Q&A Hero

Q: What would be the amount of deposits D, given that the monetary base MB = $750 billion, the required reserve rate (rD) = 0.1, the excess reserve rate (ER/D) = 0.005, and non-bank currency to deposits (C/D) equaled 1.2?

Q: The process by which simultaneous withdrawals by a particular bank's depositors results in the bank closing is known as a A) contagion. B) bank run. C) financial crisis. D) bank panic.

Q: Total banking system reserves equal $58.65 billion. The total banking system checkable deposits subject to reserve requirements are $510 billion. The required reserves are $51 billion. What is the required reserve rate, and what is the excess reserve rate?

Q: Which of the following is NOT true of an insolvent bank? A) Its net worth is negative. B) It may be unable to pay off its depositors. C) The value of its assets is less than the value of its liabilities. D) It must have no more deposits.

Q: Why would it be correct to say that, if we assume that people do not change their currency holdings and that banks do not hold any excess reserves, the equation really could be stated as ?

Q: Banks face liquidity risk because A) they can have difficulty meeting their depositor's demands to withdraw money. B) they are unable to borrow from the Federal Reserve. C) households and businesses may seek to borrow a large amount of funds in a short period of time. D) governments tend to run high budget deficits.

Q: If we assume the required reserve rate is ten percent (0.1), and that the public does not change their currency holdings and that banks do not hold any excess reserves, what will be the change in deposits resulting from a $150 million open market purchase by the Fed?

Q: Banks have a maturity mismatch since A) they borrow long term, but lend short term. B) they borrow short term, but lend long term. C) some of their loans are short term while others are long term. D) some of their borrowings are short term while others are long term.

Q: Why is it more correct to say that the Fed (the central bank) controls the monetary base than to say it controls the amount of reserves?

Q: The creation of a lender of last resort in the United States A) occurred in response to banking panics. B) was mandated in the U.S. Constitution. C) occurred in response to the S&L crisis of the 1980s. D) has been recommended by the Treasury in its report of late 1992.

Q: Traveler's checks have no reserve requirements and are included in M1. When people travel during the summer and convert some of their checking account deposits into traveler's checks, explain what happens to the monetary base.

Q: Congress created the Federal Reserve System A) to serve as a lender of last resort. B) to process the receipt of taxes received by the Internal Revenue Service. C) to regulate the value of the U.S. dollar against foreign currencies. D) to provide a source of mortgage loans to the residential housing market.

Q: If reserves pay interest below the market federal funds rate, why would a bank hold any excess reserves?

Q: What were the two main rationale for exempting nonbanks from restrictions on assets and degrees of leverage?

Q: The required reserve rate set by the Fed is ten percent of all checkable deposits. A bank sells $1 million of U.S. Treasury securities it owns to the Fed. Describe what this transaction does to the bank's total reserves, its required reserves and its excess reserves.

Q: As a result of the financial crisis of 2007-2009, the size of the shadow banking system: A) became smaller than the commercial banking system B) became larger than the commercial banking system C) declined, but remained larger than the commercial banking system D) increased, but remained smaller than the commercial banking system

Q: What happens to the monetary base if people, fearing a bank run, convert their checking deposits into currency holdings?

Q: All of the following are new rules affecting the shadow banking system as a result of the Dodd-Frank Act EXCEPT: A) some trading of derivatives are required to take place on exchanges B) large hedge funds are required to register with the SEC C) firms selling mortgage-backed securities and similar assets are required to hold 5% of the credit risk D) securitized loans must now be insured

Q: You receive a $1,000 gift from your grandmother when you graduate from college. Your grandmother withdrew the $1,000 from her checking account and gave you ten $100 bills. You deposit the ten bills into your checking account. Discuss the impact of these transactions on your grandmother's balance sheet, your balance sheet, and the Fed's balance sheet.

Q: Which of the following was the main reason for increased counterparty risk in the shadow banking system prior to the financial crisis of 2007-2009? A) increased leverage B) government insuring money market deposits C) many firms borrowing long term for short-term investments D) trading of derivatives on exchanges

Q: The Treasury usually requires most businesses to regularly deposit taxes withheld from employees into accounts at designated commercial banks. On a regular basis, the funds in these accounts are transferred to the Treasury's account at the Fed. Discuss what is happening to the balance sheet of the banking system as the businesses are making deposits and these tax accounts are increasing. What happens to the Banking system's balance sheet when the funds are transferred to the Fed?

Q: Which of the following is likely to be more of a problem after the introduction of deposit insurance? A) moral hazard B) adverse selection C) contagion D) bank runs

Q: Given the prevalence of electronic payment mechanisms like credit cards and debit cards and the safety of checks, why is the amount of currency in the hands of the public increasing?

Q: Which of the following is NOT a reason that firms in the shadow banking system were more vulnerable than commercial banks during the financial crisis of 2007-2009? A) They could invest in riskier assets. B) Investors had no insurance against loss of principal. C) They made investments that would lose value if housing prices decline. D) They were more heavily regulated than commercial banks, making them less able to adjust to changing market conditions.

Q: If the Fed sells euros valued at $100 million to commercial banks, will this change the size of the Fed's liabilities and assets? Explain.

Q: What regulatory change did Congress approve in 2010 to reduce counterparty risk in the shadow banking system? A) push more trading of derivatives onto exchanges B) required investment banks to follow the same rules on leverage as commercial banks C) require increased collateral for those trading derivatives D) banned trading of mortgage-backed securities

Q: Follow a $1 billion purchase of U.S. Treasury bonds by the Fed from commercial banks. Discuss the changes that occur to the balance sheet of the banking system and the balance sheet of the Fed.

Q: Which government agency regulates futures markets? A) SEC B) Commodity Futures Trading Commission C) Board of Trade D) the Federal Futures Agency

Q: Explain the impact on the Fed's balance sheet from a $10 million open market purchase of U.S. Treasury Securities. Be sure to identify which categories of assets and liabilities change and by what amounts.

Q: Which of the following is NOT a form of a short-term loan in the shadow banking system? A) repurchase agreements B) commercial paper C) money market mutual fund shares D) bank deposits

Q: Suppose a student writes a check in the amount of $300 to the college bookstore for textbooks. Discuss briefly the impact on the student's balance sheet, his/her bank's balance sheet and the balance sheet of the Fed.

Q: What was the primary reason that Congress initiated deposit insurance in the 1930s? A) protect the deposits of individual savers B) provide more of an incentive for depositors to monitor bank activities C) reduce systemic risk to the financial system D) reduce information problems in the banking system

Q: Why do most central banks publish their balance sheets so frequently?

Q: Which agency did Congress create in the 1930s to reduce information costs in financial markets? A) FDIC B) SEC C) Federal Reserve D) Consumer Financial Protection Agency

Q: In terms of foreign exchange reserve holdings, how does the Fed's balance sheet compare to that of the European Central Bank (ECB)?

Q: The shadow banking system refers to A) commercial banks. B) community banks. C) pawn shops and institutions that offer payday loans. D) nonbank financial institutions such as investment banks and hedge funds.

Q: If the central banks of most countries do not set the exchange rates, why do they hold foreign exchange as one of their assets?

Q: How do defined-contribution plans differ from defined-benefit plans?

Q: The Federal Reserve's Balance sheet would include an item labeled Currency. Is this an asset or a liability of the Fed, and does it include all currency that is printed? Explain.

Q: What are three reasons that employees may prefer to save through pensions provided by employers rather than through savings accounts?

Q: The assets that appear on the central bank's balance sheet include the category of loans. Who are central banks lending to and are these loans associated with the central bank functioning as the government's bank? Explain.

Q: Which of the following are statisticians who compile statistics to predict the risk of an event occurring in the population? A) rocket scientists B) quants C) actuaries D) risk analysts

Q: The authors open Chapter 17 with a contrast between the Fed's actions in response to the terrorist attacks of September, 2001 and its response to the financial crisis of the Great Depression. Why was the Fed successful at dealing with the crisis in 2001, and not as successful with the crisis of the early 1930s?

Q: A specified amount of a claim that the insurance company does not need to pay is called: A) coinsurance B) deductible C) copayments D) premium

Q: During the 1990s, the money multipliers for M1 and M2: A. decreased.B. remained fairly constant even though the economy grew.C. the M1 multiplier decreased while the M2 multiplier increased dramatically.D. increased dramatically as the economy grew.

Q: What is the name of the pension plan under which employees can make tax-deductible contributions through regular payroll deductions? A) 401(k) plans B) Social Security plans C) Early retirement plans D) 486(b) plans

Q: One thing the Fed has learned over the past twenty-five years is: A. the money multiplier is fairly constant no matter what changes are made to the monetary base.B. the money multiplier is unstable over time.C. the money multiplier has a trend rate of growth that is fairly constant.D. it should focus its attention on targeting M2.

Q: To deal with difficulties in administering pension funds, Congress in 1974 passed the A) Corrupt Pension Fund Reform Act. B) Securities and Exchange Act. C) Employee Retirement Income Security Act. D) Social Security Act.

Q: During the early years of the Great Depression, a study of the money aggregates reveals that the money multiplier: A. was at an all-time high.B. increased from 1929 right through 1936.C. decreased.D. was constant from 1929 through 1936.

Q: A defined benefits plan A) is always fully funded. B) may be underfunded but cannot be overfunded. C) may be overfunded but cannot be underfunded. D) may be either underfunded or overfunded.

Q: During the early years of the Great Depression, the monetary base and M2: A. both increased significantly.B. both decreased significantly.C. moved in opposite directions; M2 increased while the monetary base decreased.D. moved in opposite directions; the monetary base increased but M2 decreased.

Q: In a defined contribution pension plan, A) pension income varies depending on how well the plan's investments have done. B) the employee is promised an assigned benefit based on earnings and years of service. C) if the funds in the pension plan exceed the amount promised, the excess accrues to the issuing firm or institution. D) all earnings are taxable as regular income.

Q: During the Great Depression, the monetary base in the U.S.: A. decreased significantly.B. increased.C. remained constant.D. was highly erratic.

Q: Vesting refers to A) the right of the holder of an insurance policy to collect for an insurable event. B) the shielding of returns on whole life policies from taxation. C) the length of service required of an employee before he or she is eligible for a pension. D) the payments made by an employee into a pension plan.

Q: The money multiplier is much lower today than it was twenty-five years ago because: A. people are holding less currency today.B. the currency-to-deposit ratio is much higher today.C. there is less currency available today.D. credit cards are more widely used.

Q: In which of the following have pension funds invested the most? A) corporate equities and mutual fund shares B) government securities C) corporate bonds D) mortgages

Q: The use of deposit sweeping allows banks to: A. pay higher rates of interest than are allowed by law.B. reduce the amount of required reserves they must hold.C. pay less for FDIC insurance.D. weed out less profitable deposits.

Q: The largest institutional participants in capital markets are A) pension funds. B) insurance companies. C) consumer finance companies. D) business finance companies.

Q: If M = the quantity of money, m the money multiplier, MB the Monetary Base, C = Currency, D = Deposits, R = Reserves, RR = required reserves, and ER = excess reserves, then m would equal: A. R/ER.B. M/MB.C. C + D.D. D - C

Q: All of the following are potential benefits of defined contribution plans EXCEPT: A) clear ownership rights to the balances of their 401Ks B) lower risk for employees C) if the employee's investments are profitable, the employee can have high income during retirement D) contributions to traditional 401Ks are tax deductible

Q: If M = the quantity of money, m the money multiplier, MB the Monetary Base, C = Currency, D = Deposits, R = Reserves, RR = required reserves, and ER = Excess reserves, then RR would equal: A. MB.B. D - C.C. M/MB.D. R - ER.

Q: The use of deductibles and coinsurance are examples of attempts by insurance companies to deal with the problem of A) moral hazard. B) adverse selection. C) failure of policyholders to keep paying their premiums. D) excessive government regulation.

Q: If M = the quantity of money, m, the money multiplier, MB, the Monetary Base, C = Currency, D = Deposits, R = Reserves, RR = required reserves, and ER = Excess reserves, then C + R would equal: A. M.B. R.C. MB.D. ER.

Q: Charging drivers with good records lower premiums than drivers with bad records is an example of an attempt by insurance companies to deal with the problem of A) moral hazard. B) adverse selection. C) drunk driving. D) failure of policyholders to keep paying their premiums.

Q: If there were an increase in the number of bank failures, we should expect the amount of excess reserves in the banking system to: A. decrease.B. increase.C. not change.D. decrease since failing banks lost theirs.

Q: Blood tests administered to applicants for medical insurance are an example of an attempt by insurance companies to deal with the problem of A) moral hazard. B) the drug abuse problems currently plaguing the country. C) adverse selection. D) failure of policyholders to keep paying their premiums.

Q: Which of the following best completes the statement? If people increase their currency holdings, all else the same, the monetary base: A. does not change but the quantity of M2 will decrease.B. increases as does the quantity of M2.C. decreases as does the quantity of M2.D. does not change and neither does M2.

Q: The law of large numbers allows insurance companies to A) hold capital market instruments as assets without fearing overly large numbers of defaults. B) hold money market instruments as assets without fearing overly large numbers of defaults. C) predict the average number of occurrences of insurable events in a large population of policyholders. D) charge higher premiums than necessary, knowing that large numbers of individuals will pay them.

Q: Assume that the required reserve rate is ten percent, banks want to hold excess reserves in an amount that equals three percent of deposits, and the public withdraws ten percent of every deposit in cash. An open market purchase of $1 million by the Fed will see banking system deposits increase by: A. more than $1 million but less than $10 million.B. exactly $1 million.C. less than $1 million.D. more than $10 million but less than $20 million.

Q: When an insurance company makes a direct loan to a firm, the loan is known as A) a private placement. B) a commercial paper. C) an account receivable. D) an account payable.

Q: The simple deposit expansion multiplier is really too simple for understanding the link between changes in a central bank's balance sheet and the quantity of money in the economy because it: A. ignores how central banks could change their balance sheet.B. assumes banks hold excess reserves.C. ignores the fact people might change their currency holdings.D. ignores changes in vault cash.

Q: If we assume a ten percent required reserve rate, and banks not holding any excess reserves and no change in currency holdings, an open market sale of $5 million of U.S. Treasury securities by the Fed, will result in deposits: A. decreasing by $50 million.B. increasing by $5 million.C. increasing by $50 million.D. not changing.

Q: During the financial crisis, which type of risk was the biggest problem faced by investment banks? A) interest-rate risk B) currency risk C) hedging risk D) credit risk

Q: When investment banks buy or sell securities on their own account, it's called A) financial engineering. B) proprietary trading. C) underwriting. D) factoring.

Q: If we focus on the banking system and assume no change in the public's currency holdings, a loss of reserves by any one bank must: A. equal the loss of reserves by the entire system.B. be equal to the net loss of reserves for the banking system.C. result in no change in reserves for the banking system.D. result in a multiple loss to the banking system.

Q: The development of new financial securities or investment strategies using sophisticated models is known as A) underwriting. B) factoring. C) financial engineering. D) hedging.

Q: If the required reserve rate is ten percent and banks do not hold any excess reserves and there are no changes in currency holdings, a $1 million open market purchase by the Fed will result in what change in loans? A. No changeB. A decrease of $1 millionC. An increase of $10 millionD. An increase of $1 million

Q: Which of the following activities is NOT a primary concern of investment banks? A) taking in deposits and making loans B) providing advice and financing for mergers and acquisitions C) underwriting new security issues D) providing advice on new security issues

Q: If the Fed were to decrease the required reserve rate from ten percent to five percent, the simple deposit expansion multiplier would: A. double.B. decrease by 5 percent.C. increase by a factor of five.D. be half as large as it was before the reduction.

Q: Which of the following is when an investment bank purchases securities outright in case it misjudged the state of the market and it may have to sell the securities at a lower price than what was guaranteed? A) credit risk B) liquidity risk C) principal risk D) default risk