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Macroeconomics Chapter 29
Terms in this set (118)
As a result of the S&L crisis, in 1989 Congress...
empowered two government agencies, Fannie Mae and Freddie Mac, to take over much of the mortgage lending previously done by S&Ls
(T/F) The discount window is the branch of the Federal Reserve that monitors banks to be sure that they are meeting reserve and capital requirements.
(T/F) When the federal government writes a check, it is written on an account at the U.S. Treasury Department.
Money used to buy groceries is a...
medium of exchange
(T/F) The savings and loan crisis began in the early 1970s, when interest rates increased sharply and depositors at S&Ls withdrew their money from their low-interest savings accounts and invested in money market accounts that paid higher interest rates.
(T/F) If the Federal Reserve increases reserve requirements, the fed funds rate will likely increase, banks will loan less, and the money supply will likely decrease.
the fraction of deposits that the bank is required to hold as reserves.
After 1873, the U.S. government...
guaranteed the value of a dollar in terms of gold
A major problem with bank runs is that they...
spread to other banks
The U.S. dollar is defined as...
fiat money, because it was established as money by an act of law.
Long-Term Capital Management made rates of return as high as 40% by...
using computer models to take advantage of small differences in asset prices in global financial markets
Suppose a bank receives a $5,000 deposit and the reserve ratio is 25%. Based on this deposit alone, the bank can lend out...
To change the money supply, the Federal Reserve most frequently uses...
Suppose that the Federal Reserve sells $500 in U.S. Treasury bills, and as a result the money supply falls by $5,000. The reserve ratio can be as low as...
When the Federal Reserve decreases bank's reserves through an open-market operation...
the monetary base decreases, loans decrease, and the money supply decreases
Currency in circulation is cash:
I. held by the public.
II. in the vaults of commercial banks.
III. in the vault of the Federal Reserve.
(T/F) Before the Panic of 1907, trusts became unprofitable because they used too much of their capital to form their own clearinghouses.
the difference between the interest rate at which banks lend to each other and the interest rate on U.S. government debt
the TED spread
Suppose that the public holds 50% of the money supply in currency and the reserve requirement is 20%. Banks hold no excess reserves. A customer deposits $6,000 in her checkable deposit. As a result of the deposit, the bank's loans will increase by...
Bonds of the U.S. government that mature in less than a year are called...
US Treasury bills
The tools of conducting monetary policy include...
changes in the required reserve requirement.
Subprime loans are made to...
buyers who don't meet the usual criteria for getting a mortgage
According to _________________________ investment banks could set up and trade financial assets, such as stocks and bonds, but commercial banks could not trade stocks and bonds.
the Glass-Steagall Act of 1933
an asset that can be easily used to purchase goods and services
The functions of money are...
store of value, unit of account, medium of exchange
The reduction in a firm's net worth from falling asset prices is called...
the balance sheet effect
By 1933, banks were able to borrow from:
I. the Reconstruction Finance Corporation.
II. the Federal Reserve System.
I and II
(T/F) Under the Glass-Steagall Act, investment banks were allowed to accept deposits that were not covered by deposit insurance, as well as to trade in financial assets, such as stocks and bonds.
Which of the following is a function of the Federal Reserve System?
I. collecting corporate income tax
II. setting personal income tax rates
III. holding bank reserves
Suppose the banking system does NOT hold excess reserves and the reserve ratio is 25%. If Molly deposits $1,000 cash in her checking account, the banking system can increase the money supply by...
Suppose that there are no excess reserves in the banking system and the current amount of demand deposits is $100,000. If the monetary authorities lower the required reserve ratio from 10% to 5%...
the money-creating potential of the banking system will rise.
(T/F) The Wall Street Reform and Consumer Protection Act, also called Dodd-Frank, was passed in the 1930s to correct the problems that led to the Great Depression.
Suppose that the reserve ratio is 10% and the Federal Reserve sells $11,000 worth of U.S. Treasury bills to the banking system. If the banking system does NOT want to hold any excess reserves, _____ will be _____ the money supply.
$110,000; subtracted from
Suppose that the public holds 50% of the money supply in currency and the reserve requirement is 20%. Banks hold no excess reserves. A customer deposits $6,000 in her checkable deposit. The money multiplier is...
less than 5
(T/F) When the Fed buys $250 million of Treasury bills from commercial banks, the banks' reserves increase by less than $250 million.
Suppose that the public holds 50% of the money supply in currency and the reserve requirement is 20%. Banks hold no excess reserves. A customer deposits $6,000 in her checkable deposit. As a result of the deposit, required reserves will increase by...
If the Federal Reserve wants to increase the money supply, it could...
lower the reserve requirement
When you discover money in your coat that you put there last winter, you unexpectedly find you were using money primarily as a...
store of value
(T/F) Bank reserves are the currency banks hold in their vaults minus the deposits at the Federal Reserve.
(T/F) The Fed's primary liabilities are the monetary base, that is, currency in circulation plus bank reserves.
Which of the following is (are) a tool(s) of monetary policy used by the Federal Reserve?
I. open market operations
II. government purchases of goods and services
(T/F) The federal funds rate is determined by the demand and supply for bank reserves, both of which are strongly influenced by the Federal Reserve.
Most of Long-Term Capital Management's funds were...
(T/F) When the U.S. government issues Treasury bills, it sells them directly to the Federal Reserve.
M1 consists of...
currency in circulation, checkable bank deposits, and traveler's checks only.
To increase the money supply, the central bank could...
lower the discount rate
(T/F) It is the responsibility of the U.S. Department of Commerce to maintain stability in the financial system by providing liquidity to commercial banks.
When banks extend loans...
money supply increases
When a waiter deposits his cash tips in his savings account...
(T/F) Banks' assets tend to be less liquid than their liabilities.
the rate one bank would pay another bank for a loan of reserves
federal funds rate
Charlotte withdraws $8,000 from her checkable bank deposit to pay tuition this semester. Assume that the reserve requirement is 20% and that banks do not hold excess reserves. By how much will the money supply contract as a result of the withdrawal?
(T/F) Fannie Mae and Freddie Mac are the government agencies that insure deposits at financial institutions.
(T/F) The Panic of 1907 lasted only a little longer than a week, but the result was a four-year recession during which output fell and unemployment rose.
The Panic of 1907 came to an end when...
J. P. Morgan, John D. Rockefeller, and the Secretary of the Treasury increased bank reserves.
The Federal Reserve reports on two main monetary aggregates...
M1 and M2
The narrowest definition of money EXCLUDES...
currency in the vault at the bank.
To decrease the money supply, the central bank could...
make open-market sales
Included in M1 are...
checkable bank deposits
(T/F) Changes in the reserve requirement are the monetary policy tool used most often by the Fed.
The reserve requirement is 10% and Jack withdraws $5,000 travel money from his checkable deposit. Assume that banks do not hold any excess reserves and that the public holds no currency, only checkable bank deposits. As a result of the withdrawal, required reserves _____ by _____.
Suppose Ronny decides to withdraw all of the cash from his checking account and open a single time deposit account at the same bank. As a result of this transaction...
M1 falls but M2 remains unchanged
The three main monetary policy tools are...
reserve requirements, the discount rate, and open-market purchases
When, in The Wealth of Nations, Adam Smith wrote of "a sort of waggon-way through the air," he was referring to...
If the Federal Reserve conducts an open-market purchase, bank reserves _____ and the money supply _____.
Suppose you transfer $500 from your savings account to your checking account. With this transaction, M1 _____ and M2 _____.
increases; stays the same
(T/F) Shares in the pools of securitized mortgages proved to be very safe investments, since large numbers of defaults on mortgages did not occur at the same time.
Traveler's checks and checkable deposits are part of...
The most liquid form of money is...
(T/F) Savings and loans were very profitable in the 1970s because investors withdrew their funds from low-interest-paying money market accounts and invested them in high-interest-paying accounts at thrifts.
Trusts _____ than national banks
had lower reserve requirements
If the Federal Reserve wants to discourage banks from borrowing directly from the Federal Reserve and thus decrease the monetary base, it will likely...
increase the discount rate
The reserve requirement is 10% and Jack withdraws $5,000 travel money from his checkable deposit. Assume that banks do not hold any excess reserves and that the public holds no currency, only checkable bank deposits. By how much must the bank's loans decrease as a result of the withdrawal?
(T/F) When the Fed buys $100 billion of Treasury bills from commercial banks, the monetary base increases by $100 billion.
(T/F) A vicious cycle of deleveraging occurs when sales of assets to cover losses produce negative balance sheet effects on other firms, causing creditors to call in their loans, which forces further sales of assets and further decreases in prices.
Between 1864 and 1913, American banking was dominated by...
a federally regulated system of national banks
(T/F) Most of the subprime loans were made by loan originators, who sold the loans to other investors for securitization.
(T/F) Bank reserves are part of the monetary base.
(T/F) The two parts of the U.S. Federal Reserve are the Board of Governors and 50 regional banks.
(T/F) The Federal Reserve regional banks and the Board of Governors supervise, examine, and regulate commercial banks.
(T/F) If banks temporarily don't have sufficient funds to pay their depositors, they can borrow the needed funds at the Federal Reserve discount window.
The Panic of 1907, the savings and loan crisis, and the financial crisis of 2008 were similar in that they all...
involved financial institutions that were not as strictly regulated as deposit-taking banks
a liability of the U.S. government but an asset to the Federal Reserve
US Treasury Bills
The reserve requirement is 10% and Jack withdraws $5,000 travel money from his checkable deposit. Assume that banks do not hold any excess reserves and that the public holds no currency, only checkable bank deposits. As a result of the withdrawal, excess reserves _____ by _____.
Suppose the Federal Reserve were to buy $100 million of U.S. Treasury bills. The money supply would...
increase by more than $100 million
In a deposits-only monetary system with a 5% required reserve ratio, a bank deposit of $1,000 will increase the total amount of bank deposits by...
If the required reserve ratio rises...
the banking system must keep more of a deposit in its reserves.
(T/F) Included in the M2 definition of money are checkable bank deposits.
the countries that use the euro as their common currency
The tool of monetary policy with which the Federal Reserve buys and sells government bonds is called...
A private investment partnership open only to wealthy individuals and institutions is a...
Look at the table ABC Bank's Balance Sheet. The bank is holding excess reserves of...
An example of a double coincidence of wants is...
a car mechanic who wants a TV finding an owner of an electronics store who wants a car repaired
First National Bank has $80 million in checkable deposits, $15 million in deposits with the Federal Reserve, $5 million cash in the bank vault, and $5 million in government bonds. If the minimum reserve ratio is 20%, how much is the bank required to keep in reserves?
(T/F) A debit card is money because it gives access to a bank account.
When the Fed decreases the discount rate, the spread between the discount rate and the fed funds rate _____ and the cost of being short of reserves _____.
When banks borrow from and lend reserves to each other, they are participating in the _____ market.
(T/F) The discount rate is the interest rate that the Federal Reserve charges on loans to banks.
The reserve requirement is 10% and Jack withdraws $5,000 travel money from his checkable deposit. Assume that banks do not hold any excess reserves and that the public holds no currency, only checkable bank deposits. By how much will the money supply contract as a result of the withdrawal?
Suppose the required reserve ratio is 25% and a customer deposits $300 in her checkable deposit. The money supply will _____ if the banking system does NOT hold any excess reserves.
increase by $900
the ratio of the money supply to the monetary base
provides depositors with assurances that they will receive their deposits up to $250,000 even if there are questions about a bank's soundness
The largest monetary aggregate is...
M2, because it contains currency in circulation, all bank deposits, other deposits, and deposit-like assets.
the fraction of deposits kept in the form of very liquid assets
(T/F) In securitization, a pool of loans is assembled and shares of that pool are sold to investors.
(T/F) To make it easier for S&Ls to compete with banks in the late 1970s, Congress allowed the thrifts to undertake riskier investments in addition to home mortgages.
(T/F) The main problem with the national banking system in the United States between 1864 and 1913 was that the money supply was difficult to shift from urban to rural areas.
What combinations of assets is considered to be money?
currency in circulation, checkable bank deposits, and traveler's checks
(T/F) When the government injected capital into banks during the 2008 financial crisis, it was buying bonds issued by the troubled banks.
Included in M2 are...
currency in circulation, money market funds, and traveler's checks
The _____ multiplier is equal to _____.
money; 1 divided by the required reserve ratio
Suppose your grandma sends you $100 for your birthday and you deposit that $100 in your checking account. The reserve ratio is 10%. Based upon this deposit, the bank's excess reserves have increased by _____, and if the bank lends these new excess reserves, the money supply could eventually grow by as much as an additional _____.
(T/F) When the Fed increases the discount rate, the spread between the discount rate and the fed funds rate increases and the cost of being short of reserves increases.
(T/F) Normally the discount rate is below the federal funds rate to encourage banks to borrow from the Fed rather than from other banks.
When you buy a ticket to the rodeo, you are using money as mainly a...
medium of exchange
established in the 1930s to make loans to banks and to buy their preferred stock
the Reconstructions Finance Corporation
(T/F) Subprime lending takes place at below-prime interest rates.
What is a tool used by the Federal Reserve in the conduct of monetary policy?
buying and selling federal government bonds
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