assign6B - *LATE sorry ASSIGNMENT 6B Due on Thursday 3/5 by...

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Unformatted text preview: **LATE, sorry** ASSIGNMENT 6B Due on Thursday 3/5 by 10pm I’ve extended the deadline since I posted this late. Note that 7B will be available next Weds and thus may overlap this – do this as soon as you can DO THE FOLLOWING BEFORE THE DEADLINE: 1. watch the video clip 2. read the news headlines below 3. read the explanations of hw6 questions that lots of people got wrong 4. review the big QUESTIONS FROM Assignment 6 5. Do HW 6b (the multiple choice questions below) which will test you on all of the above. 1. Watch the banking video clip 9about 10 minutes – you can skip the first minute or so) on the basics of banking and the money supply at:‐fD78zyvI BEWARE this video contains some ‘Fed Conspiracy’/ monetary crank’ ideas in my opinion, hinting at plots to ruin our money (by leaving gold) and destroy our economy with the formation of the Fed. None the less, the basics are correct and I’ll point out the errors. a. how can banks stay solvent if they hold only a fraction of their deposits in their vaults or in reserve deposits with the Fed? b. who controls the quantity of money in our economy? c. why can’t bankers create an infinite amount of money thru debt? d. what prevents bank runs in our economy? e. why was gold a good money in earlier days, and why is it unnecessary these days? f. why was/is gold valuable? 2. Glenn Hubbard sent his regards (and wondered where most of your were when he spoke at Rutgers Weds 2/25) In what could be the least controversial move of his new presidency, Barack Obama has chosen a First Dog. Well, the breed of dog anyway. First Lady Michelle tells People magazine that the First Family will choose a Portuguese Water Dog. President Obama’s Speech on fiscal policy? THE ECONOMY "The recovery plan and the financial stability plan are the immediate steps we're taking to revive our economy in the short-term. But the only way to fully restore America's economic strength is to make the long-term investments that will lead to new jobs, new industries, and a renewed ability to compete with the rest of the world." NOT MUCH SAID ABOUT FISCAL POLICY Bernanke: Recovery will take years Federal Reserve chief says full recovery from this recession will take more than two or three years; downplays talk of bank nationalization. By Chris Isidore, senior writer Last Updated: February 24, 2009: 2:02 PM ET NEW YORK ( -- Federal Reserve Chairman Ben Bernanke said he's hoping the recession could end later this year, but he cautioned that a full economic recovery will take "more than two or three years." Bernanke, speaking in front of the Senate Banking Committee Tuesday, also downplayed talk that the government might have to nationalize some of the country's most troubled banks. In his prepared remarks, Bernanke said an economic turnaround will only occur "if actions taken by the administration, the Congress, and the Federal Reserve are successful in restoring some measure of financial stability." He also acknowledged the recovery might not go as well as hoped. "This outlook for economic activity is subject to considerable uncertainty, and I believe the downside risks probably outweigh those on the upside," he said. hat, overall, the • Curse of the Zombie Banks Haunts Fed Some Fed programs have helped loosen the credit logjam, but they also might have kept alive weak institutions having balance sheets stuffed with toxic assets. What’s a zombie bank? And what harm do they do? ‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐ 3. HW 6 – Questions in red have explanations below them but NOT the correct letter choice – you should easily recognize the correct letter if you read and understand the explanation – if not, post on discussion board for this weeks hw. 1) hich of the following does NOT describe a function of money? W A) store of value a B) hedge against inflation a C) unit of account a D) medium of exchange a 2) arter is B A) he exchange of goods and services for any type of money. t B) nother type of money. a C) rinting too much money. p D) he exchange of goods and services directly for other goods and services. t 3) he most direct way in which money eliminates the need for a double coincidence of T wants is through its use as a A) nit of account. u B) edium of exchange. m C) tandard of deferred payment. s D) tore of value. s 4) $25,000 price tag on a new car is an example of money as A A) store of value. a B) edium of exchange. m C) time deposit. a D) unit of account. a WE MEASURE PRICES IN TERMS OF HOW MUCH MONEY TRADES FOR A GOOD OR SERVICE – THIS IS THE UNIT OF ACCOUNT FUNCTION BY DEFINITION 5) hich of the following is an example of using money as a store of value? W A) aying cash for a new automobile p B) eeping $200 on hand for an emergency k C) aying rent with a check on a demand deposit p D) aying for a new dress with a credit card p STORING VALUE – DEFERRING CURRENT CONSUMPTION TO THE FUTURE – WE USE MONEY TO HOLD OR STORE VALUE FOR FUTURE USE (EARN $100, CONSUME $80 TODAY, PUT $20 UNDER THE PILLOW, BUY LUNCH TOMORROW – YOU HAVE STORED THE VALUE OF LUNCH IN MONEY) 6) 1 is a measure of M A) iquidity and in which the most liquid asset is money. l B) oney and includes both savings deposits and money market mutual funds. m C) oney and includes both currency and checking deposits. m D) oney and includes both savings deposits and currency. m 7) hich of the following is NOT included in the M1 definition of money? W A) urrency held outside banks c B) hecking deposits at savings and loans c C) ravelerʹs checks t D) ime deposits t 8) he definition of M2 includes T A) 1. M B) ime deposits. t C) avings deposits. s D) ll of the above a 9) f you use $500 of currency to purchase a saving deposit, I A) 1 is unchanged, but M2 M B) 1 decreases, but M2 is M increases unchanged C) 1 decreases and M2 increases M D) 1 and M2 both increase M M1=CURRENCY + CHECKS M2=M1 + SAVINGS+MONEY MARKET +TIME DEPOSITS IF ‘SELL’ CURRENCY IN RETURN FOR SAVINGS ACCOUNT, M1 FALLS BY $500 (M1 INCLUDES CURRENCY IN HANDS OF PUBLIC, NOT IN BANK) BUT THE INCREASE IN SAVINGS ACCOUNTS OFFSETS THIS SO M2 IS UNCHANGED 10) iquidity is the L A) ase with which an asset can be converted into a means of payment with little e loss of value. B) egree to which an asset acts as money without a loss of value. d C) egree to which money can be converted into an asset with little loss of value. d D) ase with which credit cards are accepted as a means of payment. e 11) n individual wanting the most liquid asset possible will hold A A) heckable deposits at a bank. c B) savings account. a C) .S government bonds. U D) urrency. c LIQUIDITY REFERS TO THE ABILITY TO CONVERT AN ASSET INTO THE MEDIUM OF EXCHANGE WITH LOW COSTS AND LITTLE CHANCE OF LOSS. BY DEFINITION, CURRENCY IS PERFECTLY LIQUID (AND IN THEORY, SO ARE CHECKABLE DEPOSITS). IN REALITY, SOME PEOPLE MAY NOT TAKE CHECKS SO THEY ARE SLIGHTLY LESS LIQUID. SAVINGS ACCOUNTS CAN BE CONVERTED TO CURRENCY WITH SOME EFFORT, SO LESS LIQUID AND GOVT BONDS CAN BE A BIT EXPENSIVE TO SELL AND THUS CONVERT TO CASH. 12) iven the list of assets below, which is the most liquid? G A) $500 travelerʹs check a B) 500 worth of General Motors bonds $ C) 500 worth of General Motors common stock $ D) one-ounce gold coin a 13) hecks are NOT money because they C A) ave value in exchange but little intrinsic value. h B) re issued by banks, not by the government. a C) re merely instructions to transfer money. a D) re not backed by either gold or silver. a 14) redit cards are C A) ot money because they are not made of paper. n B) ot money. n C) oney and are the largest part of the money supply. m D) oney but are not a large part of the money supply. m 15) sing a credit card can best be likened to U A) aking out a loan. t B) riting a check on your demand deposit account. w C) sing any other form of money because you immediately get to take the goods u home. D) barter exchange. a 16) .S. currency ________. U A) s composed of the bills and coins that we use today i B) s the sum of M1 and M2 i C) ncludes tobacco i D) s less efficient than barter i 17) new financial innovation results in people switching their funds from checking A deposits to savings accounts. The quantity of M1 ________ and the quantity of M2 ________. A) ecreases; increases d B) ecreases; decreases d C) ecreases; does not change d D) ncreases; decreases i SAME AS QUESTION 9 ABOVE 18) firm that takes deposits from households and firms and makes loans to other A households and firms is a A) redit company. c B) surer. u C) epository institution. d D) tockbroker. s 19) epository institutions D A) arn money by charging the government for their services. e B) arn zero profit but receive compensation by the government because their e services are so valuable. C) ake profit from the spread between the interest rate they pay on deposits and m the interest rate they receive on loans. D) arn profit according to how much the Federal Reserve pays them. e 20) or a commercial bank, the term ʺreservesʺ refers to F A) bankerʹs concern (ʺreservationʺ) in making loans to an individual without a a job. B) he cash in its vaults and its deposits at the Federal Reserve. t C) he net interest that it earns on loans. t D) he profit that the bank retains at the end of the year. t 21) f the following, the riskiest assets held by commercial banks are O A) ommercial loans. c B) .S. government Treasury bills. U C) .S. government bonds. U D) eserves. r 22) xamples of thrift institutions include E A) ommercial banks, savings and loan associations, and insurance companies. c B) avings and loan associations, savings banks, and credit unions. s C) avings deposits and checking deposits. s D) oney market mutual funds, commercial banks, and credit unions. m 23) credit union is A A) n depository institution owned by depositors who are members of a a particular group. B) commercial bank owned by its depositors. a C) thrift institution that issues credit cards. a D) combination of credit card corporations. a 24) oney market mutual funds invest in M A) esidential mortgages. r B) ighly liquid assets. h C) ong-term government securities. l D) ommercial real estate. c 25) hich of the following is NOT an economic benefit of depository institutions? W A) hey pool risk T B) hey create liquidity T C) hey reduce the cost of monitoring borrowers T D) hey borrow long and lend short T 26) hen banks use specialized resources to monitor borrowers, they are W A) ending to only high-risk borrowers. l B) owering the cost of creating liquidity. l C) ooling risk. p D) inimizing the cost of assessing borrowersʹ creditworthiness. m ? BAD QUESTION – IDEA RELATES TO BANKS AS INFORMATION AGENTS, WELL SUITED TO DEAL WITH ADVERSE SELECTION – LENDING TO BAD CREDIT RISKS AND MORAL HAZARD – ONCE HAVING LENT, HAVING BORROWER MISUSE THE FUNDS BANKS SPECIALIZE IN DEALING WITH THESE INFORMATION PROBLEMS 27) y borrowing money from many depositors and lending money to a variety of B borrowers, depository institutions A) pread risk efficiently. s B) an expose themselves to a great deal of risk. c C) ove money from M1 to M2. m D) ecrease the quantity of money. d 28) inancial innovation is F A) esponsible for credit cards being included as part of money. r B) he development of new financial products and services. t C) he process of turning assets into a more liquid form. t D) ausing a decrease in bank profits. c 29) he development of new financial products has been spurred by all of the T following EXCEPT A) ecreasing competition from nonbank depository institutions. d B) ttempts to circumvent bank regulations such as Regulation Q. a C) igh inflation and high interest rates. h D) ew technology in long-distance communication. n FINANCIAL INNOVATION – EVOLVED TO MAKE MORE PROFITS BY BANKS, FINANCIAL INSTITUTIONS, ETC BY –TRYING TO EVADE REGULATIONS THAT LIMITED PROFITS (REG Q PUT A CEILING ON BANK INTEREST RATES REDUCING THE AMOUNT OF FUNDS THEY COULD ATTRACT AND LEND OUT), HIGH INFLATION AND INTEREST RATES IN THE 70’S AND 80’S CAUSED THEM TO DEVELOP ADJUSTABLE RATE MORTGAGES, MONEY MARKET MUTUAL FUNDS, ETC AND NEW TECH ALLOWED CREDIT CARDS, ATMS, ETC. ALSO, **INCREASING** COMPETITION FROM THE SHADOW BANKING SYSTEM (NON‐BANK ETC) LED TO INNOVATIONS ALL OF THIS LOOKS LESS GOOD THESE DAYS 30) epository institutions undertake all the following activities except they do not D ________. A) ool risk p B) reate liquidity c C) inimize the cost of monitoring borrowers m D) rint money p 31) he Federal Reserve System T A) egulates the nationʹs financial institutions. r B) onducts the nationʹs monetary policy. c C) oth answers A and B are correct. B D) either answer A nor B is correct. N 32) ontrolling the quantity of money and interest rates to influence aggregate C economic activity is called A) oreign policy. f B) iscal policy. f C) onetary policy. m D) ank antitrust policy. b 33) hich of the following institutions is NOT part of the structure of the Federal W Reserve system? A) he Board of Governors T B) he Federal Government T C) he Federal Reserve Banks T D) he Federal Open Market Committee T 34) embers of the Federal Reserve Systemʹs Board of Governors M A) old 14-year staggered terms. h B) re elected for life. a C) re elected at large by district banks. a D) re a special subcommittee of the Senate. a 35) he Federal Open Market Committee T A) eets every week to review the state of the economy. m B) s the main policy-making organ of the Federal Reserve. i C) onsists of the Fed chairman and the 12 regional bank presidents. c D) s headed by the president of the New York Federal Reserve Bank. i 36) hich Federal Reserve Bank president is always on the Federal Open Market W Committee? A) ew York N B) oston B C) t. Louis S D) hicago C 37) he largest influence on the Fedʹs monetary policy actions is T A) istributed equally among the district banks. d B) eld by the Board of Governors. h C) eld by the New York Federal Reserve Bank because it implements policy. h D) eld by the chairman of the Board of Governors, who sets the policy agenda. h CHAIR HAS LOTS OF INFLUENCE/POWER – PUBLIC VOICE OF FED, APPOINTS STAFF, INFLUENCES OTHER MEMBERS OF BOARD WHO HAVE 7 OF 12 VOTES. 38) hich of the following is NOT a monetary policy tool? W A) iscount rate d B) pen market operations o C) ederal funds rate f D) equired reserve ratio r FED FUNDS INTEREST RATE IS A TARGET, NOT A TOOL. FED IN NORMAL TIMES USES OPEN MKT OPERATIOSN TO FORCE THE FED FUNDS RATE TO THE TARGET VALUE THEY PICK. NORMALLY, DISCOUNT RATE FOLLOWS THE FUNDS RATE (NOT AN ACTIVELY USED TOOL ANYMORE) AND RESERVE REQUIREMENTS ARE RARELY CHANGED FOR POLICY REASONS 39) he minimum percentage of deposits that a depository institution must hold and T cannot use for lending is known as the A) oney multiplier. m B) inimum rate. m C) equired reserve ratio. r D) iscount rate. d 40) he discount rate is the interest rate T A) hat banks charge their best customers. t B) n interbank lending. o C) hat the Fed charges on loans of reserves to depository institutions t D) hat bank insurers pay on insured deposits. t 41) n open market operation involves A A) hanging federal income tax rates. c B) he Federal Reserveʹs purchase or sale of government securities. t C) aising the debt limit of the United States. r D) he issuance of new corporate stock. t 42) hen bank notes were first invented, they were W A) liability to the bearer. a B) n asset to the issuer. a C) onvertible to gold on demand. c D) ot convertible to any commodity. n 43) he monetary base is the sum of T A) ederal Reserve notes, coins, and banksʹ deposits at the Fed. F B) old holdings and U.S. Treasury deposits at the Fed. g C) oreign and domestic deposits at the Fed. f D) .S. Treasury notes and other government securities. U 44) he Chairman of the Fed is appointed by ________. T A) he U.S. Senate t B) he President of the United States t C) ongress C D) he Board of Governors of the Federal Reserve System t 45) xcess reserves are E A) ctual reserves minus desired reserves. a B) esired reserves minus actual reserves. d C) iquidity funds minus actual reserves. l D) equired reserves minus actual reserves. r 46) he majority of money is created when T A) anks make loans b B) he Fed sells bonds t C) ew coins are minted n D) ew bills are printed n Assets Liabilities Reserves Deposits $100 $400 Loans Net Worth $600 $300 Total Total $700 $700 47) he above table gives the initial balance sheet for Mini Bank. If the bankʹs T desired reserve ratio is 10 percent, how much does this bank have in excess reserves? A) 10 $ B) 100 $ C) 40 $ D) 60 $ PROBABLY SHOULD SAY **REQUIRED** RESERVE RATIO (NOT DESIRED). WITH 10% OF 400 IN DEPOSITS =$40 REQUIRED, $60 IS HELD IN EXCESS RESERVES THAT **CAN** BE LOANED OUT (BANK MAY CHOOSE TO HOLD EXCESS RESERVES THOUGH). 48) he above table gives the initial balance sheet for Mini Bank. Mini Bankʹs T balance sheet is such that it will make A) o change in its lending. n B) ou cannot predict what the bank will do from this balance sheet. y C) ore loans. m D) ewer loans. f WITH $60 IN EXCESS RESERVES, BANK IS LIKELY TO INCREASE INTEREST EARNING LOANS 49) hich of the following best describes the chain of events in the money creation W process? A) ow interest rates discourage people from holding currency. When they L deposit the currency, interest rates rise, increasing the quantity of money. B) esired reserves increase, encouraging banks to seek new deposits. When the D new depositors come in, desired reserves decrease and the quantity of money increases. C) urrency is drained from the quantity of money into the banking system, C where it is lent out. The loans are spent, increasing the currency drain and also the quantity of money. D) he monetary base increases. Banks acquire excess reserves which they loan T out, increasing deposits and also the quantity of money. The new deposits then create additional excess reserves. 50) he money multiplier determines how much T A) oney demand will expand given a change in the quantity of money. m B) he monetary base will be expanded given a change in the quantity of money. t C) he quantity of money will be expanded given a change in the monetary base. t D) eal GDP will be expanded given an increase in autonomous investment. r 51) uppose that the money multiplier is 6. If the monetary base increases by $1 million, S the quantity of money will A) ncrease by $6 million. i B) ecrease by $166,667. d C) ncrease by $166,667. i D) ecrease by $6 million. d 52) n increase in currency held outside the banks is ________. A A) currency surplus a B) ealth w C) currency drain a D) ncome i 53) he opportunity cost of holding money is the T A) rice of goods and services. p B) nterest rate. i C) ase with which an asset can become money. e D) evel of wage and rental income. l 54) he figure above illustrates the effect of T A) decrease in real GDP. a C) decrease in the monetary base. a B) n increase in real GDP. a D) n increase in the monetary base. a 55) n the money market, if the interest rate exceeds the equilibrium interest, there is I a surplus of money. How is the surplus eliminated? A) he high interest rate increases the demand for money, eliminating the T surplus. B) eople buy bonds to rid themselves of the surplus money, bidding up their P price and pushing interest rates down. C) he Federal Reserve will destroy currency, reducing the quantity of money. T D) anks will lend out the surplus, lowering interest rates. B WITH INT RATE ABOVE EQUILIBRIUM, QD OF MONEY < QS CLEARLY INT RATE WILL FALL UNTIL QD INCREASES TO QS (NOTE QS DOESN’T CHANGE SINCE MS VERTICAL AND THERE IS NO REASON FOR FED TO CHANGE MS). MECHANISM ACCORDING TO KEYNES: WITH INT RATE ‘HIGH’, PEOPLE WILL CHOOSE NOT TO HOLD MONEY WHICH EARNS NO INTEREST AND RATHER BUY INTEREST EARNING BONDS. THIS WILL INCREASE THE PRICE OF BONDS WHICH AUTOMATICALLY LOWERS INTEREST RATES (WE WILL SEE WHY LATER). WITH RATES FALLING, QD INCREASES UNTIL WE REACH EQUILIBRIUM 56) n the figure above, if the interest rate is 8 percent, people demand $0.1 trillion I A) ore money than the quantity supplied and the interest rate will rise. m B) ess money than the quantity supplied and the interest rate will fall. l C) ore money than the quantity supplied and the interest rate will fall. m D) ess money than the quantity supplied and the interest rate will rise. l WITH INT RATE ABOVE EQUILIB, QD<QS AND INT RATE WILL FALL 57) n the figure above, if the interest rate is 6 percent, I A) here is a $0.1 trillion excess quantity of money and the interest rate will rise. t B) here is a $0.1 trillion excess demand for money and the interest rate will rise. t C) here is a $0.1 trillion excess quantity of money and the interest rate will fall. t D) he money market is in equilibrium and the interest rate will remain constant. t 58) n the short run, which of the following actions raise the interest rate? I A) decrease in the demand for money a B) n increase in the demand for money a C) n increase in the quantity of money a D) n increase in bond prices a SEE ABOVE – SAME AS S AND D FOR ANYTHING – IF D INCREASES OR S FALLS P (INT RATE) INCREASES. SO IF MD INCREASES OR MS FALLS, INT RATE RISES 59) he demand for money curve is the relationship between ________ and ________, T other things remaining the same. A) he quantity of money demanded; the real interest rate t B) he money demanded; the money supplied t C) he quantity of real money demanded; the quantity of real money supplied t D) he quantity of real money demanded; the interest rate t 60) f real GDP decreases, the demand for money curve will shift I A) ightward and the interest rate will rise. r B) eftward and the interest rate will fall. l C) ightward and the interest rate will fall. r D) eftward and the interest rate will rise. l DEMAND FOR MONEY=MD=QUANTITY OF MONEY (CURRENCY AND CHECKING ACCOUNTS) PEOPLE WISH TO HOLD DEPENDS ON THEIR: INCOME, EXPECTATIONS, INTEREST RATES, PRICE LEVEL) SO IF GDP=INCOME FALLS, MD FALLS (CURVE SHIFTS LEFT) ...
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