1 ï»¿ 2 ï»¿ A difference between the economic long and the short run is that: Demand can affect output and employment in the short run, whereas supply is the ruling force in the long run. There are several schemes offered by banks like savings accounts, home mortgages, business loans, and car loans etc. All of the following are examples of financial intermediaries expect: Risk that affects many businesses at the same time is called ____ risk, while risk associated with individual businesses is called ____ risk. Start studying Midterm 2 Eco 3203. A commercial bank is where most people do their banking. Two economies are identical except that the level of capital per worker is higher in Highland than in Lowland. A bank run is when a bank's depositors rush to withdraw their funds from the bank. The Bank of Canada was created in 1934 in the wake of the Great Depression. Implied in the definition is that deposits (very liquid liabilities) leave faster than the bank is able to sensibly liquidate its illiquid assets. A situation in which one party to an economic transaction has more knowledge about the transaction than the other is called: Which of the following is an example of moral hazard? Federal Deposit Insurance has ended the phenomenon of bank runs." This is called the monetary transmission mechanism. The Federal Reserve obliges banks to hold a certain amount of cash in reserve so that they never run â¦ In the IS-LM model when the Federal Reserve decreases the money supply, the public _____ bonds, and the interest rate____, leading to a(n) ____ investment and income. D. Dividing the bank's net profit after taxes by the sum of the bank's assets and its liabilities A. bank run Click card to see definition ð a phenomenon when many of a bank's depositors try to withdraw their funds at the same time due to fears of a bank failure Click again to see term ð A bank run occurs due to customer panic rather than actual insolvency on the part of the bank. Which of the following is an example of a demand shock? This problem has been solved! A bank run occurs when sâ¦ Over the business cycle, investment spending ______ consumption spending. In the Solow growth model, increases in capital_____ output and _____ the amount of output used to replace depreciating capital. Both Keynesians and supply-siders believe a tax cut will lead to growth: But Keynesians believe it works through aggregate demand whereas supply- siders believe it works though incentive effects. Bank Runs Occur When People Fear That Their Bank Has Become (Click To Select)insolventilliquid. Oh no! Now assume that the aggregate demand curve shifts so that it is represented by AD1. A person with health insurance rides a motorcycle without wearing a helmet. What is a bank run? 1. The IS curve plots the relationship between the interest rate and ______ that arises in the market for ______. If planned investment is 100 and T is 100, then the level of G needed to make equilibrium Y equal 1,000 is: Assume that the money demand function is (M/P)d = 2,200 - 200r, where r is the interest rate in percent. Bank reserves are essentially an antidote to panic. Customers generally request cash and may put the money into government bonds or other institutions they believe to be safer. The current banking regulation in the United States holds that the banks and the economy should align in order to protect consumers from the impact of bank runs. We hope it helps you all.This Quiz deals with â¦ Bank runs can turn into system-wide bank panics because customers have a difficult time distinguishing insolvent banks from solvent ones. (Exhibit: Policy Interaction) Based on the graph, starting from equilibrium at interest rate r3, income Y2, IS1, and LM1, if there is an increase in government spending that shifts the IS curve to IS2, then in order to keep the interest rate. The Bank of Canada is a privately operated commercial bank. A decrease in the nominal supply, other things being equal, will shift the LM curve: The IS and LM curves together generally determine: Equilibrium levels of income and interest rates are____ related in the goods and services market, and equilibrium levels of income and interest rates are _____ related in the market for real money balances. Governments can red ice the problem of moral hazard by: An asset-price bubble bursts If there is: A panic cycle of asset sales and falling asset prices. The money hypothesis suggests that the Great Depression was caused by a: If real money balances enter the IS-LM model both through the theory of liquidity preference and the Pigou effect, then a fall in the price level will shift: In the IS-LM model, starting with zero expected inflation, if expected inflation becomes negative, then the: during the financial crisis of 2008-2009, many financial institutions stopped making loans even to creditworthy customers, which could be represented in the IS-LM model as an: the interest sensitivity of investment and the marginal propensity to consume. In the IS-LM model when M remains constant but P rises, in short-run equilibrium , in the usual case the interest rate _____ and output ____. A bank run occurs when a large number of customers withdraw their deposits from a bank at the same time, usually because of fears that a bank is or will become insolvent. To ensure the best experience, please update your browser. If the per-worker production function is give by y=k^1/2, the saving rate(s) is 0.2, and the depreciation rate is 0.1, then the steady-state ratio of capital to labor is: Assume that two economies are identical in every way except that one has a higher saving rate. When a significant quantity of deposits are withdrawn from a bank in a short period of time. If the price level is fixed at P=2, and the Fed wants fix the interest rate at 7 percent, it should set the money supply at: (Exhibit: IS-LM Fiscal Policy) Based on the graph, starting from equilibrium at interest rate r1 and income Y1, a decrease in government spending would generate the new equilibrium combination of interest rate and income: Using the IS-LM analysis, if the LM curve is not horizontal, the multiplier for an increase in government spending is ______ for an increase in government purchases using the Keynesian-cross analysis. It looks like your browser needs an update. C) the number of depositors. Learn vocabulary, terms, and more with flashcards, games, and other study tools. In the Solow growth model, if investment exceeds depreciation, the capital stock will________, and output wil _______, until the steady state is attained. The money supply M is 2,000 and the price level P is 2. Funds flow directly between savers and investors in financial ____ and flow indirectly between savers and investors through financial ____. The introduction and greater availability of credit cards. What is the definition of bank run? They can do so all at the same time, without anyoneâs knowledge, in what is called a silent run. If the saving rate increases to a rate consistent with the Golden Rule, then in the transition to the new steady state consumption per worker will: First fall below and then rise above the initial level. (Exhibit: Steady-State Consumption II) The Golden Rule level of steady-state consumption per worker is: If an economy is in a steady state with no population growth or technological change and the marginal product of capital is less than the depreciation rate: Steady-state consumption per worker would be higher in a steady state with a lower saving rate. Your bank confirms that money is available in your account and then adds this amount to an electronic transfer of funds that it wires to the store each week. A. Bank of the United States, central bank chartered in 1791 by the U.S. Congress at the urging of Alexander Hamilton and over the objections of Thomas Jefferson.The extended debate over its constitutionality contributed significantly to the evolution of pro- and antibank factions into the first American political partiesâthe Federalists and the Democratic-Republicans, respectively. Learn more. To ensure the best experience, please update your browser. bank run definition: a period when many people take their money out of a bank because they are afraid the bank will loseâ¦. Which of the following changes would bring the U.S capital stock, currently below the Golden Rule level, closer to the steady-state, consumption-maximizing level? If an economy moves from a steady state with positive population growth to a zero population growth rate, then in the new steady state, total output growth will be ____, and growth of output per person will be ____. A bank run occurs when depositors suspect that a bank may go bankrupt and, therefore, "run" to the bank to withdraw their deposits. Even a healthy bank, if thought to be insolvent, can become illiquid. Businesses borrow money to finance LT project. Then the immediate impact will be that: Total output will fall, but output per worker will rise. 2. B. An illiquid bank can become insolvent when it: Sells assets at fire-sale prices to meet liquidity demands. If the short-run aggregate supply curve is horizontal and the Fed increases the money supply, then: Output and employment will increase in the short run. A bank run is typically the result of panic rather than true insolvency. A bank run is the sudden withdrawal of deposits of just one bank. Aggregate demand is given by curve AD0, and SRAS and LRAS represent, respectively, short-run and long-run aggregate supply. To determine whether an economy is operating at its Golden Rule level of capital stock, a policy maker must determine the steady-state saving rate that produces the: Suppose an economy is initially in a steady state with capital per worker below the Golden Rule level. A traditional bank run is a run on _____ and a modern day bank run occurs when _____. The capital share is 0.3. Commercial banks make money by providing and earning interest from loans such â¦ In the solow growth model with population growth but no technological progress, when the economy finds itself at the Golden rule steady state, the marginal product of capital minus the rate of depreciation will equal: Assume that a war reduces a country's labor force but does not directly affect its capital stock. To the extent that risky mortgage- backed securities that were sold to buyers who were not fully aware of the risks contributed to the financial crisis of 2008-2009, blame for this action lies with: During the 2008-2009 period, the conventional monetary policy response was to ____ the target deferral funds rate, while the conventional fiscal policy response was to ____ taxes and to ____ government spending. If the labor force is growing at a 3 percent rate and the efficiency of a unit of labor is growing at a 2 percent rate, then the number of effective workers is growing approximately at a rate of: In the Solow growth model with population growth and labor-augmenting technological change, the break-even level of investment must cover, Depreciating capital, capital for new workers, and capital for new effective workers. Start studying Bank Runs. Uncommon Because Of FDIC Insurance. An extra unit of capital per worker increases output per worker: (Exhibit: Output, Consumption, and Investment) In this graph, when the capital-labor ratio is OA, AB represents: Investment per worker, and BC represents consumption per worker. If the Federal Reserve increases the money supply, then ______ increase(s) in the short run and ______ increase(s) in the long run. The United States has not seen a major bank run in recent history, but in the United Kingdom, a bank called Northern Rock experienced a run in 2007 and, as a result, was eventually taken over by the government. If the short-run aggregate supply curve is horizontal, an increase in union aggressiveness that pushes wages and prices up will result in ____ prices and _____ output in the short run. Scheduled maintenance: Saturday, December 12 from 3–4 PM PST. Customers rush to the bank to take out their money as quickly as possible to avoid losing it. Expert Answer 100% (1 rating) Previous question Next question Get more help from Chegg. Dividing the bank's net profit after taxes by the bank's capital A late-night news report says the president of a local bank is about to be arrested for embezzling money from the bank at which he works. This â¦ The mortgage defaults during the 2008-2009 financial crisi severely reduced the capital positions of: A credit crunch reduces aggregate demand by: Reducing consumption and investment spending. all market participants are choosing a best strategy given that everyone else is choosing a best strategy. If the demand function for money is M/P = 0.5Y - 100r, then the slope of the LM curve is: If money demand does not depend on the interest rate, then the LM curve is ____, and ____ policy has no effect on output. Common Because Of The Low Required Reserve Ratio. BANK RUNS: CAUSES, BENEFITS, AND COSTS George G. Kaufman Introduction Bankruns haveabadreputation. Bank run (bank panic) A series of unexpected cash withdrawals caused by a sudden decline in depositor confidence or fear that the bank will be closed by the chartering agency, i.e. Investors with ST liquidity needs and borrowers with LT project horizons. The version of Okun's law studied in Chapter 10 assumes that with no change in unemployment, real GDP normally grows by 3 percent over a year. Your bank receives notice that funds need to be withdrawn from your checking or savings account at the end of the business day. In the Solow growth model of an economy with population growth but no technological change, if population grows at rate n, then capital in the steady state grows at rate ____, and output grows at rate ____, in the steady state. Normally, customers and depositors hear rumors about the bad state of their bank, and decide that it is a good idea to take their money out of the bank. If the price level is fixed and the supply of money is raised to 2,800, then the equilibrium interest rate will: Assume that the money demand function is (M/P)d = 2,200 - 200r, where r is the interest rate in percent. D) All of the above. Check your bank statement once a month. Dear Aspirants, Welcome to D2Gâs Banking Quiz. As you know, most of a bank's deposits have been loaned out, and only a fraction of them are on reserve. ANS: T PTS: 1 DIF: Easy REF: p. 228 NOT: Macro TB_10-166 15. Depositors Rush To Their Bank To Withdraw Their Funds. Scheduled maintenance: Saturday, December 12 from 3–4 PM PST. Measures of average workweeks and of supplier deliveries (vendor performance) are included in the index of leading indicators, because shorter workweeks tend to indicate ______ future economic activity and slower deliveries tend to indicate ______ future economic activity. According to the quantity theory of money, when velocity is constant, if output is higher,______ real balances are required, and for fixed M this means ___ P. Assuming velocity is constant, the aggregate demand curve tells us possible: Combinations of P and Y for a given value of M. The vertical long-run aggregate supply curve satisfies the classical dichotomy because the natural rate of output does not depend on: during which prices are sticky and cyclical unemployment may occur. Using the Keynesian-cross analysis, assume that the consumption function is given by C = 200 + 0.7(Y - T). If two economies are identical (with the same population growth rates and rates of technological progress), but one economy has a lower saving rate, then the steady-state level of income per worker in the economy with the lower saving rate: Will be at a lower level than in the steady state of the high-saving economy, The majority of empirical evidence supports the hypothesis that economies that are open to trade ____ than comparable closed economies. Maria makes a deposit of $20,000, and the bank loans $18,000 to Mark so he can buy a car Helps understand bank runs. Ask your financial institution to notify you when you are close to $0 in your account. In the IS-LM model when M/P rises, in short-run equilibrium, in the usual case the interest rate _____ and output _______. A run on a bank occurs when a large number of depositors, fearing that their bank will be unable to repay their deposits in full and on time, simultaneously try to withdraw their funds immediately. Some economists believe that the runs on banks that took place between 1930 and 1933, eventually leading to the Great Depression are responsible for a lot of bank defaults. Bank run is the phenomenon that involves accelerated withdrawal from commercial banks by the public in certain economically unstable situations. Assume that the economy starts from long-run equilibrium. When all or many depositors simultaneously demand their deposited funds. Learn vocabulary, terms, and more with flashcards, games, and other study tools. If the Japanese production function is Cobb-Douglas with capital share 0.3, output growth is 3 percent per year, depreciation is 4 percent per year, and the capital-output ratio is 2.5, the saving rate that is consistent with steady-state growth is: If the per-worker production function is y = Ak, where A is a positive constant, then the marginal product of capital: Assume that an economy described by the solow model is in a steady state with output and capital growing at 3 percent and labor growing at 1 percent. Question: Question 29 Today, Bank Runs Are: Common Because The FDIC Is Nearly Bankrupt. (Exhibit: Shift in Aggregate Demand) In this graph, initially the economy is at point E, with price P0 and output Y. Whether you are a student of economics or accounting is your course of study, banking is of vital importance. Proponents of restricting the size of financial institutions believe this policy will _____, while opponents believe this policy will _____. 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