Question

1.) Small banks

A. act more competitively than large banks.

B. usually charge more on loans relative to what is paid to depositors compared to large

banks.

C. are generally more efficient than large banks.

D. are growing in number.

2.) Which of the following best describes the current banking system in the United

States?

A. The market is dominated by 10 large banks and there are very few small banks operating

any more.

B. There are more than 10,000 small banks and the market share held by the 10 largest banks

totals less than 10%

C. There are a few large banks with significant market share and there are thousands of small

banks, but the number has been declining.

D. There are a few large banks with significant market share and the number of small banks

has been growing.

3.)One of the downsides of FDIC insurance is that it

A. provides bankers with incentives to take on more risk with depositors funds.

B. discourages households from depositing funds with risky banks.

C. is costly to taxpayers.

D. makes contagion problems associated with bank runs worse.

4.) During the financial crisis of 2007-2009,

A. yields on all types of securities fell.

B. yields on all types of securities rose.

C. yields on Treasury securities fell while yields on corporate securities rose.

D. yields on Treasury rose while yields on corporate securities fell.

5.) SELECT ALL the true statements about the Federal Funds rate (FFR).

A. The FFR is a market determined interest rate. B. The FFR is explicitly set be the Federal Reserve.

C. The FFR the interest rates that banks pay/receive when they borrow/lend from/to each other overnight.

D. The FFR cannot be influenced by open market operations. E. The FFR is the interest rate that banks pay for loans from the Federal Reserve.

6.) An open market sale of securities by the Federal Reserve

A. increases the monetary base.

B. decreases the monetary base.

C. increases the money multiplier.

D. decreases the money multiplier.

(BONUS) M2 declined by almost 30% over the period 1929 - 1933 (the first part of the Great Depression). Explain why this happened. What could the Federal Reserve have done, but did not do, to prevent this from occurring.

(BONUS) The U.S. government and Federal Reserve engaged in very unconventional fiscal and monetary policies in response to the financial crisis. With the knowledge you have so far, do you think intervention was a good idea or not? Explain.

Answer 1

1.B. usually charge more on loans relative to what is paid to depositors compared to large banks.

2.C. There are a few large banks with significant market share and there are thousands of small banks, but the number has been declining.

(Since the financial crisis the number of small banks has declined 27 percent)

3.A. provides bankers with incentives to take on more risk with depositors funds.

( FDIC insurance causes moral hazard as it motivates bankers to take bigger risks since their depositors are insured)