Money and Banking Final

The process of asset transformation refers to the conversion of
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Terms in this set (39)
When the growth rate of the money supply is increased, interest rates will fall immediately if the liquidity effect is _______ than the other money supply effects and there is ______ adjustment of expected inflation.larger; slow________ in the money supply in the market for money creates excess _______ money, causing interest rates to ______, everything else held constant.A decrease; demand for; riseWhich of the following are TRUE concerning the distinction between interest rates and returns?The rate of return on a bond will not necessarily equal the interest rate on that bond.Of the four effects on interest rates from an increase in the money supply, the initial effect is, generally, theliquidity effect.Patrick places his pocket change into his savings bank on his desk each evening. By his action, Patrick indicates that he believes that money is astore of value.When Jane Brown writes a 100 check to her nephew and he cashed the check, Mrs. Brown's bank ______ assets of 100 and ______ liabilities of 100.loses; losesTo prevent bank runs and the consequent bank failures, the United States established the _____ in 1934 to provide deposit insurance.FDICAn example of the ______ problem would be if Brian borrowed money from Sean in order to purchase a used car and instead took a trip to Atlantic City using those funds.moral hazardThe originate-to-distribute business model has a serious ______ problem since the mortgage broker has little incentive to make sure that the mortgagee is a good credit risk.principle-agentBank loans from the Federal Reserve are called _____ and represent a _____ of funds.discount loans; sourceHolding large amounts of bank capital helps prevent bank failures becauseit can be used to absorb the losses resulting from bad loans.The chartering process is especially designed to deal with the _____ problem, and regular bank examinations help to reduce the _____ problem.adverse selection; moral hazardThe government safety net creates _____ problem because risk-loving entrepreneurs might find banking an attractive industry.an adverse selectionA possible sequence for the three stages of a financial crisis in an advanced economy might be _____ leads to _____ leads to _____.asset price declines; banking crises; unanticipated decline in price levelFor a given return on assets, the lower is bank capital,the higher is the return for the owners of the bank.Asset transformation can be described asborrowing short and lending longUsing the Gordon growth model, a stock's current price decreases whenthe growth rate of dividends decreases.All else the same, if a bank's liabilities are more sensitive to interest rate fluctuations than are its assets, then ______ in interest rates will ______ bank profits.an increase; reduceBankers' concerns regarding the optimal mix of excess reserves, secondary reserves, borrowings from the Fed, and borrowings from other banks to deal with deposit outflows is an example ofliquidity managementIn September 2008, the Reserve Primary Fund, a money market mutual fund, found itself in the situation know as "breaking the buck." This means thatthey could no longer afford to redeem shares at the par value of $1.The formula linking the money supply to the monetary base isM = m x MBAssuming the economy is starting at the natural rate of output and everything else held constant, the effect of ________ in aggregate ________ is a rise in both inflation and output in the short-run, but in the long-run the only effect is a rise in inflation.an increase; demandOpen market sales shrink _____ thereby lowering _____.reserves and the monetary base; the money supplyThe interest rate charged on overnight loans of reserves between banks is thefederal funds rate.Both ______ and ______ are monetary liabilities of the Fed.currency in circulation; reservesWhich of the following is NOT an entity of the Federal Reserves System?The Comptroller of the CurrencyEverything else held constant including the monetary base, an increase in currency holdings relative to deposits will causethe money supply to fall.Models describing the determination of the money supply and the Fed's role in this process normally focus on ________ rather than ________, since Fed actions have a more predictable effect on the former.the monetary base; reservesAccording to the traditional interest-rate channel, expansionary monetary policy lowers the real interest rate, thereby raising expenditure onbusiness fixed investment.