B) the Glass-Steagall Act.
Which of the following is not a reason financial regulation and supervision is difficult in real life?
D) Financial institutions are not required to follow the rules.
Who has regulatory responsibility when a bank operates branches in many countries?
A) It is not always clear.
The collapse of the Bank of Credit and Commerce International, BCCI, showed the difficulty of international banking regulation. BCCI operated in more than ________ countries and was supervised by the small country of ________.
A) 70, Luxembourg
Agreements such as the ________ are attempts to standardize international banking regulations.
A) Basel Accord
The Basel Committee ruled that regulators in other countries can ________ the operations of a foreign bank if they believe that it lacks effective oversight.
A) restrict
In the ten year period 1981-1990, 1202 commercial banks were closed, with a peak of 206 failures in 1989. This rate of failures was approximately ________ times greater than that in the period from 1934 to 1980.
D) ten
During the 1960s, 1970s, and early 1980s, traditional bank profitability declined because of
A) financial innovation that increased competition from new financial institutions.
Moral hazard problems increased in prominence in the 1980s
B) following a burst of financial innovation in the 1970s and early 1980s that produced new financial instruments and markets, thereby widening the scope for risk taking.
The Depository Institutions Deregulation and Monetary Control Act of 1980
D) increased deposit insurance from $40,000 to $100,000.
The evidence from banking crises in other countries indicates that
A common element in all of the banking crisis episodes in different countries is
A common element in all of the banking crisis episodes in different countries is
A) the existence of a government safety net.
All of the following would reduce the agency problems of the originate-to-distribute model except
A) encouraging more complex mortgage products.
Higher capital requirements will reduce the problems incurred when troubled ________ which had been off-balance sheet activities come back on the balance sheet.
A) structured investment vehicles (SIVs)
Currently, Fannie Mae and Freddie Mac are
A) privately owned government-sponsored enterprises.
Investment banks that are part of ________ are regulated and supervised like banks.
A) bank holding companies
The inaccurate ratings provided by credit-rating agencies
A) meant that investors did not have the information they needed to make informed choices about their investments.
The subprime financial crisis showed the need for increased financial regulation, however, too much or poorly designed regulation could
A) choke off financial innovation
Moral hazard and adverse selection problems increased in prominence in the 1980s
B) following a burst of financial innovation in the 1970s and early 1980s that produced new financial instruments and markets, thereby widening the scope for risk taking.
The Depository Institutions Deregulation and Monetary Control Act of 1980
D) increased deposit insurance from $40,000 to $100,000.
One of the problems experienced by the savings and loan industry during the 1980s was
A) managers lack of expertise to manage risk in new lines of business.
In the early stages of the 1980s banking crisis, financial institutions were especially harmed by
B) the severe recession in 1981-82.
When regulators chose to allow insolvent S&Ls to continue to operate rather than to close them, they were pursuing a policy of ________.
A) regulatory forbearance
Savings and loan regulators allowed S&Ls to include in their capital calculations a high value for intangible capital called
A) goodwill.
Reasons regulators chose to follow regulatory forbearance rather than to close the insolvent S&Ls include all of the following except
D) they did not have the authority to close the insolvent S&Ls.
The policy of ________ exacerbated ________ problems as savings and loans took on increasingly huge levels of risk on the slim chance of returning to solvency.
A) regulatory forbearance; moral hazard
Regulatory forbearance
"A) meant delaying the closing of ""zombie S&Ls"" as their losses mounted during the 1980s."
The major provisions of the Competitive Equality Banking Act of 1987 include
C) directing the Federal Home Loan Bank Board to continue to pursue regulatory forbearance.
The S&L Crisis can be analyzed as a principal-agent problem. The agents in this case, the ________, did not have the same incentive to minimize cost to the economy as the principals, the ________.
A) politicians/regulators; taxpayers
"""Bureaucratic gambling"" refers to"
C) the strategy adopted by thrift regulators of lowering capital requirements and pursuing regulatory forbearance in the 1980s in the hope that conditions in the S&L industry would improve.
That several hundred S&Ls were not even examined once in the period January 1984 through June 1986 can be explained by
A) Congress's unwillingness to allocate the necessary funds to thrift regulators.
The bailout of the savings and loan industry was much delayed and, therefore, much more costly to taxpayers because
A) of regulators' initial attempts to downplay the seriousness of problems within the thrift industry.
An analysis of the political economy of the savings and loan crisis helps one to understand
C) why thrift regulators willingly acceded to pressures placed upon them by members of Congress.
Taxpayers were served poorly by thrift regulators in the 1980s. This poor performance cannot be explained by
C) Congress's dogged determination to protect taxpayers from the unsound banking practices of managers at many of the nations savings and loans.
The Federal Home Loan Bank Board and the FSLIC, both of which failed in their regulatory tasks, were abolished by the
B) Financial Institutions Reform, Recovery and Enforcement Act of 1989.
The Resolution Trust Corporation was created by the FIRREA in order to
A) manage and resolve insolvent S&Ls.
FIRREA increased the core-capital leverage requirement for thrift institutions from 3% to
A) 8%.
The Federal Deposit Insurance Corporation Improvement Act of 1991
A) increased the FDIC's ability to borrow from the Treasury to deal with failed banks.
The ability to use the too-big-to-fail policy was curtailed by the passage of the FDICIA. To use this action today, the FDIC must get approval of a two-thirds majority of both the Board of Governors of the Federal Reserve and the directors of the FDIC and also the approval of the ________.
A) Secretary of the Treasury
The directive of prompt corrective action means that
A) the FDIC will intervene earlier and more vigorously when a bank gets into trouble.
FDICIA ________ incentives for banks to hold capital and ________ incentives to take on excessive risk.
A) increased; decreased
As in the United States, an important factor in the banking crises in Norway, Sweden, and Finland was the
A) financial liberalization that occurred in the 1980s.
As in the United States, an important factor in the banking crises in Latin America was the
A) financial liberalization that occurred in the 1980s.
The Argentine banking crisis of 2001 resulted from Argentina's banks being required to
A) purchase large amounts of government debt.
When comparing the banking crisis in the United States to the crises in Latin America, cost to the taxpayers of the government bailouts was
A) higher in Latin American than in the United States.
The Japanese banking system went through a cycle of ________ in the 1990s similar to the one that occurred in the U.S. in the 1980s.
A) regulatory forbearance
China is trying to move its banking system from being strictly ________ owned by having them issue shares overseas.
A) state
The evidence from banking crises in other countries indicates that
D) deregulation combined with poor regulatory supervision raises moral hazard incentives.
The Fed uses three policy tools to manipulate the money supply: ________, which affect reserves and the monetary base; changes in ________, which affect the monetary base; and changes in ________, which affect the money multiplier.
B) open market operations; borrowed reserves; reserve requirements
The Fed uses three policy tools to manipulate the money supply: open market operations, which affect the ________; changes in borrowed reserves, which affect the ________; and changes in reserve requirements, which affect the ________.
C) monetary base; monetary base; money multiplier
The interest rate charged on overnight loans of reserves between banks is the
C) federal funds rate.
The primary indicator of the Fed's stance on monetary policy is
B) the federal funds rate.
The quantity of reserves demanded equals
C) required reserves plus excess reserves.
Everything else held constant, when the federal funds rate is ________ the interest rate paid on reserves, the quantity of reserves demanded rises when the federal funds rate ________.
B) above, falls
The opportunity cost of holding excess reserves is the federal funds rate ________.
D) minus the interest rate paid on excess reserves
In the market for reserves, when the federal funds rate is above the interest rate paid on excess reserves, the demand curve for reserves is ________.
D) negatively sloped
When the federal funds rate equals the interest rate paid on excess reserves ________.
D) the demand curve for reserves is horizontal
Which of the following is NOT an argument for the Federal Reserve paying interest on excess reserve holdings?
C) Paying interest will help the Federal Reserve have more control of the amount of discount loans.
The quantity of reserves supplied equals
B) nonborrowed reserves plus borrowed reserves.
In the market for reserves, when the federal funds interest rate is below the discount rate, the supply curve of reserves is
A) vertical.
When the federal funds rate equals the discount rate
B) the supply curve of reserves is horizontal.
In the market for reserves, if the federal funds rate is above the interest rate paid on excess reserves, then an open market ________ the supply of reserves, raising the federal funds interest rate, everything else held constant.
A) sale decreases
In the market for reserves, if the federal funds rate is above the interest rate paid on excess reserves, an open market purchase ________ the ________ of reserves which causes the federal funds rate to fall, everything else held constant.
A) increases; supply
Suppose on any given day there is an excess demand of reserves in the federal funds market. If the Federal Reserve wishes to keep the federal funds rate at its current level, then the appropriate action for the Federal Reserve to take is a ________ open market ________, everything else held constant.
B) defensive; purchase
In the market for reserves, if the federal funds rate is above the interest rate paid on excess reserves, an open market purchase ________ the supply of reserves and causes the federal funds interest rate to ________, everything else held constant.
B) increases; fall
Suppose on any given day the prevailing equilibrium federal funds rate is above the Federal Reserve's federal funds target rate. If the Federal Reserve wishes for the federal funds rate to be at their target level, then the appropriate action for the Federal Reserve to take is a ________ open market ________, everything else held constant.
D) dynamic; purchase
In the market for reserves, if the federal funds rate is above the interest rate paid on excess reserves, an open market sale ________ the supply of reserves causing the federal funds rate to ________, everything else held constant.
D) decreases; increase
Suppose on any given day there is an excess supply of reserves in the federal funds market. If the Federal Reserve wishes to keep the federal funds rate at its current level, then the appropriate action for the Federal Reserve to take is a ________ open market ________, everything else held constant.
A) defensive; sale
Suppose on any given day the prevailing equilibrium federal funds rate is below the Federal Reserve's federal funds target rate. If the Federal Reserve wishes for the federal funds rate to be at their target level, then the appropriate action for the Federal Reserve to take is a ________ open market ________, everything else held constant.
C) dynamic; sale
In the market for reserves, if the federal funds rate is above the interest rate paid on excess reserves, an open market sale ________ the ________ of reserves, causing the federal funds rate to increase, everything else held constant.
C) decreases; supply
In the market for reserves, a lower discount rate
D) shortens the vertical section of the supply curve of reserves.
In the market for reserves, a lower interest rate paid on excess reserves
C) decreases the effective floor for the federal funds rate.
Everything else held constant, in the market for reserves, when the federal funds rate is 3%, lowering the discount rate from 5% to 4%
C) has no effect on the federal funds rate
Everything else held constant, in the market for reserves, when the federal funds rate is 3%, increasing the interest rate paid on excess reserves from 1% to 2%
C) has no effect on the federal funds rate.
Everything else held constant, in the market for reserves, when the federal funds rate is 5%, lowering the discount rate from 5% to 4%
A) lowers the federal funds rate.
Everything else held constant, in the market for reserves, when the federal funds rate is 1%, increasing the interest rate paid on excess reserves from 1% to 2%
B) raises the federal funds rate
Everything else held constant, in the market for reserves, when the federal funds rate is 3%, raising the discount rate from 5% to 6%
C) has no effect on the federal funds rate.
Everything else held constant, in the market for reserves, when the federal funds rate is 3%, lowering the interest rate paid on excess reserves rate from 2% to 1%
C) has no effect on the federal funds rate.
Everything else held constant, in the market for reserves, when the federal funds rate equals the discount rate, lowering the discount rate
B) lowers the federal funds rate.
Everything else held constant, in the market for reserves, when the federal funds rate equals the interest rate paid on excess reserves, raising the interest rate paid on excess reserves
A) increases the federal funds rate
Everything else held constant, in the market for reserves, when the demand for federal funds intersects the reserve supply curve along the horizontal section, increasing the discount rate
A) increases the federal funds rate.
Everything else held constant, in the market for reserves, when the supply for federal funds intersects the reserve demand curve along the horizontal section, lowering the interest rate paid on excess reserves
A) increases the federal funds rate.
Everything else held constant, in the market for reserves, when the demand for federal funds intersects the reserve supply curve on the vertical section, increasing the discount rate
C) has no effect on the federal funds rate.
Everything else held constant, in the market for reserves, when the supply for federal funds intersects the reserve demand curve on the downward sloping section, decreasing the interest rate paid on excess reserves
C) has no effect on the federal funds rate
Everything else held constant, in the market for reserves, increases in the discount rate affect the federal funds rate
B) when the funds rate equals the discount rate.
Everything else held constant, in the market for reserves, decreases in the interest rate paid on excess reserves affect the federal funds rate
B) when the funds rate equals the interest rate paid on excess reserves.
The Federal Reserve usually keeps the discount rate
A) above the target federal funds rate.
Everything else held constant, the vertical section of the supply curve of reserves is shortened when the
B) discount rate decreases.
Everything else held constant, the vertical section of the supply curve of reserves is lengthened when the
A) discount rate increases.
In the market for reserves, if the federal funds rate is between the discount rate and the interest rate paid on excess reserves, an increase in the reserve requirement ________ the demand for reserves, ________ the federal funds rate, everything else held constant.
C) increases; raising
In the market for reserves, if the federal funds rate is between the discount rate and the interest rate paid on excess reserves, a ________ in the reserve requirement ________ the demand for reserves, raising the federal funds interest rate, everything else held constant.
B) rise; increases
In the market for reserves, if the federal funds rate is between the discount rate and the interest rate paid on excess reserves, a ________ in the reserve requirement increases the demand for reserves, ________ the federal funds interest rate, everything else held constant.
D) rise; raising
In the market for reserves, if the federal funds rate is between the discount rate and the interest rate paid on excess reserves, an increase in the reserve requirement ________ the demand of reserves and causes the federal funds interest rate to ________, everything else held constant.
C) increases; rise
In the market for reserves, if the federal funds rate is between the discount rate and the interest rate paid on excess reserves, an increase in the reserve requirement ________ the ________ for reserves and causes the federal funds interest rate to rise, everything else held constant.
B) increases; demand
In the market for reserves, if the federal funds rate is between the discount rate and the interest rate paid on excess reserves, a ________ in the reserve requirement ________ the demand for reserves, lowering the federal funds interest rate, everything else held constant.
D) decline; decreases
In the market for reserves, if the federal funds rate is between the discount rate and the interest rate paid on excess reserves, a ________ in the reserve requirement decreases the demand for reserves, ________ the federal funds interest rate, everything else held constant.
C) decline; lowering
In the market for reserves, if the federal funds rate is between the discount rate and the interest rate paid on excess reserves, a decline in the reserve requirement ________ the ________ curve of reserves and causes the federal funds interest rate to fall, everything else held constant.
A) decreases; demand
In the market for reserves, if the federal funds rate is between the discount rate and the interest rate paid on excess reserves, a decline in the reserve requirement ________ the demand of reserves, ________ the federal funds rate, everything else held constant.
A) decreases; lowering
Suppose, at a given federal funds rate, there is an excess demand for reserves in the federal funds market. If the Fed wants the federal funds rate to stay at that level, then it should undertake an open market ________ of bonds, everything else held constant. If the Fed does nothing, however, the federal funds rate will ________.
B) purchase; increase
Suppose, at a given federal funds rate, there is an excess supply of reserves in the federal funds market. If the Fed wants the federal funds rate to stay at that level, then it should undertake an open market ________ of bonds, everything else held constant. If the Fed does nothing, however, the federal funds rate will ________.
C) sale; decrease
________ are the most important monetary policy tool because they are the primary determinant of changes in the ________, the main source of fluctuations in the money supply.
A) Open market operations; monetary base
Open market purchases raise the ________ thereby raising the ________.
C) monetary base; money supply
Open market purchases ________ reserves and the monetary base thereby ________ the money supply.
B) raise; raising
Open market sales shrink ________ thereby lowering ________.
C) reserves and the monetary base; the money supply
Open market sales ________ reserves and the monetary base thereby ________ the money supply.
C) lower; lowering
The two types of open market operations are
D) dynamic and defensive.
There are two types of open market operations: ________ open market operations are intended to change the level of reserves and the monetary base, and ________ open market operations are intended to offset movements in other factors that affect the monetary base.
C) dynamic; defensive
Open market operations intended to offset movements in noncontrollable factors (such as float) that affect reserves and the monetary base are called
A) defensive open market operations.
When the Federal Reserve engages in a repurchase agreement to offset a withdrawal of Treasury funds from the Federal Reserve, the open market operation is said to be
A) defensive.
The Federal Open Market Committee makes the Fed's decisions on the purchase or sale of government securities, but these purchases or sales are executed by the Federal Reserve Bank of
C) New York.
The actual execution of open market operations is done at
B) the Federal Reserve Bank of New York.
If float is predicted to decrease because of unseasonably good weather, the manager of the trading desk at the Federal Reserve Bank of New York will likely conduct a ________ open market ________ of securities.
B) defensive; purchase
When bad storms slow the check-clearing process, float tends to ________ causing the Fed to initiate defensive open market ________.
C) increase; sales
When good weather speeds the check-clearing process, float tends to ________ causing the Fed to initiate defensive open market ________.
B) decrease; purchases
When bad storms slow the check-clearing process, float tends to ________ causing the Fed to initiate ________ open market ________.
C) increase; defensive; sales
When good weather speeds the check-clearing process, float tends to ________ causing the Fed to initiate ________ open market ________.
C) decrease; defensive; purchases
If float is predicted to increase because of bad weather, the manager of the trading desk at the New York Fed bank will likely conduct ________ open market operations to ________ reserves
B) defensive; drain
If float is predicted to decrease because of good weather, the manager of the trading desk at the New York Fed bank will likely conduct ________ open market operations to ________ reserves.
A) defensive; inject
If Treasury deposits at the Fed are predicted to increase, the manager of the trading desk at the New York Fed bank will likely conduct ________ open market operations to ________ reserves.
A) defensive; inject
If Treasury deposits at the Fed are predicted to ________, the manager of the trading desk at the New York Fed bank will likely conduct ________ open market operations to ________ reserves.
A) increase; defensive; inject
If Treasury deposits at the Fed are predicted to fall, the manager of the trading desk at the New York Fed bank will likely conduct ________ open market operations to ________ reserves
B) defensive; drain
If Treasury deposits at the Fed are predicted to ________, the manager of the trading desk at the New York Fed bank will likely conduct ________ open market operations to ________ reserves.
B) fall; defensive; drain
If the Fed expects currency holdings to rise, it conducts open market ________ to offset the expected ________ in reserves.
B) purchases; decrease
If the Fed expects currency holdings to fall, it conducts open market ________ to offset the expected ________ in reserves.
C) sales; increase
If the banking system has a large amount of reserves, many banks will have excess reserves to lend and the federal funds rate will probably ________; if the level of reserves is low, few banks will have excess reserves to lend and the federal funds rate will probably ________.
B) fall; rise
The Federal Reserve will engage in a repurchase agreement when it wants to ________ reserves ________ in the banking system.
B) increase; temporarily
If the Fed wants to temporarily inject reserves into the banking system, it will engage in
A) a repurchase agreement.
The Fed can offset the effects of an increase in float by engaging in
B) a matched sale-purchase transaction.
The Federal Reserve will engage in a matched sale-purchase transaction when it wants to ________ reserves ________ in the banking system.
C) decrease; temporarily
Discount policy affects the money supply by affecting the volume of ________ and the ________.
B) borrowed reserves; monetary base
The discount rate is
A) the interest rate the Fed charges on loans to banks.
The most common type of discount lending that the Fed extends to banks is called
C) primary credit.
The most common type of discount lending, ________ credit loans, are intended to help healthy banks with short-term liquidity problems that often result from temporary deposit outflows.
B) primary
When the Fed acts as a lender of last resort, the type of lending it provides is
C) secondary credit.
The Fed's discount lending is of three types: ________ is the most common category; ________ is given to a limited number of banks in vacation and agricultural areas; ________ is given to banks that have experienced severe liquidity problems.
C) primary credit; seasonal credit; secondary credit
The discount rate is ________ kept ________ the federal funds rate.
D) typically; above
The discount rate refers to the interest rate on
A) primary credit.
The interest rate on secondary credit is set ________ basis points ________ the primary credit rate.
C) 50; above
The interest rate for primary credit is usually set ________ basis points ________ the federal funds rate. In March 2008, this gap was changed to ________ basis points.
B) 100; above; 25
The interest rate on seasonal credit equals
D) an average of the federal funds rate and rates on certificates of deposits.
The Fed is considering eliminating
C) seasonal credit lending.
At its inception, the Federal Reserve was intended to be
C) a lender-of-last-resort.
"Much of the credit for prevention of a financial market meltdown after ""Black Monday"" (October 19, 1987) must be given to the Federal Reserve System and its chairman"
D) Alan Greenspan.
"A financial panic was averted in October 1987 following ""Black Monday"" when the Fed announced that "
B) it would provide discount loans to any bank that would make loans to the security industry.
The facility that was created in December of 2007 that banks can use to borrow from the Fed that has less of a stigma for banks compared to borrowing from the discount window is the ________.
B) Term Auction Facility
Which of the following special lending facilities set up by the Federal Reserve is reserve neutral?
C) Term Securities Lending Facility
The Fed's lender-of-last-resort function
D) creates a moral hazard problem.
The most important advantage of discount policy is that the Fed can use it to
B) perform its role as lender of last resort.
An increase in ________ reduces the money supply since it causes the ________ to fall.
B) reserve requirements; money multiplier
A decrease in ________ increases the money supply since it causes the ________ to rise.
B) reserve requirements; money multiplier
The Federal Reserve has had the authority to vary reserve requirements since the
B) 1930s.
Since 1980, ________ are subject to reserve requirements.
D) all depository institutions
Funds held in ________ are subject to reserve requirements.
A) all checkable deposits
The policy tool of changing reserve requirements is
C) no longer used.
The European System of Central Banks signals the stance of its monetary policy by setting a target for the
B) overnight cash rate.
When the European System of Central Banks uses main refinancing operations, it is similar to the Federal Reserve using
B) defensive open market operations.
When the European System of Central Banks uses long-term refinancing operations, it is similar to the Federal Reserve using
A) dynamic open market operations.
The equivalent to the Federal Reserve's discount rate in the European System of Central Banks is the
B) marginal lending rate.
The Federal Reserve ________ pay interest on reserves held on deposit. The European System of Central Banks ________ pay interest on reserves held on deposit.
C) does not; does
Since the European Central Bank ________ interest on reserves, banks have a ________ cost of complying with reserve requirements when compared to banks complying with the reserve requirements of the Federal Reserve.
A) pays; lower