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Money and Banking > Test 2 > Flashcards

Test 2 Flashcards

1
Q

what are intermediaries

A

investigate people who want loans to see if the loans are risky or not

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2
Q

what is asymmetric information

A

when one party has more information than the other

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3
Q

what is adverse selection

A

when one party has more information about certain things in a transaction. EX: buying a car the dealership knows the actual price but the buyer can’t tell a difference

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4
Q

what is a moral hazard

A

when one party is able to take more risk because they do not feel the full consequences (happens after the transaction)

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5
Q

what are unsecured loans

A

loans made without collateral

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6
Q

how is a bank balance sheet set up

A

total bank assets= total bank liabilities +bank capital

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7
Q

what are the 4 categories assets are divided into

A
  1. cash
  2. securities
  3. loans (primary asset of banks)
  4. others
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8
Q

what type of deposits make up the most of checkable deposits

A

DDA (demand deposits)

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9
Q

what is the federal funds market

A

the market where banks will lend their excess reserves to other banks (unsecured loans)

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10
Q

what is return on assets (ROA)

A

a banks net profit after taxes

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11
Q

what is return on equity

A

a gauge of a companies profitability and how well they can make money

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12
Q

what is operational risk

A

the risk of loss resulting from internal processes or people

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13
Q

what is a cyber risk

A

the loss that arises when information systems are compromised

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14
Q

how long are federal reserve presidents elected for

A

5 years

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15
Q

what are the 3 branches of the federal reserve

A
  1. board of governors in DC
  2. 12 regional banks
  3. FOMC
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16
Q

how long are board of governor terms

A

14 years (appointed by president, confirmed by senate)

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17
Q

what rate does the FOMC control

A

federal funds rate

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18
Q

how many times does the FOMC meet

A

8 times a year

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19
Q

what are the 3 main assets on the Fed balance sheet

A
  1. securities
  2. foreign exchange reserves
  3. loans
    (first 2 are for government purposes, last is for commercial banks)
20
Q

why does the Fed hold foreign exchange reserves

A

when they try to influence the market value of other currencies

21
Q

when does the fed give out discount loans

A

when banks are short on cash

22
Q

what are the 3 main liabilities on the Fed balance sheet

A
  1. currency
  2. government’s deposit account
  3. deposit accounts of commercial banks
23
Q

what is the monetary base

A

the currency in the public’s hand plus all of the reserves in the banking system

24
Q

what are the 4 transaction types the Fed can do

A
  1. open market operations (buying/selling securities)
  2. foreign exchange intervention (buying/selling foreign exchange reserves)
  3. extend a discount loan to banks
  4. decision of a individual to remove money from their account
25
Q

what do commercial banks have to provide in order to receive a discount loan

A

collateral

26
Q

what does the deposit expansion multiplier show

A

the change in commercial bank deposits following one open market operation

27
Q

what is the money multiplier

A

shows the quantity of money related to the monetary base. As the monetary base grows so does the amount of money in the world (due to fractional reserve lending)

28
Q

what are the 4 things money quantity depends on

A
  1. the monetary base
  2. reserve requirement
  3. bank desire to hold excess reserves
  4. public demand for money
29
Q

what is zero lower bound

A

the idea that interest rates can not be below 0

30
Q

what is effective lower bound

A

the minimum interest rate that will still have an effect on increasing aggregate demand or GDP

31
Q

what are the 4 tools the Fed uses

A
  1. rate for federal funds rate
  2. interest rate on excess reserves
  3. rate for discount lending
  4. reserve requirement
32
Q

what is quantitative easing

A

when central banks will buy securities to stimulate the economy. happens when lowering interest rates is ineffective

33
Q

what are the 3 types of discount loans from the fed

A
  1. primary loans
  2. secondary loans
  3. seasonal loans
34
Q

when do banks ask for secondary loans

A

when the bank is in trouble and could not receive money from anyone else

35
Q

what is the European central bank version of primary credit

A

lending facility

36
Q

European central bank (ECB) reserve requirement

A

based on how many liabilities the bank holds

37
Q

what is taylors rule

A

an equation to suggest to banks what to set their target interest rates at to achieve the dual mandate

38
Q

what is the ratio for an increase in inflation points to federal funds rate

A

1 point increase in inflation is 1.5 point increase in federal funds rate

39
Q

3 unconventional policy approaches

A
  1. forward guidance (Fed communicating intentions with policy)
  2. quantitative easing
  3. targeting asset purchases
40
Q

what is the velocity of money

A

how many times a single dollar is used

41
Q

what does the quantity theory of money say

A

money growth translates directly into inflation

42
Q

what part of aggregate demand is interest rate sensitive

A
  1. consumption
  2. investment
  3. net exports
43
Q

what changes the long run interest rate

A
  1. shifts in aggregate expenditure curve
  2. changes in potential output
    EX: increase in government purchases shifts the expenditure curve right but potential output must remain equal so interest rates rise to combat the interest sensitive components
44
Q

what happens to long run interest rates when potential output increases

A

it falls

45
Q

what is the monetary policy reaction curve

A

the behavior of central bankers when interest rate changes

46
Q

what way does the monetary policy reaction curve slope

A

downwards

47
Q

what do shifts mean in the monetary policy reaction curve

A

a change in the level of interest rates at every level of inflation. EX: a decrease in the target inflation shifts it left. a decline in long run interest rate shifts it right

Money and Banking (2 decks)

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