89 terms

Monetary Economics

Final Exam
STUDY
PLAY
when one part to a transaction knows more than another, the situation is one of
asymmetric information
when people or firms that are worse than average risks are most likely to enter a contract that is offered to everyone, the problem is called
adverse selection
a bank offers credit cards with a 25% interest rate, when its competitors' cards have just a 15% interest rate. despite the high rate, the bank finds itself losing money because many of its customers fail to repay the balances on their cards. the bank's losses are most likely to have occurred because of
adverse selection
a legally enforced part of a loan contract that requires the borrower to act in a certain way or to use the borrowed funds for a particular purpose is known as
a covenant
which of the following is the main reason behind the financial crisis of 2008
banks in the U.S. made subprime mortgage loans
accounting rules require that a bank's ______ equals its ______
liabilities; assets minus equity capital
the market in which banks with excess reserves lend them to banks that desire additional reserves risk known as the _____ market
federal funds
a bank's net interest spread equals
the average interest rate on the bank's assets minus the average interest rate on its liabilites
when a bank run spreads from one bank to another, it is said to be
contagion
the law that allowed banks to engage in investment banking was the
Gramm-Leach-Bliley Act
the government provides deposit insurance through the
FDIC
which of the following is true of the Dodd-Frank Wall Street Reform and Consumer Protection Act
under the Dodd-Frank Act banking regulators increased the capital and liquidity requirements for banks and other financial institutions
the United States has a dual banking system, which means that a bank
may choose whether to be chartered by federal government authorities or by a state government
in the CAMELS rating system, which is used to assess the health of the banks, the letter A stands for
asset quality
which of the following is NOT component evaluated under the CAMELS rating system
strategic planning
labor productivity multiplied by the number of hours worked gives
total output
in which of the following periods was unemployment the highest in the U.S. economy
great depression
a period when a recession ends and an expansion begins is known as
a trough
a variable that is determined within a model is called
an endogenous variable
a general-equilibrium model is a model in which
all key macroeconomic variables are endogenous
a model that allows variables to change over time is referred to as a
dynamic model
aggregate supply tells us
the amount of goods and services being produced in the economy
the largest component of aggregate demand is
consumption
a rise in income will cause consumer spending to
rise
a rise in the real interest rate, everything else remaining unchanged, will cause business investment
decline
the unemployment rate reflecting normal job turnover is called
the natural rate of unemployment
if there is a significant drop in business optimism in an economy
the economy's aggregate demand curve shifts to the left
an unexpected change in an exogenous variable is known as
a shock
when a country's currency appreciates relative to other countries,
the price of its exports rise, and the price of its imports fall
if only one good is traded between two countries and the price of the god is the same in both countries when expressed in units of the same currency, then
the law of one price holds
a measure of the flow of goods and services out of a country into other countries or other items that cause payments to flow into the country is
the balance on current account
which policymaking institution determines the money supply, sets the rules for how checks are cleared and how banks obtain new currency, and determines what activities banks may or may not engage in
federal reserve system
the nominal interest rate minus the expected inflation rate equals the
real interest rate
when the overall level of business activity declines persistently, there is said to be
a recession
in the long run, the only economic variable that the Federal Reserve can affect is
inflation
which of the following will be included in the financial system of a country
banks
a contract that promises to pay a given amount of money to the owner of a security at specific dates in the future is known as
a debt security
maturity is
the time until borrowed funds are repaid
when money is used as a value in which prices re denoted, money is serving the role of a
unit of account
according to Gresham's law
whenever there are two different types of money circulating, people hoard the good one, and use the bad one as a medium of exchange
when you buy something one day and pay for it later, the repayment you make is denoted in terms of money. in this case, money is serving the role of a
standard of deferred payment
the law states that a lender must accept money in the repayment of debts. this means that money is a
legal tender
money that has value in large part by the government's proclamation is known as
fiat money
credit cards are
not counted as money because they represent borrowings and not payments
under the fiat money system, the revenue that the government makes on every coin issued is referred to as
seignorage revenue
a bond that makes a regular interest payment until maturity, at which time the face value is repaid is referred to as a
coupon bond
the process of turning assets such as mortgages into bonds sold to investors is
securitization
a corporate bond with a financial rating of _____ is likely to have the lowest yield to maturity
aaa
a basis point equals
one hundredth of a percentage point
what does a yield curve show
the yield to maturity on the vertical axis and the time to maturity on the horizontal axis
which of the following bonds has the greatest interest-rate risk
a thirty-year bond
an inverted yield curve indicates that
a recession is about to begin
the amount of interest paid on a debt security in dollar terms as a percent of the principal is referred to as the
nominal interest rate
the nominal interest rate adjusted for actual inflation is the
expected real interest rate
one year ago, you bought a bond for $40,000. today, you received the $40,000 principal back plus an interest of $2,000. if the inflation rate over the last year was 3%, calculate your real return
2%
the hypothesis that an increase in the expected inflation rate will cause the nominal interest rate to rise and the real interest rate to remain unchanged is the
Fisher hypothesis
a stock index tells you
the average price of a collection of stocks
the S&P 500 stock index is an index of
500 major companies whose shares trade in U.S. markets
the idea that stock prices fully reflect all available information is called
the efficient markets hypothesis
a mutual fund is
an investment company that pools the funds of many investors and buys a large number of different stocks
identify the correct statement from the following
both dividend payments and realized capital gains are subject to taxes
the money supply in an economy equals
money multiplier multiplied by monetary base
Green bank has transaction accounts worth $200 million. if the required reserve ratio is 10%, Green bank holds required resreves
$20 million
consider a bank that has $10 million as reserves, $5 million as securities, and $100 million as transaction accounts. if a customer, who is a government securities dealer, sells $20 million in securities to the Fed
the bank's reserves increase by $12 million
M1 money multiplier equals
(transaction accounts + currency)/monetary base
if the excess reserves held by banks increase, the money multiplier is likely to
fall
if the Open-Market Desk at the fed buys securities, the most likely effect is that the
federal funds rate decreases
an increase in reserve requirements by the Fed
would decrease the money multiplier
which of the following is true of an economy is a liquidity trap
the economy's nominal short-term interest rates become close to zero
the lag between when a change in policy is decided on and when it is implemented
implementation lag
the lag that arises because the random nature of the data makes it difficult for policy makers to fully understand the state of the economy
recognition lag
the time it takes from when a policy is implemented to when it has an effect on the economy
effectiveness lag
the lag in policy that arises because it takes time for policymakers to make a decision
decision lag
the amount of output that would be produced by an economy if resources were being utilized at a high rate that is sustainable in the long run is referred to as the
potential output
in case of positive inflation rates,
borrowers of funds gain, while lenders lose out
the unemployment rate minus the natural rate of unemployment is known as the
unemployment gap
the tradeoff in the data between unemployment and inflation is represented by the
phillips curve
the systematic setting of policy according to a formula is known as
a rule for monetary policy
a situation in which policymakers must increase the inflation rate in response to an increase in the expected inflation rate
expectations trap
the situation where monetary policy is not set by a rule
discretion
another name for the ideal inflation rate
inflation target
the difficulty that arises when policymakers have discretion over policy and choose a policy at one date that leads people to make decisions based on that policy, which then causes the policymakers to choose a different policy at a later date
time inconsistency
monetarists think that
money growth is closely related to inflation in the long run
the equation that says money times velocity equals total spending is known as
the equation of exchange
a part of a loan contract that requires the borrower to act in a certain way or to use the borrowed funds for a particular purpose
a covenant
the rule that is used to set a target for the federal funds rate in response to deviations of real output and inflation from their targets is
the Taylor rule
if the Fed follows the Taylor rule and actual inflation is below the inflation target set by the Fed,
the Fed should reduce the nominal federal funds rate
a rule for monetary policy under which the same monetary policy is pursued whether the economy is in a recession or an expansion
nonactivist rule
a rule that focuses only on the growth rate of money in the economy; under such a rule, the central bank simply would set money growth in the long run, ignoring short-run fluctuations in the economy
money-growth rule