Eliminating the Fed’s independence

Eliminating the Fed’s independence might lead to a more pronounced political business cycle because a politically exposed Fed would be more concerned with:A. short-run objectives and thus be more likely to engage in expansionary policies designed to lower unemployment and interest rates before an election.B. long-run objectives and thus be more likely to engage in expansionary policies designed to lower unemployment and interest rates before an election.C. short-run objectives and thus be a defender of a sound dollar and a stable price level.D. long-run objectives and thus be a defender of a sound dollar and a stable price level.

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Critics of Fed independence argue that:A. it is undemocratic to have monetary policy controlled by an elite group responsible to no oneB. the Fed, since it does not face a binding budget constraint, spends too much of its earningsC. an independent Fed conducts monetary policy with a consistent inflationary biasD. Only A and B are correct

Greater central bank independence is associated withA. no change in either unemployment or inflation.B. lower inflation and lower unemployment.C. higher inflation and no change in unemploymentD. lower inflation and no change in unemployment

Proponents of a Fed under greater control of the president or Congress argue thatA. the Fed has always used its independence successfully.B. some sacrifices in unemployment is necessary to lower inflation.C. it is undemocratic to have monetary policy controlled by an elite group.D. greater control would help coordinate fiscal and monetary policies.

The case for Federal Reserve independence does not include the idea thatA. policy is always performed better by an elite group such as the Fed.B. political pressure would impart an inflationary bias to monetary policy.C. a politically insulated Fed would be more concerned with long−run objectives and thus be a defender of a sound dollar and a stable price level.D. a Federal Reserve under the control of Congress or the president might make the so−called political business cycle more pronounced.

The theory of bureaucratic behavior suggests that the objective of a bureaucracy is to maximize:A. the public’s welfare.B. conflicts between the executive and legislative branches of government.C. profits.D. its own welfare.

The theory of bureaucratic behaviour when applied to the Fed helps to explain why the Fed:A. is supportive of congressional attempts to limit the central bank’s autonomyB. sought less control over banks in the 1980sC. is so secretive about the conduct of future monetary policyD. is willing to take on powerful groups that may threaten its autonomy

Which is more independent, the Federal Reserve or the European Central Bank? Why?A. The Federal Reserve System—It must be more independent since the European Central Bank was patterned after it.B. The Federal Reserve System—Its charter can be changed through legislation, making it more independent than the European Central Bank.C. The European Central Bank—Its charter cannot be changed through legislation, making it more independent than the Federal Reserve.D. Because the structures of the Federal Reserve and the European Central Bank are similar, it can be argued that the two systems have the same level of independence.

The European System of Central Banks (ESCB) is similar to the Federal Reserve System in that:A. the ECB is involved in supervision and regulation of financial institutions.B. it is structured such that the central banks for each country control their own budgets as Federal Reserve banks do.C. monetary operations are centralized.D. it is structured such that the central banks for each country have a similar role to that of the Federal Reserve banks.

Which of the following statements is true?A. The Eurosystem is the most independent central bank in the worldB. The long-term goal of the European Central Bank (ECB) is price stability, which means that the goal for the Eurosystem is more clearly specified than it is for the Federal Reserve SystemC. The Eurosystem’s charter cannot be changed by legislation; it can be changed only by revision of the Maastricht TreatyD. Only B and C are correctE. All of the above are correct

Under the European System of Central Banks, the Executive Board is similar in structure to the ________ of the Federal Reserve System.A. Board of GovernorsB. Federal Open Market CommitteeC. Federal Reserve BanksD. Federal Advisory Council

Why did the Bank of England up until 1997 have a low degree of independence?A. The Bank of England was not a member of the European Monetary Union until 1997.B. Until 1997, the inflation target was determined solely by the Bank of England.C. The Bank of England was formally independent of the government until 1997.D. Until 1997, the power to set interest rates was determined exclusively by Her Majesty’s Treasury.

Which of the following statements about central bank structure and independence is true?A. In recent years, greater independence has been granted to many central banks with the exception of the Bank of England and the Bank of Japan, which are still subject to strict governmental control.B. In theory, central banks subject to government control produce better monetary policy, but experience suggests that more independent central banks have produced superior monetary policy results.C. In recent years, there has been a remarkable trend toward increasing independence.D. Only A and C are correct.E. All of the above are correct.

In recent years, the tendency for central banks has been to:A. increase independenceB. decrease independenceC. increase reserve requirementsD. decrease transparencyE. Both A and C are correct

On paper, the Bank of Canada has ________ instrument independence and ________ goal independence when compared to the Federal Reserve System.A. more; moreB. less; lessC. less; moreD. more; less

The following are the three reseach documents that play an important role in the monetary policy process and at Federal Open Market Committee except theA. green bookB. blue bookC. beige bookD. red book

Among the research documents, the only book that is given to the public is the __________.

Beige Book

The Federal Reserve Banks are ________ institutions since they are owned by the ________.A. public; Board of GovernorsB. public; private commercial banks in the district where the Reserve Bank is locatedC. quasi−public; Board of GovernorsD. quasi−public; private commercial banks in the district where the Reserve Bank is located

The nine directors of the Federal Reserve Banks are split into three categories: ________ are professional bankers, ________ are leaders from industry, and ________ are to represent the public interest and are not allowed to be officers, employees, or stockholders of banks.A. 5; 2; 2B. 3; 3; 3C. 2; 5; 2D. 4; 2; 3

The Federal Reserve Bank of ________ houses the open market desk.A. BostonB. ChicagoC. New YorkD. San Francisco

All ________ are required to be members of the Fed.A. banks with assets less than $500 millionB. state chartered banksC. banks with assets less than $100 millionD. national banks chartered by the Office of the Comptroller of the Currency.

Prior to 1980, member banks left the Federal Reserve System due toA. a desire to avoid interest rate regulations.B. a desire to avoid credit controls.C. the high cost of discount loans.D. the high cost of required reserves.

Banks subject to reserve requirements set by the Federal Reserve System includeA. only banks with assets less than $100 million.B. only nationally chartered banks.C. all banks whether or not they are members of the Federal Reserve System.D. only banks with assets less than $500 million.

There are ________ members of the Board of Governors of the Federal Reserve System.A. 5B. 7C. 12D. 19

Each governor on the Board of Governors can serveA. only one nonrenewable fourteen−year term.B. one full nonrenewable eight−year term plus part of another term.C. only one nonrenewable eight−year term.D. one full nonrenewable fourteen−year term plus part of another term.

PRACTICE EXAM 2

If the dividend of a stock decreases, then according to the Gordon Growth Model, holding everything else constant, the price of the stock will ___________.(increase, decrease, stay the same)

Decrease

Define how the market price of a share of DuWop stock is likely to react to each of the following changes:
If DuWop announces an increase in the annual dividend, Div, the price of a share of DuWop will ___________.(increase, decrease, stay the same)
If investors develop a greater aversion to risk or view DuWop stock as having greater risk, k, the share price will ____________.(increase, decrease, stay the same)If investors expect an increase in the growth, g, of earnings and dividends over the next 5 years, the price of a share of DuWop will _____________.(increase, decrease, stay the same)

Increase, Decrease, Increase

If the public expects a corporation to lose $5 per share this quarter and it actually loses $4, which is still the largest loss in the history of the company, what does the efficient market hypothesis say will happen to the price of the stock when the $4 loss is announced?The stock price will ________________.

be revised upward.

Can a person with rational expectations, given new information about the search technology industry, expect the price of a share of Google to rise by 10% in the next month?A. Yes, but only if Google is paying dividends to its stockholders.B. Yes, if this information is such that expectations of growth prospects or desired yields justify such a change.C. No, 10% per month is more than 100% per year [left parenthesis 1.10 right parenthesis Superscript 12 Baseline equals 3.14(1.10)12 = 3.14—it more than triples]. This growth rate in stock prices is unrealistic with any available information.D. No, such a dramatic change in stock price would present significant opportunities for profitlong dash—opportunities that would have already been realized.

*A company announces profits of $400 million. Stock analysts predicted profits of $350 million. If the efficient market hypothesis is true, the price of IBM stock will _________.IBM announces a merger with Dell Computer. The deal is so complex that only financial analysts and other financially sophisticated people can correctly assess that it will make both firms much more efficient and profitable. If the efficient market hypothesis is true, then the price of IBM stock will _____________.(increase, decrease, stay the same)

Increase, increase

*A company announces profits of $200 million. Stock analysts predicted profits of $400 million. If the efficient market hypothesis is true, the price of IBM stock will _________.IBM announces a merger with Dell Computer. The deal is so complex that only financial analysts and other financially sophisticated people can correctly assess that it will make both firms much more efficient and profitable. If the efficient market hypothesis is true, then the price of IBM stock will _____________.(increase, decrease, stay the same)

Decrease, Increase

What does the stronger view of the efficient market hypothesis imply?A. A security’s price only reflects a fraction of available information about the market value of the securityB. Security prices can be used by managers to assess their cost of capitalC. An inefficient capital marketD. An investment can be compared to another, but market prices do not reflect the actual value.

_____________ are the selling of borrowed shares of stock that must be replaced at a later date, thus betting that the stock price will go down.

Short Sales

Evidence from studies in behavioral finance suggests thatA. investment fads cause stock prices to be undervalued most of the time.B. investors are overconfident so they buy and sell too often.C. social contagion, not overconfidence, causes bubbles.D. investors do not fear losing money so they engage in too much short selling.

________ means people are more unhappy when they suffer losses than they are happy when they achieve gains.A. Loss fundamentalsB. Loss cycleC. Loss aversionD. Loss leader

Loss aversion can explain why very little ________ actually takes place in the securities market.A. bargainingB. barteringC. short sellingD. negotiating

Describe two ways in which financial intermediaries help lower transaction costs in the economy.A. They pool many small deposits together and specialize in loan risk assessment and other forms of expertise.B. They offer safety-deposit box services to depositors and make only a few loans per year.C. They attract funds from many depositors and only make loans available to large-scale borrowers.D. They accept only large-denomination deposits and make only a small number of large loans.

__________(sales) are the selling of borrowed shares of stock that must be replaced at a later date, thus betting that the stock price will go down.
Evidence from studies in behavioral finance suggests thatA.investment fads cause stock prices to be overvalued most of the time.investment fads cause stock prices to be overvalued most of the time.B. investors are not overconfident so they buy and sell too minimally.investors are not overconfident so they buy and sell too minimally.C. investors do not fear losing money so they engage in too much short selling.D.social contagion, not overconfidence, causes bubbles.

short sales, A

The structure of financial markets is the result of:A. regulating the great number of small firms in the United States.B. attempting to reduce transaction costs.C. attempting to cartelize the provision of financial services.D. adapting to continually changing government regulations.

Asymmetric information can lead to a bank panic when:A. rumors of impending bank failure lead to mass withdrawals of customer deposits.B. bank managers panic about the economy and begin selling the bank’s assets.C. rumors of government intervention cause mistrust of the government.D. rumors that the government will not enact a “safety net” lead to public protests.

The inequality of information between borrowers and lenders in financial markets is broadly known as:A. moral hazard.B. asymmetric information.C. noncollateralized risk.D. adverse selection.

The “lemons problem” is a term used to describe theA. principal-agent problem in financial markets.B. moral hazard problem in financial markets.C. adverse selection problem in financial markets.D. free-rider problem in financial markets.

The “lemons problem” occurs in the used-car market due to the following statements except thatthe following statements except thatA. information is hardlyhardly available and accessible.B. potential sellers are the only ones who truly know the real value of the cars.C. potential sellers are willing to disclose the true value of their car.D. potential buyers do not know the real value of the cars.

What might lead to poor management when control and ownership are separate, like in many American corporations?A. Free-rider problem.B. Sarbanes-Oxley problem.C. Principal-agent problem.D. Adverse selection.
What is the reason for this problem?A. Owners limit the manager’s ability to run the corporation efficiently.B. A manager does not have access to sufficient resources to run the corporation efficiently.C. A manager does not have sufficient incentive to maximize the company’s profits.D. Stockholder meetings are infrequent, and the manager has to wait for these results to get anything done.

C , C

Because information is expensive to acquire:A. equity contracts are used much more frequently to raise capital than are debt contractsB. government regulations, such as standard accounting principles, have no impact on problems such as moral hazardC. monitoring managers gives rise to costly state verificationD. developing nations do not rely heavily on banks for business financing

Which of the following correctly lists a procedure used to reduce asymmetric information problems as well as the type of asymmetric information problem it reduces?A. Covenants are used to reduce moral hazard.B. Monitoring is used to reduce adverse selection.C. Screening is used to reduce moral hazard.D. All of the above correctly list a procedure and the type of problem it reduces.

Which of the following is true about techniques used to reduce asymmetric information problems?A. Screening is used before the transaction; monitoring is used after the transaction.B. Monitoring is used before the transaction; screening is used after the transaction.C. Both screening and monitoring are used after the transaction.D. Both screening and monitoring are used before the transaction.

Many policymakers in developing countries have proposed implementing systems of deposit insurance like the one that exists in the United States. However, replicating the financial system from one nation may not be successful in other nations due to different economies, politics, histories, etc.Deposit insurance is designed to ____________ fears of bank runs and therefore ____________ confidence in banks and deposits.However, because depositors may feel that the “safety net” of deposit insurance means they no longer need to supervise banks themselves, asymmetric information in the form of ____________ may ___________.

Decrease, Increase, Moral Hazard, Increase

Of the following sources of external finance for American nonfinancial businesses, the least important isA. loans from other financial intermediaries.B. loans from banks.C. stocks.D. bonds and commercial paper.

Because checking accounts are ________ liquid for the depositor than savings accounts, they earn ________ interest rates.A. less; lowerB. less; higherC. more; lowerD. more; higher

Secondary reserves are so called becauseA. they can be converted into cash with low transactions costs.B. they are not easily converted into cash, and are, therefore, of secondary importance to banking firms.C. they rank second to bank vault cash in importance of bank holdings.D. 50% of these assets count toward meeting required reserves.

When a $10 check written on the First National Bank of Chicago is deposited in an account at Citibank, thenA. the liabilities of the First National Bank increase by $10.B. the reserves of the First National Bank increase by $ 10.C. the assets of Citibank fall by $10.D. the liabilities of Citibank increase by $10.

With a 10% reserve requirement ratio, a $100 deposit into New Bank means that the maximum amount New Bank could lend isA. $110.B. $90.C. $100.D. $10.

Banks hold excess and secondary reserves toA. achieve higher earnings than they can with loans.B. provide for unexpected deposit outflows.C. satisfy margin requirements.D. reduce the interestminus−rate risk problem.

Long−term customer relationships ________ the cost of information collection and make it easier to ________ credit risks.A. increase; screenB. increase; increaseC. reduce; screenD. reduce; increase

If the First National Bank has a gap equal to a negative $30 million, then a 5 percentage point increase in interest rates will cause profits toA. decline by $15 million.B. decline by $1.5 million.C. increase by $1.5 million.D. increase by $15 million.

The ability of a central bank to set monetary policy instruments is ___________, while the ability of a central bank to set goals of monetary policy is _______.A. policy independence; target independenceB. goal independence; target independenceC. target independence; policy independenceD. instrument independence; goal independence

The European Central Bank (ECB) has complete control over monetary policy in eleven euro countries and has a charter that cannot be changed by legislation. In comparison to the Federal Reserve System, the ECB is:A. equally independent.B. more independent.C. less independent.

The public’s fear of centralized power and distrust of moneyed interests led to the demise of the first two experiments in central banking, otherwise known as:A. the First Central Bank of the United States and the Second Central Bank of the United States.B. the First Bank of the United States and the Second Bank of the United States.C. the First Bank of North America and the Second Bank of North America.D. the First Bank of the United States and the Central Bank of the United States.

The Federal Reserve entity that makes decisions regarding the conduct of open market operations is theA. Board of Governors.B. Federal Open Market Committee.C. Open Market Advisory CouncilD. chairman of the Board of Governors.

Recent research indicates that inflation performance (low inflation) has been found to be best in countries withA. the most independent central banks.B. political control of monetary policy.C. a policy of always keeping interest rates low.D. money financing of budget deficits.

The second oldest central bank, having been founded in 1694, is theA. Federal Reserve System.B. Bank of England.C. Bank of Japan.D. Deutsche Bundesbank.

The trend in recent years is that more and more governmentsA. have been reducing the independence of their central banks to make them more accountable for poor economic performance.B. have mandated that their central banks focus on controlling inflation.C. have required their central banks to cooperate more with their Ministers of Finance.D. have been granting greater independence to their central banks.

The three players in the money supply process includeA. banks, depositors, and borrowers.B. banks, depositors, and the U.S. Treasury.C. banks, borrowers, and the central bank.D. banks, depositors, and the central bank.

The sum of the Fed’s monetary liabilities and the U.S. Treasury’s monetary liabilities is calledA. the monetary base.B. the money supply.C. bank reserves.D. currency in circulation.

Purchases and sales of government securities by the Federal Reserve are calledA. open market operations.B. discount loans.C. federal fund transfers.D. swap transactions.

An increase in the nonborrowed monetary base, everything else held constant, will causeA. no change in the money supply.B. the money supply to fall.C. demand deposits to fall.D. the money supply to rise.

The ratio that relates the change in the money supply to a given change in the monetary base is called theA. required reserve ratio.B. money multiplier.C. discount rate.D. deposit ratio.

A $5 million deposit outflow from a bank has the immediate effect ofA. reducing deposits and loans by $5 million.B. reducing deposits and reserves by $5 million.C. reducing deposits and securities by $5 million.D. reducing deposits and capital by $5 million.

Property promised to the lender as compensation if the borrower defaults is called ________.A. contingenciesB. collateralC. restrictive covenantsD. deductibles

Duration analysis involves comparing the average duration of the bank’s ________ to the average duration of its ________.A. assets; liabilitiesB. securities portfolio; nonminus−deposit liabilitiesC. assets; deposit liabilitiesD. loan portfolio; deposit liabilities

The ability of a central bank to set monetary policy instruments is ___________, while the ability of a central bank to set goals of monetary policy is _______.A. policy independence; target independenceB. target independence; policy independenceC. goal independence; target independenceD. instrument independence; goal independence

Goal independence is the ability of ________ to set monetary policy ________.A. the central bank; goalsB. Congress; goalsC. Congress; instrumentsD. the central bank; instruments

The strongest argument for an independent Federal Reserve rests on the view that subjecting the Fed to more political pressures would impartA. an inflationary bias to monetary policy.B. a disinflationary bias to monetary policy.C. a deflationary bias to monetary policy.D. a countercyclical bias to monetary policy.

Eliminating the​ Fed’s independence

Eliminating the Fed’s independence