Mac Test 3

Card Set Information

Mac Test 3
2011-10-31 09:39:46

SQ#3 8-11, SQ#4 1-4, 6-17(-15D), 19-23 SQ#5 1-5
Show Answers:

  1. What is a "liquidity crisis" (bank run)?
    No bank ever has enough ready cash to simultaneous close all checking accounts
  2. What is deposit insurance (FDIC)?
    • FDIC-federal deposit insurance corporation
    • Insures money in your account up to 250,000.
    • Bank pays insurance premium.
    • Tax payers pay if insurance doesn't have money to pay
  3. Define Bank Failue. Give an example of something that can cause a bank failure.
    • Liabilities are more than assets.
    • Example alot of bad loans
  4. What happens to owner's equity during a bank failure?
    The owners equity goes to zero (broke)
  5. Our government paid billions for the Bank "rescue" plan in fall, 2008. What were the two main things the money was used for?
    • A. Government buys the bad loans from the banks
    • B. Inject owner's equity into the banks (gov becomes co-owner)
  6. What is the meaning of the phrase "too big to fail"?
    If large banks fail it would be too disruptive to the overall economy. (Job loss, business failure)
  7. In the past (50s and 60s), what did banks and savings and loans do with mortgage loans that they made?
    • Banks loan money to homebuyers, and banks hold the loans.
    • Bank profits-depends on borrower to repay loans & bank earns interest
  8. In recent years, what did banks, savings and loans, and other lenders do with most (sometimes all) mortagage loans that they made?
    • Banks loan money to home buyers and sell loan to other investers
    • Bank profits- fees
  9. How did lender incentives, with respect to mortgages, change from the 60s-90s, and 2000s?
    • A. Past Incentives- make careful loans (good loans). Ability to pay loans bases on Income and job
    • B. Current Incentives- make lots of loans, maximize fees and income. Ability to pay based on expected future increase in price of house.
  10. Fannie Mae and Freddie Mac are two large government sponsered financial intermediaries that facilitate home ownership. Descripe how they operate.
    • They buy mortgages from banks and hold them.
    • Resells them to other investers.
    • Insures mortgages, earns a fee
  11. How did the housing market contribute to the current financial crisis?
    Draw graph. Demand for houses kept increasing supply stayes the same
  12. Breifly describe the Federal Reserve System (The FED)
    • Indepentant Agency Part of the US government
    • Created by Act of Congress-1914 Federal Reserve Act
    • Ron Paul-wants to abolish Federal Reserves
    • Congress divided US in 12 Geographic Regions creating 12 Regional Federal Reserve Banks, each headed by a regional federal bank president
  13. Who is the current Secretary of Treasury?
    Tim Geithner
  14. How are the 7 members of the Federal Reserve Board of Governers choses?
    Appointed by President of the US, Confirmed by US Senate, to a 14 year term, non-renewable
  15. Who is the Chairman of the Federal Reserve Board of Governers? When was he appointed as Chair? When does his term as Chair end? Who appoints the Fed Chairman?
    • Ben Bernanke
    • 1st appointed in 2006 by bush, and in 2010 by obama
    • Term ends in 2014
    • The president appoints fed chairman to a renewable 4 year term
  16. What are the names of two previous Fed Chairmen?
    • Alan Greenspan 1987-2006
    • Paul Volcker 1979-1987
  17. Who are the 12 members of the Federal Open Market Committee?
    • 12 members include 7 members of the Federal Board of governers and 5 of the Presidents of Regional Federal Banks
    • they meet every 6 weeks
  18. What are the 5 functions of the federal Reserve System?
    • Fed regulates banks (set reserve ratio)
    • Fed acts as a banker for banks (lend money to banks)
    • Fed acts as banker for US Government{treasury} (lend mony to government)
    • FED issues paper Currency(printed at Bureaua of printing and engraving new currency 120 billion)
    • FED controls the size of money supply (M1)
  19. Monetary Policy
    A deliberate change in the size of nation's money supply done by the FEDs in order to influence the overall economy. change-increase(expansionary) or decrease (contractionary) M1
  20. What are the 3 "monetary tools" the Fed uses to alter the money supply?
    • Reserve ratio
    • Discount rate
    • Open market operations
  21. Describe effect on the level of bank loans and money supply if Fed decreases reserve ratio. (4)
    • Decrease required reserves
    • Increase excess reserves
    • Banks can make more loans
    • Increase the money supply
  22. Describe effect on the level of bank loans and money supply if Fed increases reserve ratio. (4)
    • Increase required reserves
    • Decrease excess reserves
    • Banks make fewer loans
    • Decrease money supply
  23. Discount Rate
    Interest rate charged by the Fed when the Fed lends dollar reserves to a bank. Fed set discount rate 3/4 %
  24. Prime Interest Rate
    Interest rate on a loan from bank to customer. (higher than discount rate for profit)
  25. Describe effect on the level of bank loans and money supply if Fed lowers discount rate on loans to banks. (4)
    • Bank is charges lower interest rate by Fed
    • Banks can charge a lower interest rate to customer
    • More loans
    • Increase money supply
  26. Describe effect on the level of bank loans and money supply if Fed raises the discount rate on loans to banks. (4)
    • Bank is charges higher interest rate by Fed
    • Banks will charge a higher interest rate to customer
    • Fewer loans
    • Decrease money supply
  27. US Government Securities
    • Loans to the US government at some specified interest rate and for some time perieod
    • Are issued by the US Treasury when the government borrows money
    • Why? Budget deficeit government spends more than they collect in taxes
    • Most can be resold to other investors
  28. Explain the effect on excess reserves and the money supply when the fed purchases US government securities from banks.
    • Fed pays bank in reserves
    • bank have more excess reserves
    • bank make more loans
    • M1 up
  29. Explain the effect on excess reserves and the money supply when the fed sells US government securities to banks.
    • Bank pays fed in reserves
    • bank have less excess reserves
    • bank make fewer loans
    • M1 down
  30. Explain the effect on excess reserves and the money supply when the Fed purchases US government securities from the US Treasury: assume the treasury spends the money.
    • US treasury spends newly created money (by Fed) into economy
    • Increase money supply
  31. Explain how increase in the money supply could lead to change in the interest rate. Show on Graph
    • increase supply of loan
    • decrease interest rate
    • more loans
    • increae spending
    • increase GDP
  32. Trade-offs of in the use of expansionary monetary policy
    • pros:
    • increase spending, increase production, increase jobs, lower interest rates(borrowers)

    • cons:
    • Banks don't lend to business & consumers,can cause inflation,can cause bad loans, can increase level of consumer debt, can cause trade deficit, lower interest rates (savers)
  33. Explain how decrease in the money supply could lead to change in the interest rate. Show on Graph
    • decrease supply of loan
    • increase interest rate
    • Excess reserves down
    • fewer loans
    • decrease spending
    • lowers GDP
  34. Trade offs in the use of contractionary Monetary Policy
    • Pros:
    • decrease spending, can prevent inflation, high interest rates(savers), encourage savings

    • Cons:
    • high interest rate (borrowers), can cause recession, high unemployment
  35. Explain how change in the "Demand for Loans" can lead to interest rate change. Show on graph
    • Increase in demand for loans interest rate up
    • Decreae in demand for loans interest rate down
  36. Economic growth
    Increase in nation's capacity to produce products
  37. Growth rate
    • percentage increase in our nation's capacity to produce products
    • 3-4 % good, 1-2% average
  38. Productivity
    Number of products produced per worker per hour
  39. What are the sources of productivity growth? (4)
    • better technology
    • Better labor-education, training, skills
    • Better management
    • More investment goods-computers, tools, equipment
  40. What is the relationship between investment spending and economic growth?
    More investment spending leads to faster economic groth
  41. What has been the trend in U.S productivity growth since 1950?
    • 50-75 productivity growth averaged +3% per year (economy grows 3% each year) fast
    • 75-2010 productivity growth averaged 1 1/2 % per year (economy grows 1 1/2% per year) slow
    • Trend- slowed down from 75 until today
  42. What has caused the trend? (3)
    • Transition to information based economy
    • Outsourcing
    • Financial deregulation
  43. What is the relationship between productivity growth and average real income?
    Productivity growth dictates(equals) average real income