Question 1(5 points)

The strongest argument for an independent Federal Reserve rests on the view that subjecting the Fed to more political pressures would impart:

Question 1 options:

an inflationary bias to monetary policy.

a deflationary bias to monetary policy.

a disinflationary bias to monetary policy.

a countercyclical bias to monetary policy.

Question 2(5 points)

When the Federal Reserve was created, its most important role was intended to be:

Question 2 options:

a storage facility for the nation's gold.

a lender of last resort.

a regulator of bank holding companies.

None of the above

Question 3(5 points)

Net worth:

Question 3 options:

is the difference between current assets and current liabilities.

is the difference between assets and liabilities.

is total assets divided by total liabilities.

is total assets plus total liabilities.

Question 4(5 points)

The supply curve for reserves is __________ when the federal funds rate is below the discount rate and __________ when the federal funds rate is above the discount rate.

Question 4 options:

upward sloping; horizontal

upward sloping; vertical

vertical; horizontal

vertical; downward sloping

Question 5(5 points)

When we refer to the shadow banking system, what are we talking about?

Question 5 options:

Hedge funds, investment banks, and other nonbank financial firms that supply liquidity

The "underground" banking system used for illegal activities

The subsidiaries of depository institutions

Conflicts of interest

Question 6(5 points)

The problem created by asymmetric information before the transaction occurs is called __________, while the problem created after the transaction occurs is called __________.

Question 6 options:

adverse selection; moral hazard

moral hazard; adverse selection

costly state verification; free-riding

free-riding; costly state verification

Question 7(5 points)

A key finding of the economic analysis of financial structure is that:

Question 7 options:

the existence of the free-rider problem for traded securities helps to explain why banks play a predominant role in financing the activities of businesses.

while free-rider problems limit the extent to which securities markets finance some business activities, the majority of funds going to businesses are channeled through securities markets.

given the great extent to which securities markets are regulated, free-rider problems are not of significant economic consequence in these markets.

economists do not have a very good explanation for why securities markets are so heavily regulated.

Question 8(5 points)

If the Fed's strategy for conducting monetary policy is thought of as a game plan that proceeds in stages, then the game plan can be summarized as which of the following?

Question 8 options:

The Fed selects its policy goals, then the intermediate targets consistent with achieving its policy goals, then the operating targets consistent with its intermediate targets. Finally, it adjusts its policy tools to effect the desired targets and goals.

The Fed selects its policy goals, then the operating targets consistent with achieving its policy goals, then the intermediate targets consistent with its operating targets. Finally, it adjusts its policy tools to effect the desired targets and goals.

The Fed selects its policy goals, then the intermediate targets consistent with achieving its policy goals, then the policy tools consistent with its intermediate targets. Finally, it adjusts its operating targets to effect the desired targets and tools.

The Fed selects its policy tools, then the operating targets consistent with achieving its policy tools, then the intermediate targets consistent with its operating targets. Finally, it adjusts its policy goals to effect the desired targets and tools.

Question 9(5 points)

Which of the following led to the U.S. financial crisis of 2007-2009?

Question 9 options:

Financial innovation in mortgage markets

Agency successes in mortgage markets

An increase in moral hazard at credit rating agencies

Symmetric information and credit-rating services

Question 10(5 points)

The majority of household debt in the United States consists of:

Question 10 options:

credit card debt.

consumer installment debt.

collateralized loans.

unsecured loans, such as student loans.

Question 11(5 points)

The oldest central bank, founded in 1694, is the:

Question 11 options:

Bank of England.

Deutsche Bundesbank.

Bank of Japan.

Federal Reserve System.

Question 12(5 points)

During the 1800s, many U.S. financial crises were precipitated by an increase in __________, often originating in London.

Question 12 options:

interest rates

housing prices

gasoline prices

heating oil prices

Question 13(5 points)

In addition to having a direct effect on increasing adverse selection problems, increases in interest rates also promote financial crises by __________ firms' and households' interest payments, thereby __________ their cash flow.

Question 13 options:

increasing; increasing

increasing; decreasing

decreasing; increasing

decreasing; decreasing

Question 14(5 points)

Most financial crises in the United States have begun with:

Question 14 options:

a steep stock market decline.

a decrease in uncertainty resulting from the success of a major firm.

a steep decline in interest rates.

a steep bond market decline

Question 15(5 points)

Stock market declines preceded a full-blown financial crisis:

Question 15 options:

in the United States in 1987.

in the United States in 2000.

in the United States in 1929.

in the United States in 2005.

Question 16(5 points)

Investment banks serve two client groups,:

Question 16 options:

home buyers and mortgage lenders.

people saving for retirement and pension funds.

issuers of securities and investors in those securities.

mutual funds and investors with relatively small amounts to invest.

Question 17(5 points)

Although neither __________ nor the __________ is officially set by the Federal Open Market Committee, decisions concerning these policy tools are effectively made by the committee.

Question 17 options:

margin requirements; discount rate

margin requirements; federal funds rate

reserve requirements; discount rate

reserve requirements; federal funds rate

Question 18(5 points)

An open market __________ leads to a(n) __________ of reserves and deposits in the banking system and hence to a(n) __________ of the monetary base and the money supply.

Question 18 options:

sale; expansion; contraction

purchase; expansion; contraction

sale; expansion; expansion

purchase; expansion; expansion

Question 19(5 points)

Hierarchical mandates can cause a problem that Mervyn King, Governor of the Bank of England, refers to as an "inflation nutter," that can lead to large:

Question 19 options:

inflation spikes.

output fluctuations.

unemployment rates.

economic growth.

Question 20(5 points)

Which of the following is NOT one of the eight basic facts about financial structure?

Question 20 options:

The financial system is among the most heavily regulated sectors of the economy.

Issuing marketable securities is the primary way businesses finance their operations.

Indirect finance, which involves the activities of financial intermediaries, is many times more important than direct finance in which businesses raise funds directly from lenders in financial markets.

Financial intermediaries is the most important source of external funds to finance businesses.