ADMS 1000 Study Guide - Stephen Poloz, Loanable Funds, Reserve Requirement

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2 Nov 2014

School

York University

Department

Administrative Studies

Course

ADMS 1000

Professor

Ardeshir Noordeh

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ADMS 1000 Full Course Notes

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Document Summary

It"s the process by which the federal government affects the economy by influencing the expansion of money and credit. Money supply: too much money supply inflation, too little money supply deflation. This is set by the banks of canada: an increase (decrease) in the reserve ratio will reduce (raise) the money supply by decreasing (increasing) the supply of loanable funds. Household response: increase in purchases of goods. Therefore spending increases and money supply increases as well. Higher interest rates: encourage investment/savings higher rate of return, discourages borrowing which in turn discourages spending. Therefore spending decreases, money supply decreases as well. By buying a bond, the bank of canada will add this amount to the banks, which affect the amount of money the bank is able to lend. The bank rate: the rate of interest paid by the chartered banks on money borrowed from the bank of. Canada: determined by setting an operating band for the overnight lending rate.

Related Questions

Each Federal Reserve Bank is

Answer

		a corporation.
		a government owned enterprise.
		a government subsidized entity.
		a government-sponsored enterprise.

A transaction in which the Fed agrees to buy a security one day and sell it back the next day is

Answer

		an overnight securitization operation.
		a repurchase agreement.
		a legal tender.
		a rebate sale.

The Federal Reserve document that states the goals of the FOMC and the target for the federal funds rate is known as the

Answer

		Directive.
		Beige book.
		Bluebook.
		Green book.

How long is the normal term in office for a Governor of the Federal Reserve Board?

Answer

		Five years
		Seven years
		Fourteen years
		Life

The federal funds rate is the interest rate on

Answer

		loans to banks from the Fed.
		loans by banks to the Fed.
		short-term loans between banks.
		Treasury bills.

Expenditures of each Federal Reserve Bank are approved by

Answer

		the U.S. Senate.
		the President of the United States.
		the U.S. Treasury Department.
		the Federal Reserve Board of Governors.

Federal Reserve Banks pay for their central banking operations through

Answer

		government tax revenue.
		interest on the securities they own.
		fees charged to banks that use their services.
		dividends paid by local banks.

When the Fed engages in open-market operations, the transactions are conducted by

Answer

		the Open Market Desk at the Federal Reserve Bank of New York.
		the Open Market Desk at the Federal Reserve Board in Washington, D.C.
		the National Bureau of Economic Research.
		the Federal Open Market Committee.

In 2006, Chairman Greenspan left the Fed because

Answer

		President Bush wanted him to resign.
		he reached mandatory retirement age.
		his term as Governor expired.
		his term as Chairman expired.

The Federal Reserve publication that discusses forecasts for the economy is known as the

Answer

		Redbook.
		Beigebook.
		Bluebook.
		Greenbook.

The FOMC directive

Answer

		describes forecasts for the economy.
		states the target for the federal funds rate.
		discusses the regional economies around the country.
		shows the Fed's balance sheet.

The chairman of the Federal Reserve Board who reduced the inflation rate from over 10 percent to about 3 percent in the early 1980s was

Answer

		Arthur Burns.
		G. William Miller.
		Paul Volcker.
		Alan Greenspan.

Which Fed chairman ensured the independence of the Federal Reserve in the 1950s?

Answer

		William McChesney Martin
		Arthur Burns
		Paul Volcker
		G. William Miller

There are ____ Federal Reserve Banks.

Answer

		seven
		ten
		twelve
		fifteen

Purchases and sales of government securities in the secondary market are known as

Answer

		discount borrowing and lending.
		federal funds purchases and sales.
		discounting.
		open-market operations.

The monetary base can be divided into

Answer

		currency plus transactions deposits.
		vault cash plus reserves held at the Fed.
		required clearing balances plus currency.
		reserves plus currency.

The Fed does not generally change reserve requirements to affect the money supply because

Answer

		the impact is too large.
		the Fed needs the approval of Congress to do so.
		it's not legal for the Fed to do so.
		the Fed needs the approval of the President of the United States to do so.

The Fed has decided to tighten monetary policy, so it decreases the money supply through

Answer

		defensive open-market operations.
		dynamic open-market operations.
		reduced discount loans for profit.
		reduced discount loans for business needs.

A haircut is

Answer

		the extra collateral the Fed requires above the value of a discount loan.
		the extra principal a commercial bank requires the Fed to pay when making a discount loan.
		the difference between what an investor pays for a bond and what the investor sells the bond for.
		expected personal grooming for a member of the Board of Governors.

Currency held by the nonbank public plus banks' vault cash plus banks' deposits at the Fed equals

Answer

		the Fed's capital stock.
		discount loans.
		the monetary base.
		required clearing balances.

The extra collateral the Fed requires above the value of a discount loan is known as

Answer

		the term premium.
		a haircut.
		a covenant.
		secondary credit.

Currency held by the nonbank public plus banks' reserves equals

Answer

		the Fed's capital stock.
		discount loans.
		the monetary base.
		required clearing balances.

The money supply divided by the monetary base equals

Answer

		the reserve ratio.
		velocity.
		high-powered money.
		the money multiplier.

The main liability on the Federal Reserve's balance sheet is

Answer

		discount loans.
		securities.
		monetary base.
		capital.

A bank in good condition may take out a loan without the Fed questioning the purpose or nature of the loan. Such a loan is known as

Answer

		a no documentation discount loan.
		a haircut.
		a covenant.
		a primary credit discount loan.

If the Open-Market Desk at the Fed buys securities when the federal funds rate is below the primary credit discount rate, the most likely effect is that the

Answer

		federal funds rate decreases.
		primary credit discount rate decreases.
		primary credit discount rate increases.
		federal funds rate increases.

In November and December, people use more currency than usual, so the Fed increases the money supply through

Answer

		defensive open-market operations.
		dynamic open-market operations.
		discount loans for profit.
		discount loans for business needs.

Reserves held by banks at the Fed that earn implicit interest payments in the form of earnings credits for Fed services are known as

Answer

		required clearing balances.
		reserve requirements.
		excess reserves.
		non-transaction deposits.

Required clearing balances

Answer

		pay interest in the form of earnings credits.
		count as reserves and can be used to meet reserve requirements.
		pay interest equal to the federal funds rate minus one percent.
		are required to be held against transactions deposits.

QUESTION 31

The Board of Governors of the Federal Reserve System is

		composed of seven members who are appointed by the President and approved by the Senate.
		composed of 12 members of the Senate and the U.S. House of Representatives.
		elected by the general public.
		composed of representatives from the country's 12 largest commercial banks.

1.11 points

QUESTION 32

The Fed is said to be the "lender of last resort" in that

		it charges a higher interest rate to borrowers than does any other bank.
		it functions as the government's bank only when commercial banks fail to do so.
		it makes loans to individuals whom commercial banks do not believe are credit-worthy.
		it stands ready to lend to any depository institution that it has decided should not fail.

1.11 points

QUESTION 33

The Federal Reserve System acts as the government's fiscal agent by

		providing checking account services for the government.
		preparing the budget the President presents to Congress every year.
		determining how to finance a deficit.
		auditing taxpayers.

1.11 points

QUESTION 34

The Federal Reserve System was established in which year?

		1913.
		1929.
		1865.
		1941.

1.11 points

QUESTION 35

By serving as the lender of last resort,

		the Fed provides check clearing services.
		the Fed aids in the sale of government securities.
		the Fed supervises depository institutions.
		the Fed can prevent bank failures.

1.11 points

QUESTION 36

Depository institutions must

		use and pay for the services of the Federal Reserve System.
		set their interest rates according to schedules established by the Federal Reserve System.
		keep a certain percentage of their deposits as reserves.
		turn over a percentage of their profits to the Federal Reserve System as payment for services provided by the Fed.

1.11 points

QUESTION 37

The Federal Reserve System has

		50 district banks.
		24 district banks.
		12 district banks.
		7 district banks.

1.11 points

QUESTION 38

The part of the Federal Reserve System (the Fed) that holds the reserve balances of depository institutions is

		the Board of Governors.
		the Federal Advisory Committee.
		the Federal Open Market Committee.
		the Federal Reserve district banks.

1.11 points

QUESTION 39

The potential for a financial breakdown at one financial institution to spread throughout the financial system is known as a

		systemic risk.
		liquidity risk.
		lending risk.
		moral hazard.

1.11 points

QUESTION 40

A system in which depository institutions hold reserves that are less than the amount of total deposits is called

		fiat money banking.
		required reserve banking.
		fractional reserve banking.
		central banking system.

1.11 points

QUESTION 41

Total reserves of private banks are

		all customer deposits.
		the minimum amount banks need to hold against time deposits.
		federal reserve notes.
		deposits held at the Fed and vault cash.

1.11 points

QUESTION 42

A statement of assets and liabilities of any business entity is called

		a cash flow statement.
		an income statement.
		a balance sheet.
		a statement of net worth.

1.11 points

QUESTION 43

Which of the following actions has no effect on the total money supply?

		The Federal Open Market Committee buys government securities.
		There is a transfer of deposits from one bank to another bank.
		There is change in the money multiplier.
		The Federal Open Market Committee sells government securities.

1.11 points

QUESTION 44

Given a required reserve ratio of 20 percent, a commercial bank that has received a new deposit of $100 can make additional loans of

		$80.
		$0.
		$400.
		$20.

1.11 points

QUESTION 45

The Federal Open Market Committee has responsibility for

		appointing members to the Board of Governors of the Federal Reserve system.
		issuing orders to buy or sell government securities for the Fed.
		advising the Treasury Department on monetary policy.
		printing money.

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1. Which of the following are reasons that banks are so heavily regulated?
a. Governments are concerned about the safety of deposits.
b. The industry is a principal determinant of aggregate demand. c. Bank failures are contagious.
d. All of the above are correct.
2. Bankers' business decisions can affect the money supply because bankers
a. are respected men and women.
b. have the ability to create money.
c. use a special accounting system developed by the Federal Reserve Board.
d. All of the above are correct.
3. Bank failures in the U.S.
a. occurred frequently through the 1960s and declined since then.
b. occurred infrequently through the 1960s and have become more common since then.
c. occurred frequently through the 1930s, declined after that time, and became more common
in 2008.
d. occurred infrequently through the 1930s, increased after that time, and became less
common in 2008.
4. Money is an imperfect store of value when
a. the rate of inflation is high.
b. the unemployment rate is high.
5. Fiat money is
a. always backed by gold or silver. b. useful in buying Italian cars.
6. Which of the following assets is most liquid? a. short-term government bonds
b. savings accounts
c. gold prices are falling.
d. businesses are failing due to bankruptcy.
c. only backed by government decree. d. not as liquid as precious metals.
c. checking accounts d. currency and coins
7. The official definition of the money supply that includes coins, paper money, travelers' checks, conventional checking accounts, and other checkable deposits at banks and savings institutions is called ____.
a. M1 c. M3
b. M2 d. L
8. One difference between the assets included in M1 and those added to calculate M2 is that items in M1 are
a. better stores of value than those added to compute M2.
b. more liquid than those added to compute M2.
c. less liquid than those added to compute M2.
d. larger than those added to compute M2.
9. Bank regulation exists because public authorities are convinced that
a. the balance between public interest and safety does not affect profitability, and should be
removed from the hands of managers.
b. the balance between bank profitability and public interest cannot be handled with
legislation, but can be handled with regulation.
c. the balance between bank profitability and safety cannot be left to profit-maximizing
managers.
d. the balance between bank safety and public interest can best be obtained by reliance on the
market.
10. Banks try to keep their level of excess reserves low because
a. b. c. d.
the Fed charges a penalty for holdings of excess reserves.
they are concerned that the money multiplier will become too large. they wish to maximize profits.
bank regulators levy fines on the amount of excess reserves.
11. If the
a. 10. c. 4. b. 5. d. 2.
required reserve ratio, m, is 20 percent, then the oversimplified money multiplier is
12. If the
the maximum amount by which the money supply can be increased?
banking system has $5 million in excess reserves, and the required reserve ratio is 25 percent, what is
a. $25 million
b. $20 million
13. Barter transactions involve a double coincidence of wants. a. True
c. $5 million d. $2.5 million
b. False
14. The only major disadvantage of paper money is that it is hard to divide into smaller denominations.
a. True
Chapter 13
15. The principal objective of the Federal Reserve System is to
a. circulate coins and paper Federal Reserve Notes.
b. subsidize the income of member banks.
c. help stabilize the economy through monetary policy.
d. make profits to remit to the Treasury Department.
b. False
16. In practice, money supply and short-term interest rates are determined by the
a. b.
17. If the a. b. c. d.
Treasury and Commerce departments. c. Board of Governors. Federal Open Market Committee. d. House and Senate.
Fed buys a T-bill from a commercial bank, how will it pay for the T-bill? It will give the bank new reserves.
It will write the bank a check.
It will transfer cash to the bank's vault.
It will take reserves from another bank.
18. If the Federal Open Market Committee decides to expand the money supply, then it will
a. raise the discount rate to member banks.
b. issue directions to purchase government securities, thus putting more reserves in member
banks.
c. issue directions to sell government securities, thus taking reserves from member banks. d. order new Federal Reserve notes delivered to member banks.
19. As a knowledgeable investor in 2007, you should have realized that as interest rates fell, bond prices would
a. also fall. c. become more volatile, like stock prices.
b. rise. d. fall but not by as much as stock prices.
20. The concept of "lender of last resort" is that when
a. lending decreases, the Fed will be the last to resort to higher interest rates.
b. borrowing increases, the Fed will be the last to increase lending.
c. commercial banks are hesitant to lend, the Fed will step in and increase reserves. d. a borrower has tried everyone else, the Fed will lend directly to them.
21. If the Fed raises the reserve requirement on deposits from 15 percent to 20 percent, what would happen to the money supply?
a. It would decrease. c. It would remain unchanged.
b. It would increase. d. It depends on the value of interest rates.
22. Which of the following is most sensitive to monetary policy?
a. Governmentexpenditure b. Consumption spending
23. The main purpose of expansionary monetary policy is to a. expandTreasuryborrowing.
b. increase reserve requirements.
c. Utilityspending
d. Investment spending
c. insure deposits.
d. reduce interest rates.
24. The Fed is institutionally independent. A major advantage of this is that monetary policy
a. b. c. d.
25. Open a. b.
is subject to regular congressional scrutiny. will often offset fiscal policy.
is not controlled by politicians.
is usually coordinated with fiscal policy.
market operations generally involve the purchase and sales of governmentsecurities. c. coinsandcurrency. stocks and bonds. d. Federal Reserve notes.
26. Banks will hold additional excess reserves when
a. loans to customers look safe and interest rates are high.
b. they anticipate a bank audit.
c. loans to customers look risky and interest rates are low.
d. the economy is booming and there is a large demand for loans.
27. The United States is the only industrialized country without a central bank. a. False b. True
28. Unconventional monetary policies include massive lending to banks and open-market purchases of assets other than Treasury bills.
a. True b. False
Chapter 14
29. Which of the following was not a typical characteristic of subprime mortgages in 2003-2006?
a. low or zero down payments
b. loans to borrowers with poor credit histories
c. Lenders may not verify the stated income of the borrowers
d. Home interest rate was a record high
30. The intended use of TARP funds was to
a. support the FDIC. c. fund "shovel-ready" projects. b. increase consumers' disposable income. d. purchase unwanted securities.
31. What amount of money was appropriated by Congress for the Troubled Asset Relief Program? a. Around $20 billion c. Around $700 billion
b. Around $252 billion d. Around $1 billion
32. Based on the documentary,

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ADMS 1000 Study Guide - Stephen Poloz, Loanable Funds, Reserve Requirement

ADMS 1000 Full Course Notes

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