Chapter 15 example #79370

19 May 2023
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question
Until‚Äč 1946, residents of the island of Yap used large‚Äč doughnut-shaped stones as financial assets. Although prices of goods and services were not quoted in terms of the‚Äč stones, the stones were often used in exchange for particularly large‚Äč purchases, such as payments for livestock. To make the‚Äč transaction, several individuals would place a large stick through a‚Äč stone's center and carry it to its new owner. A stone was difficult for any one person to‚Äč steal, so an owner typically would lean it against the side of his or her home as a sign to others of accumulated purchasing power that would hold value for later use in exchange. Loans would often be repaid using the stones. These stones performed the following functions of money ‚Äč:
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medium of‚Äč exchange, store of‚Äč value, and standard of deferred payment functions of money.
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During the‚Äč 1945-1946 Hungarian‚Äč hyperinflation, when the rate of inflation reached 41.9 quadrillion percent per‚Äč month, the Hungarian government discovered that the real value of its tax receipts was falling dramatically. To keep real tax revenues more‚Äč stable, it created a good called a‚Äč "tax peng√∂", in which all bank deposits were denominated for purposes of taxation. ‚ÄčNevertheless, payments for goods and services were made only in terms of the regular Hungarian‚Äč currency, whose value tended to fall rapidly even though the value of a tax‚Äč peng√∂ remained stable. Prices were also quoted only in terms of the regular currency.‚Äč Lenders, however, began denominating loan payments in terms of tax‚Äč peng√∂s. The tax‚Äč peng√∂ functioned as money in Hungary in 1945 and 1946
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as a store value
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Money may serve as a‚Äč "standard of‚Äč value" that allows for comparison of the relative worth of various goods and services. What function of money does this‚Äč describe?
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Unit of accounting.
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A credit card is not considered money because
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-it is not a unit of accounting. -it simply defers rather than completes transactions that ultimately involve the use of money. -it is not a store of value.. -All of the above.
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Paul needs to decide between buying a new home gym for‚Äč $1,800 or being able to go on a Canadian vacation for‚Äč $1,000 and still having enough left over to buy a new set of free weights for‚Äč $800. Paul opts for the new set of free weights and the Canadian vacation. Paul has used money in what ways in making his‚Äč decision?
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Medium of exchange and a standard unit of account.
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Which of the following assets is the least‚Äč liquid?
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A house.
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Which of the following assets is the most‚Äč liquid?
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A‚Äč traveler's check.
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The opportunity cost of money holdings is
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the alternative interest income foregone from not holding some other asset.
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Which of the following statements is true when considering‚Äč liquidity?
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The most liquid assets typically earn no or little interest.
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When sellers accept money as payment in market‚Äč transactions, money is serving as a
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medium of exchange.
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When money is used as a standard of value that allows people to compare the relative worth of various goods and‚Äč services, it is serving as a
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unit of accounting.
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When money is set aside to be used for future‚Äč purchases, it is serving as a
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store of value.
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When money is used as a means of settling debts maturing in the‚Äč future, it is serving as a
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standard of deferred payment.
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Money is the least liquid asset.
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false
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The value of the U.S. dollar is based on
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the‚Äč public's faith that the dollar can be exchanged for goods and services.
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Money is defined by its‚Äč functions, which are as a‚Äč __________ of‚Äč __________, __________ of‚Äč __________, __________ of‚Äč __________, and‚Äč __________ of‚Äč __________ __________.
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medium of‚Äč exchange; unit of‚Äč accounting; store of‚Äč value; and standard of deferred payment.
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Money is a highly _______ asset because it can be disposed of with low transaction costs and with relative certainty as to its value.
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liquid
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Modern nations have ______ monetary systemslong dash‚ÄĒnational currencies are not convertible into a fixed quantity of gold or silver.
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fiduciary
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Money is accepted in exchange for goods and services because people have confidence that it can later be exchanged for other goods and services. In‚Äč addition, money has _____ value.
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predictable
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M1
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= Currency‚Äč + Transactions/CHECKABLE deposits‚Äč + Traveler's checks.
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M2
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= M1‚Äč + Savings deposits‚Äč + Small-denominations time deposits‚Äč + Money market deposit accounts‚Äč + Noninstitution money market mutual funds.
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A‚Äč $1,000 balance in a transactions deposit at a mutual savings bank. This item is counted in
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BOTH
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A‚Äč $100,000 certificate of deposit issued by a New York bank. This item is counted in
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NEITHER
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A‚Äč $10,000 time deposit an elderly widow holds at her credit union. This item is counted in
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M2
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A‚Äč $50 traveler's check. This item is counted in
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BOTH
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A‚Äč $50,000 money market deposit account balance. This item is counted in
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M2
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A‚Äč $20 Federal Reserve note is counted in
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BOTH
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An example of a fiduciary monetary system is
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American‚Äč one-dollar bills.
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A currency will cease to function as money if
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people think that they will not be able to use it to exchange for goods and services later.
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There are two major ways of measuring‚Äč money, M1 and M2. Which statement is true about the measuring of M1 and‚Äč M2?
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M1 is measured by the transactions approach which stresses the role of money as a medium of exchange while M2 is measured by the liquidity approach which stresses the role of money as a temporary store of value.
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The M1 measurement of the money supply includes all of the following components except
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SAVINGS DEPOSITS
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The M2 measurement of the money supply includes all of M1 plus several other highly liquid assets. Which of the following is not one of those assets which is included in‚Äč M2?
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credit card balances
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The money supply can be defined in a variety of‚Äč ways, depending on whether we use the transactions approach or the liquidity approach. Using the transactions ‚Äčapproach, the money supply consists of‚Äč currency, transactions‚Äč deposits, and‚Äč traveler's checks. This is called
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M1
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___________ deposits are any deposits in financial institutions from which the deposit owner can transfer funds using a debit card or checks.
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TRANSACTIONS
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When we add savings‚Äč deposits, small-denomination time‚Äč deposits, and retail money market mutual fund balances to ______ we obtain the measure known as _____________.
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M1/M2
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A manager of a savings and loan association responds to reports of a likely increase in federal deposit insurance coverage. She directs loan officers to extend mortgage loans to less creditworthy borrowers. This situation poses
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moral hazard problem
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A loan applicant does not mention that a legal judgment in his divorce case will require him to make alimony payments to his‚Äč ex-wife. This situation poses
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adverse selection problem
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An individual who was recently approved for a loan to start a new business decides to use some of the funds to take a Hawaiian vacation. This situation poses
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moral hazard problem
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Financial intermediaries
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transfer funds from savers to investors.
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Scott is seeking a loan from his bank for a home improvement project. He receives the loan and then decides to take a special vacation opportunity to Las Vegas and enter a gambling tournament. The‚Äč bank, as a financial‚Äč intermediary, is facing a problem of
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moral hazard
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Obviously financial intermediaries need to collect money from a variety of sources so they can redirect it where it can be used efficiently. The primary source of funds for a financial intermediary are known as its
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liabilities.
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The financial intermediary with liabilities of shares and checkable deposits and assets that include consumer debt and long term mortgage loans is a
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credit union.
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Which of the following is a major reason why financial‚Äč intermediaries, such as‚Äč banks, exist?
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The existence of asymmetric information makes financial intermediaries more efficient in channelling money to its most efficient use.
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Individuals purchasing new bonds issued by a corporation is an example of direct finance for the corporation.
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TRUE
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Liabilities refer to amounts‚Äč owed, and assets refer to amounts owned.
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TRUE
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The possibility that a borrower might engage in riskier behavior after a loan has been obtained is known as
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moral hazard.
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In the United‚Äč States, the dollar volume of payments using checks exceeds the volume using debit cards.
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FALSE
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____________ intermediaries, including depository institutions such as commercial banks and savings‚Äč institutions, insurance‚Äč companies, mutual‚Äč funds, and pension‚Äč funds, transfer funds from ultimate lenders‚Äč (savers) to ultimate borrowers.
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FINANCIAL
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Financial intermediaries specialize in tackling problems of ______________ information. They address the ________________ problem by carefully reviewing the‚Äč credit-worthiness of loan‚Äč applicants, and they deal with the ____________ problem by monitoring borrowers after they receive loans. Many financial intermediaries also take advantage of cost reductions arising from the centralized management of funds pooled from the savings of many individuals.
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ASYMMETRIC/ADVERSE SELECTION/ MORAL HAZARD
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The Fed acts like a private banking institution when it
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holds Depository institution's reserves/provides payment‚ąíclearing services to depository institutions/ acts as the government's fiscal agent.
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The Fed acts like a government agency when it
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supplies the economy with fiduciary currency/ supervises depository institutions
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Which of the following is not a duty of the a central‚Äč bank?
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Guarantee the savings of its citizens.
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Due to the‚Äč Gramm-Leach-Bliley Act of 1999
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the US government allowed commercial banks to own stock and sell insurance policies.
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Which of the following statements is true when considering national banking structures around the‚Äč world?
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U.S. businesses only obtain approximately‚Äč 30% of their funds from bank loans compared to‚Äč 65% for European firms.
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Which of the following statements is true when considering central‚Äč banks?
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The number of central banks in the world grew enormously after the Great Depression.
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What is the basic structure of the Federal Reserve‚Äč Bank?
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There are 12 district‚Äč banks, a Board of Governors and a Federal Open Market Committee.
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Which of the following events caused Congress to begin seriously looking at setting up the Federal Reserve‚Äč system?
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Some severe banking crises at the end of the 19th century and early 20th century.
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Which of the functions of the Federal Reserve is appropriately matched with its correct‚Äč institution?
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Holds reserve balances for depository‚Äč institutions; The Federal Reserve Bank.
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If you live in‚Äč Atlanta, Georgia, and you purchase a computer in Los‚Äč Angeles, California, while there on‚Äč vacation, which of the following paths would your check take before it finally‚Äč clears?
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The check goes from the computer‚Äč store's bank to the Federal Reserve bank in San‚Äč Francisco, then to the Federal Reserve bank in‚Äč Atlanta, and then to your bank.
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Which of the following does not describe some of the functions of the Federal Reserve‚Äč Bank?
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Acts as a medium of‚Äč exchange, a unit of‚Äč accounting, a store of value and a standard of deferred payment.
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When the Fed acts as the lender of the‚Äč "last resort" it means that
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the Fed lends to depository institutions it deems should not fail.
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Which of the following statements is ‚Äčincorrect?
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There are a total of 25 Federal Reserve district banks.
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When a temporarily illiquid bank which is otherwise in good financial condition borrows money from the Fed in an attempt to prevent a loss of confidence in the bank or in other‚Äč banks, this is an example of the Fed
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acting as the lender of last resort.
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The central bank in the United States is the ____________, which was established on December‚Äč 13, 1913.
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Federal Reserve System
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here are 12 Federal Reserve district‚Äč banks, with 25 branches. The Federal Reserve System is managed by the ______________ in‚Äč Washington, D.C. The Fed interacts with almost all depository institutions in the United‚Äč States, most of which must keep a certain percentage of their transactions deposits on reserve with the Fed. The Fed serves as the chief regulatory agency for all depository institutions that have Federal Reserve System membership.
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board of governers
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The functions of the Federal Reserve System are to supply fiduciary ________, provide‚Äč payment-clearing services, hold depository institution __________‚Äč, act as the‚Äč government's fiscal‚Äč agent, supervise depository‚Äč institutions, regulate the supply of‚Äč money, intervene in foreign currency‚Äč markets, and act as the ___________.
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currency/ reserves/lender of last resort
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Loans to a private company are
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ASSETS
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Borrowings from a Federal Reserve district bank are
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LIABILITIES
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Deposits with a Federal Reserve district bank are
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ASSETS
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U.S. Treasury bills are
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ASSETS
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Vault cash is
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ASSETS
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Loans to other banks in the federal funds market are
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ASSETS
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Transactions deposits are
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LIABILITIES
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potential money multiplier
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= 1/ RESERVE RATIO
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EXCESS RESERVES = LOANS TO ITS CUSTOMERS
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= TOTAL RESERVES - REQUIRED RESERVES
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change in total deposits
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= potential money multiplier x federal reserve purchases
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An auto loan to an individual is an __________ to a commercial bank.
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asset
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Funds borrowed from a credit union in the federal funds market is a ________ to a commercial bank.
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liability
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A‚Äč customer's savings deposit is a ___________ to a commercial bank.
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liability
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The‚Äč bank's required reserve is an ________ to a commercial bank.
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asset
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Which of the following statements is true concerning a fractional reserve banking‚Äč system?
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Banks maintain a fraction of deposits on hand to meet the daily needs of their customers.
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Required reserves
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are the minimum amount of legal reserves that a depository institution must have to back up its checkable deposits.
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Ancient goldsmiths are credited with
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-creating paper notes that could purchase goods and services. -the creation of the fraction reserve banking system. -developing deposit slips for gold and silver. -All of the above.
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Excess reserves
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-are zero if required reserves equal legal reserves. -are negative if legal reserves are not sufficient to cover required reserves. -are minimized by‚Äč profit-maximizing banks since they generate no income. -All of the above.
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A‚Äč bank's only liabilities are ‚Äč$14 million in transactions deposits. The bank currently meets its reserve‚Äč requirement, and it holds no excess reserves. The required reserve ratio is 0.08. Assuming that its only assets are legal‚Äč reserves, loans, and‚Äč securities, calculate the value of loans and securities held by the bank.
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= (1-.08) *14
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total assets
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= required reserves + loans + securities
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total assets
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= total reserves + loans + securities + other assets
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Suppose that there is a checkable deposit intoYourBank. Which of the following statements is an accurate description of the changes that occur at‚Äč YourBank?
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The required reserves decrease by the amount of the withdrawal times the required reserve ratio.
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required reserved
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= required reserved ratio x deposit amount
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Open market operations
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are the purchase and sale of existing U.S. government securities by the Federal Reserve.
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The Fed sells ‚Äč$30 comma 000 comma 30,000,000 in bonds to‚Äč Jim, a bond dealer who pays for the bonds with a check drawn on his bank. Assume a 1010‚Äč% required reserve ratio. Which of the following statements correctly records this transaction at‚Äč Jim's bank with respect to the‚Äč bank's reserves?
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The‚Äč bank's reserves will go down by ‚Äč$30,000,000.
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The Fed sells ‚Äč$10,000,000 in bonds to‚Äč Jim, a bond dealer who pays for the bonds with a check drawn on his bank. Assume a 55‚Äč% required reserve ratio. Which of the following statements correctly records this transaction at‚Äč Jim's bank with respect to the‚Äč bank's reserves?
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The‚Äč bank's reserves will go down by ‚Äč$10,000,000.
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The required reserve ratio is 0.20. If the Federal Reserve buys‚Äč $1,000,000 worth of bonds from a bond dealer who has her account at Bank XYZ above and she deposits the entire‚Äč $1,000,000 into a checking account at Bank‚Äč XYZ, what will be the new required and excess reserves for this bank‚Äč (assume no new loans are‚Äč made)? (Remember that required reserves are found by applying the required reserve ratio to the amount of total checkable‚Äč deposits.) Total checkable deposits at Bank XYZ grow by ‚Äč_________ because of this deposit from the broker.
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‚Äč$1000000
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Bank XYZ is now required to hold an additional ‚Äč$_________ as required reserves due to this‚Äč $1,000,000 deposit into a checking account.
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200000/ 800000
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Suppose all banks have zero excess reserves. The Fed buys bonds for‚Äč $1 million and a bond dealer deposits the check in his or her bank. The required reserve ratio is 10 percent. The bank loans out the maximum it is allowed to a local business. The business writes a check for the full amount for‚Äč supplies, which is then deposited in another bank. The largest loan the second bank can make‚Äč is:
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The largest loan the second bank can make is ‚Äč$810,000 =1mx(1-.10) =900000x(1-.10)
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Assume that the required reserve ratio is 8 percent. What is the total possible expansion of the money supply after a $1 million bond purchase by the‚Äč Fed?
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12500000
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Which of the following statements is true concerning the potential money‚Äč multiplier?
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The required reserve ratio and the potential money multiplier are inversely related.
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On a‚Äč bank's balance‚Äč sheet, ________ are assets and‚Äč ________ are liabilities.
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reserves and‚Äč loans; transactions deposits
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If the Fed engages in an open market sale with a bond‚Äč dealer, the bond‚Äč dealer's bank's transactions deposits liabilities will‚Äč ________ and the money supply will‚Äč ________.
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‚Äčdecrease; decrease
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The potential money multiplier is equal to
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1 divided by the reserve ratio.
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__________ of depository institutions consist of their vault cash and deposits that they hold with ________ district banks.
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reserves/ federal reserve
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The fraction of transactions deposit liabilities that depository institutions hold as reserves is the
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reserve ratio
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The _______________is equal to 1 divided by the reserve ratio.
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potential money multiplier
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Stockbrokers monitor the companies after investing funds in‚Äč them, in order to
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limit moral hazard
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Commercial banks screen their borrowers before a loan can be‚Äč approved, in order to
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limit adverse selection
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Money market mutual funds combine the savings of many‚Äč individuals, in order to
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lower management costs
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An individual with several children who has just learned that she has lung cancer applies for life insurance but fails to report this recent medical diagnosis. This situation poses
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an adverse selection problem
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A corporation that recently obtained a loan from several banks to finance installation of a new computer network instead directs some of the funds to executive bonuses. This situation poses
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a moral hazard problem
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A‚Äč state-chartered financial institution exempt from laws requiring it to have federal deposit insurance decides to apply for deposit insurance after experiencing severe financial problems that may bankrupt the institution. This situation poses
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an adverse selection problem
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Which of the following is a true‚Äč statement?
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The FDIC has reduced the number of depositors who have lost‚Äč savings, but in doing‚Äč so, has inadvertently encouraged banks to make riskier loans.
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The Federal Deposit Insurance Corporation‚Äč (FDIC)
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-creates moral hazard problems in that big banks take on more risk knowing the FDIC will consider them‚Äč "too big to‚Äč fail." -was created in 1933 to prevent bank runs that had been plaguing the economy during the Great Depression.. -assures depositors that their deposits will be fully recoverable‚Äč (up to a maximum of‚Äč $250,000 per depositor per‚Äč institution) regardless of how serious a‚Äč bank's financial situation may be. -All of the above.
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What are the features of federal deposit‚Äč insurance?
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Depository‚Äč institutions' premiums are based on the value of their deposits with the funds being held for use in the case of a failed bank so that depositors can be reimbursed.
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Which of the following is a situation of moral hazard created by the existence of the‚Äč FDIC?
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Financial‚Äč institutions, with FDIC‚Äč protection, use‚Äč depositors' funds in riskier investment projects.
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All deposits in U.S. banks are insured by the Federal Deposit Insurance Corporation.
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True
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Federal deposit insurance currently covers up to‚Äč $250,000 per depositor per institution.
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True
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The FDIC possesses regulatory powers to offset‚Äč risk-taking temptations to depository institution managers.
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True
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Because of the‚Äč FDIC, the federal government is not exposed to asymmetric information problems.
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False
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Since‚Äč 2010, the FDIC has been able to assess premium rates on‚Äč banks' total liabilities.
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True
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To limit the fallout from systemwide failures and bank‚Äč runs, Congress created the ______________ in 1933. Since the‚Äč advent, there have been no true bank runs at federally insured banks.
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Federal Deposit Insurance Corporation
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Federal insurance of bank deposits insulates depositors from‚Äč risks, so depositors are ___________ concerned about riskier investment strategies by depository institutions.‚Äč Thus, bank managers have an incentive to invest in _________ assets to make _________ rates of return.
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less/ riskier/ higher
question
On the one‚Äč hand, the Federal Deposit Insurance Reform Act of 2005 expanded the __________ risks associated with deposit insurance by increasing limits for insured retirement deposits and indexing limits for other deposits to inflation. On the other‚Äč hand, the law granted the FDIC greater discretion to assess‚Äč risk-based deposit insurance ______ intended to restrain ______ risks.
answer
moral hazard/ premiums/ moral hazard