Macroeconomics/Economics 102 Exam 3

Functions of Banks

• Identify profitable lending opportunities

• transform short-term liabilites to long-term investments

• manage risk from depositors to bank stockholders/US government

Bank Runs and FDIC

The expanding panic and rising flood of withdrawals. The FDIC helps repay depositors of that bank up to a certain cap.

Characteristics of Money

Medium of exchange, store of value and a unit of account

The costs of unexpected changes in inflation

Creates logistical costs and may lead to counterproductive policies like price control

SIFI (Systematically Important Financial Institutions)

Too Big to Fail or a financial institution that is large enough to pose a threat to the entire financial system

Causes of shifts in demand for reserves 

5: Economic expansion or contraction, Changing liquidity needs, changing deposit base, and changing interst on reserves (IOR)

Roles of the Federal Reserve

Regulates, manages interbank transfers, and countercyclical monetary policy

What policy tool would help the Fed solve certain problems

Changing the supply of reserves and changing interest on reserves. 

Federal Funds Market Graph

With Quantitative easing policy, the supply curve for reserves shifts right, the overnight call rate decreases and the demand for reserves stays the same.

Causes of shifts in supply of reserves

Government buy or sell government bonds

Federal Funds market

the market where banks obtain overnight loans of reserves from one another

The stock market crash of 1929

Reflected revised expectations about the profitability of firms

Shifts in labor demand

changes in productivity or wage flexibility

Quantity Theory of Money

Money supply and nominal GDP grow at the same rate 

Liquidity

Funds that are available for immediate payment

Business Cycle Definitions

Economic fluctuations - Short -run changes in the growth of GDP

Recessions - periods when economies contracts/ has to be consecutive quarters of negative growth in real GDP

Expansions - periods between recessions

Economic expansion begins at the end  of a recession

Which of the following likely contributed to the Great Depression?

Smoot-Hawley tariff legislation designed to protect jobs from foreign competition

Bank Balance Sheet Liabilites and Stockholders' Equity

Short-term borrowing, Stockholders' equity, demand deposits and long-term debt

 Which of the following contributed to the Great Depression?

 D. All of these: Bank assets were inadequately diversified B. Expectations of bank failures were self-fulfilling C. The Federal Reserve didn’t step in and rescue the banks 

Bank balance sheet Assets

Reserves, Cash Equivalents, and Long-term investments