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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
what do commercial banks have to provide in order to receive a discount loan
collateral
26
what does the deposit expansion multiplier show
the change in commercial bank deposits following one open market operation
27
what is the money multiplier
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
what are the 4 things money quantity depends on
1. the monetary base 2. reserve requirement 3. bank desire to hold excess reserves 4. public demand for money
29
what is zero lower bound
the idea that interest rates can not be below 0
30
what is effective lower bound
the minimum interest rate that will still have an effect on increasing aggregate demand or GDP
31
what are the 4 tools the Fed uses
1. rate for federal funds rate 2. interest rate on excess reserves 3. rate for discount lending 4. reserve requirement
32
what is quantitative easing
when central banks will buy securities to stimulate the economy. happens when lowering interest rates is ineffective
33
what are the 3 types of discount loans from the fed
1. primary loans 2. secondary loans 3. seasonal loans
34
when do banks ask for secondary loans
when the bank is in trouble and could not receive money from anyone else
35
what is the European central bank version of primary credit
lending facility
36
European central bank (ECB) reserve requirement
based on how many liabilities the bank holds
37
what is taylors rule
an equation to suggest to banks what to set their target interest rates at to achieve the dual mandate
38
what is the ratio for an increase in inflation points to federal funds rate
1 point increase in inflation is 1.5 point increase in federal funds rate
39
3 unconventional policy approaches
1. forward guidance (Fed communicating intentions with policy) 2. quantitative easing 3. targeting asset purchases
40
what is the velocity of money
how many times a single dollar is used
41
what does the quantity theory of money say
money growth translates directly into inflation
42
what part of aggregate demand is interest rate sensitive
1. consumption 2. investment 3. net exports
43
what changes the long run interest rate
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
what happens to long run interest rates when potential output increases
it falls
45
what is the monetary policy reaction curve
the behavior of central bankers when interest rate changes
46
what way does the monetary policy reaction curve slope
downwards
47
what do shifts mean in the monetary policy reaction curve
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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