Econ 330 Exam 2 Name ID Section Number

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1 Econ 330 Exam 2 Name ID Section Number MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) When financial institutions go on a lending spree and expand their lending at a rapid pace they are participating in a A) credit boom. B) market race. C) deleveraging. D) credit bust. 1) 2) The TALF program was set up by the Fed to: 2) A) restore the mortgage-backed-security market. B) place Fannie Mae and Freddie Mac into conservatorship. C) restore the securitization market. D) restore credit flows through the commercial paper market. 3) A $5 million deposit outflow from a bank has the immediate effect of 3) A) reducing deposits and reserves by $5 million. B) reducing deposits and securities by $5 million. C) reducing deposits and loans by $5 million. D) reducing deposits and capital by $5 million. 4) Measuring the sensitivity of bank profits to changes in interest rates by multiplying the gap times the change in the interest rate is called A) basic duration analysis. B) interest-exposure analysis. C) basic gap analysis. D) gap-exposure analysis. 5) Assuming initially that rr = 15%, c = 40%, and e = 5%, a decrease in e to 0% causes the M1 money multiplier to, everything else held constant. A) decrease from 2.55 to 2.33 B) increase from 2.33 to 2.55 C) decrease from 1.82 to 1.67 D) increase from 1.67 to ) Subject to the approval of the Board of Governors, the decision of choosing the president of a district Federal Reserve Bank is made by A) all nine district bank directors. B) class A and class B directors. C) three district bank directors who are professional bankers. D) the six district bank directors elected by the member banks. E) district bank directors who are not professional bankers. 4) 5) 6) 7) The money multiplier is 7) A) negatively related to the required reserve ratio. B) positively related to the excess reserves ratio. C) negatively related to high-powered money. D) positively related to holdings of excess reserves. 8) Everything else held constant, a decrease in the required reserve ratio on checkable deposits causes the M1 money multiplier to and the money supply to. A) decrease; decrease B) increase; decrease C) decrease; increase D) increase; increase 8)

2 9) Net profit after taxes per dollar of assets is a basic measure of bank profitability called 9) A) return on assets. B) return on capital. C) return on investment. D) return on equity. 10) The money supply is related to expected deposit outflows, and is related to the market interest rate. A) negatively; negatively B) negatively; positively C) positively; negatively D) positively; positively 10) 11) Of the following, which would be the first choice for a bank facing a reserve deficiency? 11) A) Borrow from the Fed B) Call in loans C) Sell securities D) Borrow from other banks 12) Using Taylor's rule, when the equilibrium real federal funds rate is 3 percent, the positive output gap is 2 percent, the target inflation rate is 1 percent, and the actual inflation rate is 2 percent, the nominal federal funds rate target should be A) 5 percent. B) 5.5 percent. C) 6 percent. D) 6.5 percent. 13) In the "Vicious Cycle of the Mortgage Crisis," the nexus between the asset component of the economy and the income component was the. A) falling values of MBS B) falling bank capital C) home foreclosures D) rising supply of homes 14) When the Federal Reserve purchases a government bond from a bank, reserves in the banking system and the monetary base, everything else held constant. A) decrease; decreases B) increase; increases C) increase; decreases D) decrease; increases 12) 13) 14) 15) All are required to be members of the Fed. 15) A) banks with assets less than $500 million B) nationally chartered banks C) state chartered banks D) banks with assets less than $100 million 16) The excess reserves ratio is related to expected deposit outflows, and is related to the market interest rate. A) negatively; negatively B) positively; negatively C) negatively; positively D) positively; positively 17) The Chairman of the Board of Governors is chosen from among the seven governors and serves a term. A) one-year B) two-year C) four-year D) eight-year 16) 17) 18) The rate of inflation increases when 18) A) the unemployment rate exceeds the NAIRU. B) the unemployment rate is less than the NAIRU. C) the unemployment rate increases faster than the NAIRU increases. D) the unemployment rate equals the NAIRU. 19) Which of the following is not a characteristic of Repurchase Agreements? 19) A) Secured cash loan. B) Repurchase price is greater than original price. C) Over -collateralized to mitigate credit risk. D) Drains reserves from the banking system.

3 20) Because of an expected rise in interest rates in the future, a banker will likely 20) A) buy short-term rather than long-term bonds. B) make either short or long-term loans; expectations of future interest rates are irrelevant. C) buy long-term rather than short-term bonds. D) make long-term rather than short-term loans. 21) Debt deflation occurs when 21) A) an economic downturn causes the price level to fall and a deterioration in firms' net worth because of the increased burden of indebtedness. B) corporations pay back their loans before the scheduled maturity date. C) lenders reduce their lending due to declining stock prices (equity deflation) that lowers the value of collateral. D) rising interest rates worsen adverse selection and moral hazard problems. 22) Member commercial banks have purchased stock in their district Fed banks; the dividend paid by that stock is limited by law to percent annually. A) four B) five C) six D) eight 23) Estimates suggest that, in the United States economy, it takes just over for monetary policy to affect output and just over for monetary policy to affect the inflation rate. A) 6 months; 1 year B) 1 year; 6 months C) 1 year; 2 years D) 2 years; 1 year 22) 23) 24) Agency problems in the subprime mortgage market included all of the following except 24) A) mortgage originators had little incentives to make sure that the mortgage is a good credit risk. B) the evaluators of securities, the credit rating agencies, were subject to conflicts of interest. C) homeowners could refinance their houses with larger loans when their homes appreciated in value. D) underwriters of mortgage-backed securities had weak incentives to make sure that the holders of the securities would be paid back. 25) If the required reserve ratio is 10 percent, currency in circulation is $400 billion, checkable deposits are $1000 billion, and excess reserves total $1 billion, then the monetary base is A) $400 billion. B) $401 billion. C) $500 billion. D) $501 billion. 26) Collateral requirements lessen the consequences of because the collateral reduces the lender's losses in the case of a loan default and it reduces because the borrower has more to lose from a default. A) adverse selection; moral hazard B) moral hazard; adverse selection C) adverse selection; diversification D) diversification; moral hazard 27) If the required reserve ratio is one-third, currency in circulation is $300 billion, checkable deposits are $900 billion, and there is no excess reserve, then the monetary base is A) $333 billion. B) $600 billion. C) $300 billion. D) $667 billion. 28) The goal for high employment should be a level of unemployment at which the demand for labor equals the supply of labor. Economists call this level of unemployment the A) Keynesian rate level of unemployment. B) structural level of unemployment. C) natural rate level of unemployment. D) frictional level of unemployment. 25) 26) 27) 28)

4 29) The Federal Reserve Bank of plays a special role in the Federal Reserve System because it houses the open market desk. A) Boston B) Chicago C) San Francisco D) New York 29) 30) In the market for reserves, a lower discount rate 30) A) lengthens the vertical section of the supply curve of reserves. B) decreases the supply of reserves. C) increases the supply of reserves. D) shortens the vertical section of the supply curve of reserves. 31) In the market for reserves, when the federal funds interest rate is below the discount rate, the supply curve of reserves is A) horizontal. B) negatively sloped. C) positively sloped. D) vertical. 31) 32) The monetary base minus currency in circulation equals 32) A) reserves. B) the non-borrowed base. C) discount loans. D) the borrowed base. 33) Credit risk management tools include 33) A) duration analysis. B) interest rate swaps. C) collateral. D) deductibles. 34) A pays out cash flows from subprime mortgage-backed securities in different tranches, with the highest-rated tranch paying out first, while lower ones paid out less if there were losses on the mortgage-backed securities. A) Discount bond B) Negotiable CD C) Collateralized debt obligation (CDO) D) Adjustable-rate mortgage 34) 35) Which of the following is not a factor contributing to the rise in the excess reserve ratio? 35) A) Rising business demand deposits. B) Falling Fed Funds interest rate. C) Fed paying interest on excess reserves. D) Rising liquidity risk fears. 36) Banks subject to reserve requirements set by the Federal Reserve System include 36) A) only banks with assets less than $100 million. B) only nationally chartered banks. C) all banks whether or not they are members of the Federal Reserve System. D) only banks with assets less than $500 million. 37) Assuming initially that rr = 10%, c = 40%, and e = 0, an increase in c to 50% causes the M1 money multiplier to, everything else held constant. A) decrease from 2.8 to 2.5 B) decrease from 2.8 to 2.33 C) increase from 2.33 to 2.8 D) increase from 2.5 to ) In the market for reserves, if the federal funds rate is between the discount rate and the interest rate paid on excess reserves, a decline in the reserve requirement the demand of reserves, the federal funds rate, everything else held constant. A) decreases; raising B) decreases; lowering C) increases; lowering D) increases; raising 37) 38)

5 39) To reduce moral hazard problems, banks include restrictive covenants in loan contracts. In order for these restrictive covenants to be effective, banks must also A) be willing to rewrite the contract if the borrower cannot comply with the restrictions. B) monitor and enforce them. C) trust the borrower to do the right thing. D) be prepared to extend the deadline when the borrower needs more time to comply. 39) 40) The difference of rate-sensitive liabilities and rate-sensitive assets is known as the 40) A) gap. B) duration. C) interest-sensitivity index. D) rate-risk index. 41) If a banker expects interest rates to fall in the future, her best strategy for the present is 41) A) to increase the duration of the bank's assets. B) to buy short-term bonds. C) to increase the duration of the bank's liabilities. D) to sell long-term certificates of deposit. 42) In the market for reserves, if the federal funds rate is between the discount rate and the interest rate paid on excess reserves, an increase in the reserve requirement the demand of reserves and causes the federal funds interest rate to, everything else held constant. A) increases; rise B) decreases; rise C) decreases; fall D) increases; fall 43) If a borrower takes out a $200 million loan in a repo agreement and is asked to post $220 million of mortgage-backed securities as collateral, the "haircut" is A) 20%. B) 5%. C) 10%. D) 50%. 44) In one sense appears surprising since it means that the bank is not its portfolio of loans and thus is exposing itself to more risk. A) specialization in lending; rationing B) screening; rationing C) specialization in lending; diversifying D) credit rationing; diversifying 45) If the Taylor Principle is not followed and nominal interest rates are increased by less than the increase in the inflation rate, then real interest rates will and monetary policy will be too. A) fall; tight B) fall; loose C) rise; tight D) rise; loose 46) Banks today can engage in riskless arbitrage by borrowing from the market and investing the funds in. A) Discount Loans, 3-month T-Bills B) Fed Funds, 3-month T-Bills C) Fed Funds, Excess Reserves D) Discount Loans, Fed Funds 47) Although neither nor the are officially set by the Federal Open Market Committee, decisions concerning these policy tools are effectively made by the committee. A) reserve requirements; federal funds rate B) margin requirements; federal funds rate C) margin requirements; discount rate D) reserve requirements; discount rate 48) Everything else held constant, in the market for reserves, when the federal funds rate is 3%, lowering the interest rate paid on excess reserves rate from 2% to 1% A) has an indeterminate effect on the federal funds rate. B) has no effect on the federal funds rate. C) raises the federal funds rate. D) lowers the federal funds rate. 42) 43) 44) 45) 46) 47) 48)

6 49) When financial intermediaries deleverage, firms cannot fund investment opportunities resulting in A) a contraction of economic activity. B) a call for government regulation. C) an increased opportunity for growth. D) an economic boom. 50) If the required reserve ratio is 10 percent, currency in circulation is $400 billion, checkable deposits are $800 billion, and excess reserves total $0.8 billion, then the monetary base is A) $80 billion. B) $80.8 billion. C) $480.8 billion. D) $480 billion. 49) 50)

7 1) A 2) C 3) A 4) C 5) B 6) E 7) A 8) D 9) A 10) B 11) D 12) D 13) C 14) B 15) B 16) B 17) C 18) B 19) D 20) A 21) A 22) C 23) C 24) C 25) D 26) A 27) B 28) C 29) D 30) D 31) D 32) A 33) C 34) C 35) A 36) C 37) A 38) B 39) B 40) A 41) A 42) A 43) C 44) C 45) B 46) C 47) D 48) B 49) A 50) C