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ECON308 Lecture Notes - Lecture 5: Excess Reserves, Moral Hazard, Federal Deposit Insurance Corporation

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redwalrus66
22 Mar 2016
School
University of Delaware
Department
Economics
Course
ECON308
Professor
Marra Vincent

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Document Summary

85% of u. s. currency is outside the united states: other countries have very high inflation compared to the u. s, u. s. money holds better as a store of value than much foreign currency. As inflation increases, purchasing power decreases: this leads to people spending more money to get what they need, which worsens inflation. Nominal interest rates have 2 components: real return. How much money you actually earn: inflation rate. Represented by : inom = ir + . The federal reserve has a 2% inflation target per year: they don"t set it at 0, a 0% target inflation would mean some amount of deflation. People would spend less due to low prices, leading to a recession: when deflation occurs, there is debt deflation. The value of assets falls, but the liabilities stay the same. Ex: house bought for ,000 with a loan is not worth only. ,000, but you still must repay all ,000 initially borrowed.

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Related Questions

Question 32

  1. Tim, a citizen of the United States living in Virginia, buys a computer that was made in South Korea by a Japanese firm. This transaction would affect the GDP of the United States in which way?

    Net exports would decrease and GDP would decrease.

    Net exports would decrease and GDP would be unaffected.

    Net exports would increase and GDP would increase.

    Net exports would increase and consumption would increase.

1 points

Question 33

  1. An increase in U.S. government spending tends to

    increase U.S. interest rates and increase the U.S. capital account surplus.

    increase U.S. interest rates and decrease the U.S. capital account surplus.

    decrease U.S. interest rates and increase the U.S. capital account surplus.

    decrease U.S. interest rates and decrease the U.S. capital account surplus.

1 points

Question 34

  1. A _______ is a system in which the government intervenes extensively in the foreign exchange market to keep the exchange rate within certain bounds.

    dirty float

    floating exchange rate

    fixed exchange rate

    dollarization

1 points

Question 35

  1. Suppose the exchange rate between the euro and the dollar is E0.5 to $1. If a Big Mac costs $3 in the United States and E1.5 in Germany, then the real exchange rate is

    1:1.

    2:1.

    1:2.

    It cannot be determined from this information.

1 points

Question 36

  1. Which of the following prevent the purchasing power parity theorem from holding perfectly?

    transportation costs

    goods that cannot be shipped

    tariffs and quotas

    Each of these answers is correct.

1 points

Question 37

  1. Fiscal policy is more effective in affecting economic activity if

    many resources are unemployed.

    there is a real shock instead of an aggregate demand shock.

    the economy returns to the long-run condition almost immediately.

    there is a long implementation lag.

1 points

Question 38

  1. In a typical year, changes in government spending compared to overall spending are relatively

    small.

    large.

    unpredictable.

    well-timed.

1 points

Question 39

  1. Which statement is TRUE about the difference between monetary and fiscal policy?

    Fiscal policy can quickly adjust to changes in aggregate demand.

    Fiscal policy can have a more direct impact.

    Monetary policy is subject to many long lags.

    Monetary policy can affect the economy regardless of the actions banks take.

1 points

Question 40

  1. Fiscal policies that help an economy in a recession without additional actions by policy makers are called

    consumption smoothers.

    Ricardian equalizers.

    automatic stabilizers.

    Each of these answers is correct.

1 points

Question 41

  1. The U.S. individual income tax system can best be described as a

    regressive tax system.

    flat tax system.

    zero tax system.

    progressive tax system.

1 points

Question 42

  1. What demographic change in the United States will cause government spending to increase in the next 50 years?

    The population over 65 will grow.

    The population will be younger.

    Women will have fewer children.

    Immigration will increase.

1 points

Question 43

  1. What kind of rising costs will mostly cause U.S. government spending to skyrocket in the future?

    defense

    environmental protection

    education

    health care

1 points

Question 47

  1. The Fed could have popped the bubble of the housing boom in the 2000s by

    lending directly to homeowners.

    regulating the stock markets more.

    reducing the growth rate of the money supply.

    doing nothing.

1 points

Question 48

  1. Which of the following would be an example of running monetary policy by rules?

    A 5 percent increase in money supply automatically leads to a 2 percent increase in real GDP.

    An increase in money supply automatically leads to an increase in inflation.

    The Fed will increase money growth to different levels, depending on the severity of the recession.

    A 1 percent drop in real GDP will automatically elicit a 2 percent increase in money supply.

    Question 50

    Moral hazard occurs when

    the failure of one financial institution can bring down other institutions as well.

    financial institutions take on too much risk because they are insured.

    financial institutions become insolvent because they issued too many loans.

    there are more short-term liabilities than short-term assets.

    Which of the following is NOT a transmission mechanism?

    reductions in the money supply

    intertemporal substitution

    uncertainty

    sticky wages and prices

    Question 56

    For a given increase in government spending growth, intertemporal substitution is more widespread when

    the impact of AD growth on both inflation and real GDP growth is stronger.

    the impact of AD growth on both inflation and real GDP growth is weaker.

    the impact of AD growth on inflation is stronger and the impact of the AD growth on real GDP growth is weaker.

    the impact of AD growth on inflation is weaker and the impact of AD growth on real GDP growth is stronger.

    Stalin:

    instituted democratic reforms, leading to widespread prosperity.

    took government control of the farms in Ukraine, leading to the starvation of millions of people.

    increased the provision of public goods, which had a positive effect on lowering the unemployment rate.

    tried unsuccessfully to expand voting rights in 1924 Russia.

    1 points

    Question 60

    1 points

    Question 59

    If voters care about two issues such as taxes and war, then politicians:

    will form a stable policy on these issues.

    can pose a policy that will never lose against another policy.

    must assume that there is no median voter.

    may never converge on a stable outcome.

    1 points

    Question 58

    Policy A adversely affects 50 million people at a cost of $1 per person. But Policy A also benefits 1,000 people at $30,000 per person. Which of the following statements is true?

    Policy A will not become law because it hurts more people than it helps.

    Policy A concentrates all the costs among a small group of people and all the benefits among a large group of people.

    Policy A is likely to be supported by politicians even though it makes society worse off.

    Since Policy A negatively affects many people, and so rational ignorance will not be a problem.

    1 points

    Question 57

    Data for the United States show that the incumbent party tends to win the election if:
    I. personal disposable income is growing.
    II. the inflation rate is low.
    III. the political party has not been in power for too many continuous terms.

    I only

    I and II only

    I and III only

    I, II, and III

    1 points

    Question 53

    1 points

    Question 52

    What is the purpose of the Fed's structure?

    to give the President of the United States as many tools as possible to regulate the economy

    to make sure all states are given equal access to monetary policy decisions

    to keep the private sector out of the monetary policy making arena

    to keep the power of the Fed dispersed

    1 points

    Question 51

    An increase in money growth will cause inflation to increase in

    the short run only.

    the long run only.

    both the short run and the long run.

    neither the short run nor the long run.

1. Which of the following is NOT a tool the Fed uses to manage the money supply?

A) open market operations

B) discount policy

C) deposit insurance

D) reserve requirements 0.4 points

 

2. The problem with barter economies is:

A) less time and trouble to trade as compared with a money economy.

B) that there may be a double coincidence of wants.

C) a banking system for trade to occur.

D) that there be a single coincidence of wants. 

 

3. If banks do not loan out all their excess reserves, then the real world multiplier is

A) smaller than 1/RR.

B) larger than 1/RR.

C) equal to 1/RR.

D) not related to 1/RR. 

 

4. If the Federal Open Market Committee wants to increase the money supply through open market operations, it will

A) buy U.S. Treasury Securities.

B) sell U.S. Treasury Securities.

C) increase the discount rate.

D) decrease the discount rate. 

 

5. M1 includes

A) currency in circulation, checking account balances at banks, the value of traveler's checks.

B) currency in circulation, savings accounts, checking account balances at banks.

C) currency in circulation, savings accounts, checking account balances at banks, travelers.

D) coins, savings account balances at banks, traveler's checks. 

 

6. Using the quantity equation, if the velocity of money grows at 5 percent, the money supply grows at 10 percent, and real GDP grows at 4 percent, then the inflation rate will be

A) 19 percent.

B) 15 percent.

C) 11 percent.

D) 6 percent.

 

7. According to the quantity theory of money, the inflation rate equals

A) the money supply minus real output.

B) real output minus the money supply.

C) the growth rate of the money supply minus the growth rate of real output.

D) the growth rate of real output minus the growth rate of the money supply.

 

8. Suppose that you sold a basketball ticket for the SEC tournament for $750. Assuming that you deposit the entire $750 in your bank and that the RR = 10%, Answer the following questions while also using the same assumptions in the book/lecture slide. Correct answers contain no decimals. Please report them as they are.

a) What is the total change in checking account deposits?

b) How much new money is created? (or what is the change in money supply given the above state conditions?) The total change in the money supply is Blank 2.

c) The amount of new money created in this example would be higher or lower than in the real world. The amount of money created this way would be Bank 3 than in the real world.

Short Answer/Problems—Answer all numbered questions @ 10 points each. Provide your answers in the space provided or the back of the page. Make sure to scan all work pages. Any quantitative questions require showing your work for full credit. Round all $ problems to the nearest cent. All other calculations must be to at least the fifth decimal place. 1. Answer BOTH parts a & b below. a) Explain the impacts of low level unanticipated inflation for a country like the United States. b) In the United States, our confidence in our fiat money is derived from (3 things) 2. Given the following 4 scenarios: • The contract interest rate was 6.5% and the expected inflation rate was 2.5%. • The contract interest rate was 12% and the expected inflation rate was 10%. • The contract interest rate was 7.5% and the expected inflation rate was 4%. • The contract interest rate was 4% and the expected inflation rate was 1%. a) Indicate which scenario would have been best for the lender and explain why it is best for the lender. b) With an ex post actual inflation rate of 2.25%, indicate which scenario would have been best for society and explain why it is best for society of the four options. 3. Define, compare, and contrast two of the following sets of terms as they. a. organized exchange markets vs. OTC (over the counter) markets b. fiat money vs. representative full-bodied money c. adverse selection vs. moral hazard 4. Indicate what would happen to both M1 and M2 (increase, decrease, no change) due to each of the following events. Consider each lettered event to be independent of the others. a) you write a check for cash at the casino b) an individual redeems a personal CD and deposits the funds into a savings deposit account c) U.S. commercial banks use some of their excess reserves to purchase $250 billion worth of U.S. Treasury securities from the Federal Reserve. d) as the economy improves, banks ease their credit standards and approve a higher percentage of loan applications. e) you spend $4,000 in U.S. currency while on your spring break trip to Acapulco (if you spent less than that you could not have had much fun) Part III: Longer Problems—Answer all numbered questions @ 15 points each. Provide your answers in the space provided or the back of the page. Make sure to scan all work pages. Any quantitative questions require showing your work for full credit. Round all $ problems to the nearest cent. All other calculations must be to at least the fifth decimal place. 5. The following is a historical list of median home prices in two states. Year State 1 ($) State 2 ($) GDP deflator (2009 base year) 1950 9,564 5,396 14.09 1960 15,100 9,800 17.56 1970 23,100 13,000 23.18 1980 84,500 43,900 46.05 1990 195,500 50,800 67.62 2000 211,500 74,400 82.59 2017 (estimate) 400,000 201,991 113.61 a. Convert each price into current year dollars. b. Determine how much a person would have had to pay in 1950 (for both states) to equal the 2017 real home value. c. For both states, determine the percentage increase in home values from 1950-2017 (one calculation for each). 6. Using the following information for a U.S. state: Nominal GDP Real GDP Population Year (millions) (millions 2009 $’s) 1,151,119 1,421,713 32,987,911 1998 1,879,520 1,975,457 36,020,878 2006 2,350,807 2,143,167 38,792,459 2014 a. What is the average annual growth rate for this state during the time periods listed? (Note: time periods of interest are 1998-2006 & 2006-2014) b. What is the average annual inflation rate for this state during the time periods listed? c. To what extent are living standards likely changing in this economy? Explain and support your claim using evidence from the above table. d. For 1 bonus point, indicate the U.S. state associated