MACRO TEST 2

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MACRO TEST 2
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  1. The 3 main functions of money are:
    • It serves as a medium of exchange.
    •  It serves as a store of value.
    •  It serves as a unit of account.
  2. M1 is one of many measurements of the U.S. money supply. Describe them.
    • M1 is made up of currency (coins and paper money) plus all types of checking
    • accounts.
  3. The textbook tells us that credit cards are not really money. They are simply a tool to get a
    short-term loan. However, debit cards are:
    Are part of the money supply since they are directly tied to checking accounts.
  4. Is MZM is always less than M2:
    False
  5. In the U.S., is paper money a debt of the Federal Reserve Bank.
    Yes
  6. M1 consists of roughly __%
    cash and ___% checking accounts
    • 50%
    • 50%
  7. It was the banking crisis of 1907 that helped the U.S. government decide that it was time to
    create a national bank like the Federal Reserve Bank:
    True
  8. The Federal Reserve Bank does
    what:
    • It controls the U.S. money supply,
    • helps to influence interest rates, and
    • regulates the U.S. banking system.
  9. ______________  creates the monetary
    policy of the Federal Reserve Bank:
    The Federal Open Market Committee (FOMC)
  10. The Federal Open Market Committee is often referred to as .............
    The lender of last resort.
  11. The Wall Street Reform and Consumer Protection Act of 2010 eliminated a federal agency that watched over the thrift industry and gave more power to two other agencies.

    Which agency was eliminated and what other agencies gained more power?
    The Office of Thrift Supervision was eliminated and FDIC and the Fed got more power.
  12. It sets the Reserve Requirements for all U.S. banks.
    &
    It acts as a fiscal agent (or
    private banker) for the U.S. government.
    Federal reserve bank
  13. In the Federal
    Reserve’s Twelfth District, _________  is where the main regional headquarters is located
    San Francisco
  14. Most of the 8,300 + thrift institutions are
    Made up of credit unions
  15. Why do some countries use the
    U.S. dollar as their primary currency
    • They feel the U.S. dollar provides monetary stability. They also see the U.S. as a “safe
    • haven” country.

    They probably had a history of massive inflation and they want to use a currency that the people can trust.

    • They like to use the dollar because when it
    • appreciates in value against other major international currency, then they will
    • benefit.
  16. The Board of Governors at the
    Federal Reserve does what?
    • They set the basic policies of
    • the Fed

    • Some of the board members are
    • appointed by the President of the U.S. to serve on the FOMC and are subject to
    • final approval by the U.S. Senate.
  17. US _____ the largest private banks in the world.
    does NOT have
  18. Which entity is considered to be a quasi-public bank:
    The 12 federal reserve banks
  19. The Comptroller of the
    Currency does what: (page 646 footnote)
    It has supervisory authority over banks and thrifts (including credit unions).
  20. The term "securitization" means what and
    which asset listed below would be a good
    example of a securitized security?
    • This means that financial instruments such as bond are bundles or wrapped together and sold as an investment. An example would be
    • mortgage backed securities
  21. Essentially what does the transaction
    demand for money mean?
    This means that people need cash (green dollars) to buy things.

    • There is always a demand for cash because it
    • is used as a medium of exchange.
  22. What can we say about the asset
    demand for money?
    This means that people need cash (green dollars) in order to buy assets.

    • There is a relationship between the rate of
    • return and the demand for money.
  23. . The transaction demand + the asset demand for money equals what?
    The total demand for money.
  24. When a $10,000 U.S. government bond pays a 4% interest rate, then what is the common term used to describe the interest rate that is paid?
    The current yield.
  25. When U.S. bond market prices rally (or go up), then DOES this means that interest rates will also start to go up?

    What is the main reason bond market prices would rally
    NO

    There is lots of bad economic news and investors are worried.  This would probably happen if Iran detonated a nuclear bomb and showed the world that they had these types of weapons.
  26. What is the main reason bond
    market prices would rally
    There is lots of bad economic news and investors are worried.  

    This would probably happen if Iran detonated a nuclear bomb and showed the world that they had these types of weapons.
  27. What is the main reason that bond
    market prices would fall?
    • If the stock market enters into a multi-year rally and stock values start going up 20
    • percent per year. Since there is less fear, people wouldn’t need to hold
    • bonds.   

    • If the housing market recovers, banks start lending again and if we can get GDP growth to 3 or 4 percent per year. Since
    • there is less fear, people wouldn’t need to hold bonds.    

    • If the Federal Reserve sold $1 trillion of
    • bonds into the marketplace.
  28. As of 2012, the largest part of the Federal Reserve Bank’s balance sheet is made up of
    which assets asset listed below?
    • Their holdings of U.S. government bonds ‘and’
    • mortgage backed securities.
  29. We recently discussed this in
    class? What was the Federal Reserve Bank’s TALF program
    They created a $1 trillion line of credit and primarily bought low-quality mortgage loans from the banks in order to encourage them to make more new loans.
  30. The U.S. Treasury Department has an account with the ________________ and they keep their deposits with them. The Fed acts as Uncle Sam’s private banker.
    Federal Reserve Bank
  31. When the Federal Reserve sell bonds from its portfolio to the marketplace, then this will
    mean that the money supply will go ____ and that interest rates should go ____.
    • Down
    • &
    • Up
  32. If there is a severe recession going on, then the proper response from the Federal Reserve should be to _____ bonds from the U.S.Treasury and from the general ______.
    • buy
    • marketplace
  33. Does The Federal Reserve Bank totally
    controls the Fed Funds rate. It’s currently at 0.25%
    • NO!
    • This is a trick question
    • because the Fed influences, but it doesn’t outright control the
    • Fed
  34. During September 2008 to December 2008, the Fed Funds market broke down because
    banks were afraid to lend money to each other due to toxic subprime mortgage loans.
    • the Fed acted as the lender of
    • last resort during this period
  35. The Fed’s Discount Window is open to all _______ . They may borrow direct from the Fed.
    Banks
  36. This ____ happens but if it does it is ____ The wholesale Fed Funds rate can sometimes go above the retail Prime Rate.
    • doesnt
    • rare
  37. What does the term ‘pushing on a string’ mean in terms of Fed Policy?
    =The Fed can lower rates all they want, but they can’t force people to borrow.
  38. The Fed has good control over ____-term interest rates, but the Bond _____ has better
     control over ____-term rates. The Fed is not very good at controlling long-term rates.
    • fed = short short term
    • bond market = Long term
  39. During March 2009, the Federal Reserve Bank set up a $1 trillion line of credit known as _____. The purpose of this program was to
    buy low-quality mortgages directly from banks in order to stimulate the housing
    market and to strengthen the asset side of bank balance sheets.
    TALF
  40. M1 consists of cash and checking accounts.
    M1 is the most basic measurement of U.S. money supply.                                                                                                                                        
    True / False
    True
  41. Congress authorized a $___ billion bailout for U.S. banks during Q4 2008. A few months after this, the Federal Reserve also set up an
    ‘unlimited line of credit’ for both Fannie Mae and Freddie Mac. The Fed also
    set up an unlimited line of credit for the commercial paper market during 2009
    and issued several billion more to support the insurance firm – AIG. (Everything
    stated up top this point is true)

     

    Therefore, we can probably conclude that the U.S. “might
    realistically” suffer significantly higher inflation in the years to come if
    the Fed doesn’t eventually reverse the Ms > GDP growth rate.     

     

                                                               

                                                          
    True / False
    True
  42. ____ was the new replacement for the old M3 money supply measurement.
    MZM
  43. Debit cards ___ affect the money supply
    Do
  44. For years the Federal Reserve Bank has been telling Congress to reduce reckless spending and to stop creating and expanding social programs (e.g. Medicare and free prescription drugs for elderly retirees) that have no
    cost restraints. The bottom line is that Congress doesn’t have to do what the
    Federal Reserve says because the Federal Reserve has no legal control over fiscal policy.
      

     

                                                                                                                                        8.
    True / False
    true
  45. The 12 regional Federal Reserve Banks are privately owned by regional commercial banks, but instead of trying to maximize profits like most private firms, they act in the public interest.  

     

     

                                                                                                                                        9.
    True / False
    true
  46. When the Fed sells U.S. government bonds in the general marketplace, it is effectively increasing the money supply.

     

                                                                       
    True / False
    false
  47. The Federal Open Market Committee controls Monetary Policy. They meet roughly once every two months to make decisions about the
    money supply and interest rates.
    True
  48. The Federal Reserve Bank acts as the fiscal agent (or private banker) for the U.S. federal government. The U.S. government does not typically deposit the hundreds of billions it controls with big banks like Bank of America, Wells Fargo or Chase Bank instead it deposits this money with the
    Federal Reserve Bank.

                                                   

                                                                                                                                        13.
    True / False
    true
  49. The Office of Thrift Supervision was eliminated with the passage of the Wall Street Reform and Consumer Protection Act of 2010.
    true
  50. It is not in the strategic interest of the U.S. to allow countries like Cuba, China, Russia, Argentina, Liberia, Panama, Bolivia and
    Vietnam to widely use U.S. dollars as the ‘currency of choice’ to conduct
    trade. The U.S.
    should take aggressive steps to halt these uses of the U.S. dollar in these
    foreign countries.   

     

     

                                                                                                                                        15.
    True / False
    Flase
  51. During the 18th and 19th centuries in
    the U.S., people used gold and silver to conduct trade. They also used the private
    bank notes printed by the strong regional banks of those days as currency for trading purposes.  

     


    True
    / False
    True
  52. The Reserve Ratio is set by the Federal Reserve Bank. This tells banks what percentage of new deposit money must be kept in their vaults.  

     

     

                                                                                                                                        17.
    True / False
    true
  53. Only the Federal Reserve Bank can increase the money supply, banks and credit unions don’t have the ability to independently increase the money supply.
    False
  54. The Money Multiplier is calculated like?
    1/Required Reserve Ratio
  55. If Americans suddenly started to repay debt and
    started to payoff their car, home and personal loans, then the money supply in
    the U.S. would increase.
    true
  56. Open market operations, the discount window and the reserve requirement are the three main tools that the Fed has to conduct monetary policy. The Open Market Operation
    tool is by far the most used of the three tools.
    true
  57. The Federal Reserve Bank doesn’t care what goes on in the Fed Funds Rate because that
    is a private market where banks loan money directly other banks. The Fed pays no attention to this private market.   

     

                                                                                                                                        22.
    True / False
    False
  58. If the Federal Reserve severely decreased the money supply by 30 percent, then that
    would be bad news for stocks and good news for holders of bank Certificates of Deposit who always desire to have higher rates of interest.  

     

                                                                                                                                        23.
    True / False
    True
  59. During the fourth quarter 2008, the U.S. nearly went into a Great Depression because large banks like Washington Mutual and Citibank failed and needed emergency bailout money. Large Wall Street firms like Merrill Lynch and Lehman Brother also failed, the
    insurance firm known as AIG who was a major player in the $100 trillion in U.S. based derivatives based on sub-prime mortgage loans failed and other large firms important to the U.S. economy such as General Motors and Chrysler were on the brink of bankruptcy.    

     

                                                                                                                                        24.
    True / False
    True
  60. One of the changes from the Wall Street
    Reform and Consumer Protection Act of 2010 is that it gave the Federal
    Reserve Bank the power to watch over and regulate mortgage backed securities
    and derivates.
    True
  61. This question is about the concept of ‘moral hazard.This concept says that bankers, investors and/or financial services firms will take more risk if they know that the government will be there to save them
    in case they make decisions that lead to disaster.
    True
  62. The Federal Deposit Insurance Corporation (FDIC) regulates and insures the deposits of all credit unions in America. They are the leading
    regulatory agency for U.S. credit unions. 
     

     

                                                                                                                                        26.
    True / False
    False
  63. Securitization is a concept that describes the
    process of slicing up and bundling mortgage loans or bonds into distinct new
    securities that will be re-sold to investors.

     

                                                                                                                                        28.
    True / False
    True
  64. The Board of Governors at the Federal Reserve Bank has the power to set the Fed Funds Rate, print money and issue statements about
    the Fed’s monetary policy choices.

     

                                                                                                                                        29.
    True / False
    False
  65. For the past several years, the Federal Reserve paid banks interest if they simply put the extra money they had on deposit with them. The
    Federal Reserve Bank was trying to prevent banks from lending out too much of their excess reserves.
    True
  66. Not only did the Troubled Asset Relief Program (TARP) lend out $700 billion to banks during the financial crisis during Q4 2008, but the Federal Reserve Bank also started to purchase commercial paper directly in the marketplace to help support business. Traditionally, the Fed doesn’t do this
    but it had to during this crisis because banks stopped buying commercial paper
    from business firms.

     

     

                                                                                                                                        31.
    True / False
    True
  67. In 1933, President Franklin Roosevelt declared a “bank holiday.” The purpose of this was to give bank inspectors enough time to review bank accounting records and to decide which banks should remain open and
    which ones should be closed down. The bank holiday lasted for one week.

     

                                                                                                                                        32.
    True / False
    True
  68. Does the fed res own gold?
    yes
  69. In past recessions (after-1945), the Fed usually increased the money supply in order to stimulate the economy. The goal was to stimulate the Aggregate Demand and grow the GDP.

     

     

                                                                                                                                        34.
    True / False
    True
  70. The “liquidity trap” will happen when bankers get very bold and start lending lots of money to business and individual borrowers.
    During a liquidity trap, borrowers are also very happy to borrow as much money as they can.

     

                                                                                                                                        35.
    True / False
    False
  71. The President of the United States nominates and appoints all seven members of the Board of Governors who serve at the Federal Reserve
    Bank.
    This statement is partially true. But they must be approved by the U.S. Senate
  72. What two factors influence the demand for money?
    Both the transaction demand and the asset demand for money
  73. How can the Fed effectively lower inflation without causing turmoil in the marketplace?
    Make sure Ms growth = GDP growth
  74. Essentially what does the transaction demand for money mean?
    • This means that
    • people need cash (green dollars) to
    • buy things.

    There is always a demand for cash because it is used as a medium of exchange.
  75. What does this term: asset demand for money mean?
    This means that people need cash (green dollars) in order to buy assets.

    There is a relationship between the rate of return and the demand for money.
  76. The transaction demand + the asset demand for money equals what?
    The total demand for money.
  77. When a $10,000 U.S. government bond pays a 4% interest rate, what term do we
    use to describe the interest rate that is paid to the investor?
    A) The current yield
  78. When U.S. bond market prices rally (or go
    up), then this means that
    interest rates for short-
    term business loans will also
    go up? --> FALSE
  79. What is the main reason that bond market
    prices would rally?
    There is lots of bad economic news and investors are worried.

    • This would probably happen if North Korea started a war with South Korea and
    • Japan.
  80. What is the main reason why bond market prices
    would fall? (two reasons)
    • If most U.S. investors felt good
    • about the economy and started to pour massive amounts of money into the U.S.
    • stock market.

    B) If the U.S. unemployment rate fell to 4.00%.

    • C) Only
    • if the Federal Reserve sells large amounts
    • of bonds into the marketplace.
  81. As of 2013, the largest part of the
    Federal Reserve Bank’s balance sheet is
    made up of what assets listed below?
    • Their holdings of U.S. government bonds and mortgage backed
    • securities.
  82. We recently discussed this in class. What was the Federal Reserve Bank’s TALF program?
    • They bought $1 trillion of low-quality mortgages from U.S. banks. The Fed was hoping that this
    • action would encourage them to make more
    • loans.
  83. The U.S. Treasury Department (uncle Sam) has their main money account with the Federal Reserve Bank and they keep the vast majority of their deposits with them.
    This statement is true.
  84. When the Federal Reserve sell bonds from its portfolio to the marketplace, this means that the money supply is going down and that interest rates will go up.
    • This statement
    • is true.
  85. If the economy is experiencing a severe recession, then the proper response from the
    Federal Reserve Bank would be to buy bonds from the marketplace.
    True
  86. DuringSeptember 2008 to December 2008, the Fed Funds market broke down because banks were afraid to lend money to each
    other due to toxic subprime mortgage loans and their loss of confidence in each
    other.
    • This is true and this is why the
    • Fed acts as the lender of last
    • resort in times of emergency
  87. The Fed Funds rate can sometimes go above the Prime Rate.
    This never happens.
  88. The Fed’s FOMC strictly follows the Taylor Rule – this is the official policy of the Fed.
    False

    • This is false but the Fed is friendly to this
    • rule.
  89. What does the term
    ‘pushing on a string’ mean in
    terms of Fed Policy?
    The Fed can lower rates all they want, but they can’t force people to borrow.
  90. TheFed has good control over short-term interest rates, but the bond market has better control over long-term rates. The Fed is not very good at controlling long-term rates.
    This statement is true.
  91. The Fed has good control over short-term interest rates, but the bond market has better control over long-term rates. The Fed is not very good at controlling long-term rates.
    This statement is true.
  92. The U.S. has what type of banking system?
    A fractional reserve banking system.
  93. a bank panic occurs when
    When depositors try to cash out their bank accounts all at once.
  94. On the bank’s balance sheet, their net worth is calculated by which formula?
    • Assets
    • minus Liabilities = Net Worth.



    • Net Worth =
    • Assets minus Liabilities
  95. When a bank accepts a $500,000 deposit, it must record this on their balance sheet. How would they record this transaction?
    Cash is increased by $500,000 and checkable deposits are also increased by $500,000 on the liability side of the balance sheet.
  96. If the Federal Reserve Bank dictates that all
    U.S. banks must keep 1/10 or 10 percent of required reserves, what does this mean?
    The bank must keep only ten percent of all deposits as cash in the vault
  97. Let’s assume that the Federal Reserve Bank tells ABC Commercial Bank to keep a minimum required reserve of $100,000. Let’s also
    assume that the bank has checkable deposits of $1,000,000. What regulation is the Federal
    Reserve trying to enforce?
    • To
    • conform to the Reserve Ratio requirement.
  98. Bank Excess Reserves means what? :
    That the bank has excess cash to lend because it has met the reserve requirements
  99. The Federal Deposit Insurance Corporation (FDIC) has the right to perform bank audits:
    To ensure that commercial banks have enough cash in the vault.
  100. During the start
    of the Great Depression (1930
    to 1933), more than 9000 banks failed
    and the U.S. government didn’t replace any of that lost money.
    This event did what?
    • A) It caused the
    • U.S. money supply to fall by 25 percent.

    • B)
    • This traumatic event
    • eventually helped U.S.
    • President Franklin Roosevelt to declare a bank holiday in 1933 so that the FDIC
    • could be created to prevent more losses.

    • C) It
    • helped to make the Great Depression
    • even worse.
  101. If all American families suddenly paid off credit cards, auto and home loans, then this event would reduce the U.S. money supply.
    This statement is true.
  102. If banks make new loans and if the Federal Reserve is also buying U.S. government bonds,
    then they are both increasing the money supply.
    This statement is true.
  103. Non-personal bank accounts such as corporate
    business accounts do not have to comply with the required reserve minimums set by the Federal Reserve.
    • This statement
    • is true.
  104. For most big commercial banks like Bank of America and Wells Fargo, the current
    reserve ratio is:
    10%
  105. If a check for $100,000
    clears from Bank A to Bank B, this
    means that Bank A lost the

    $100,000 in deposits and
    Bank B gained the deposit of $100,000 (This statement is true up to this point). Therefore, what happens next to the U.S.
    money supply:
    • Nothing at all.
    • One bank’s loss is another
    • bank’s gain and there is no change
    • to the money supply just to clear checks.
  106. If the reserve ratio is
    20 percent, then this means that the bank will have $80,000 in excess reserves to loan
    out from a $100,000 deposit.
    • This statement
    • is true.
  107. Refer to the Question
    35 above. Is it possible for this
    bank to create and add $400,000 in new U.S. money supply simply from making an
    $80,000 loan assuming that the reserve ratio is

    20 percent?
    • B) This is true we
    • can create $400,000 in new money
    • supply from an $80,000 bank loan. C) 1
    • / Reserve Requirement or (1
    • / .20) is the Money Multiplier formula.
    • In this case we

    • could calculate the potential
    • money supply creation potential
  108. When banks borrow from other banks, this
    private market is known as the
    • Fed
    • Funds Market.
  109. The economist says that the best way to calm the people down would be to print extra money and send all households 10,000
    pesos. He also recommended that the dictator should lower the bank reserve requirement (1/RR) from 1/.25 to 1/.10 .
    The economist says that the banks

    would suddenly have more money to lend and that this action would
    greatly increase the money supply. This should fool the people into
    thinking that there was more prosperity, then the people would start
    to love their new dictator. What can we
    conclude from this short story?
    • A) It is true that lowering
    • the bank reserve requirement would increase the supply of money

    • B)
    • The rate of inflation would probably increase
    • with this plan.
  110. If the Federal Reserve Bank suddenly sold their U.S. government bond holdings to the public, this would: (2 things)
    • Lower $ supply
    • Raise interest rates

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