25.4 Q&A
When the Federal Reserve purchases Treasuries securities in the open market...? When the Fed sells treasuries securities in the open market...?
1) The seller of such securities deposits the funds in their banks and bank reserves increase 2) The buyers of these securities pay for them with checks and bank reserves fall.
Suppose the Fed makes a $10m discount loan to FNB Bank by increasing FNB's account at the Fed. 1) Complete the following T-Account to show the impact of the transaction on FNB 2) FNB had no excess ratio. The max. amount of $10m that FNB can issue in loans is 3) Assume the RR is 10%. The max. total increase in the money supply that can result from the Fed's discount loan is
Assets: +$10m Reserves Liab.: +$10m discount loans 2) $10m 3) %100m ($10m * 10)
Suppose the Fed. engages in an open market sale of $39m in US Treasury bills to banks. In the T-Account, fill in the missing information
Fed Assets: - $39m Treasure bills (sale) Liab.: - $39m Reserves Banking system Assets: $39m Treasure bills (purchase) Assets: - $39m Reserves
What is the shadow banking system? The financial firms of the shadow banking system were
Financial Firms that raise money from investors and provide it to borrowers. more vulnerable than commercial banks to bank-runs because they were more highly leveraged than commercial banks.
Which one of the following is not one of the policy tools the Fed uses to control money supply? Which tool is most important?
Moral suasion The Fed conducts monetary policy principally through open market operations
1) When the people's bank of China "cut the amount of cash that banks must set aside as reserve", the monetary policy tool they used was a change in... 2) How would this action [..] support lending?
Required reserve ratio Banks can make more loans
Why do most depositors seem to be unworried that banks loan out most of the deposits they receive?
The FDIC insures deposits up to $250.000
The process of {x} involved creating a secondary market in which bundled loans can be traded in financial markets Which of the following is NOT a factor that helped lead to the financial crisis of 2007-2009
[x] securitization deposit insurance for commercial banks
In a speech in 2008, Timothey Geithner {...} a) What did Geithner mean by the "non-bank financial system"? b) What is a classic type of run? c) Why would deposit insurance provide the banking system with protection against runs?
a) Money market mutual funds, hedge funds, and other financial firms that raise money from investors and provide it to firms and households b) Many depositors simultaneously decide to withdraw their money from a bank.
In the secuitization process,
banks grant loans to households and bundle those loans into securities that are then sold to investors.
To increase the money supply, the FOMC directs the trading desk [..] to By raising the discount rate, the Fed leads banks to make [x] loans, which will [y] checking account deposits and money supply
buy US Treasury securities from the public [x] fewer [y] decrease
The Federal Reserve acting as a lender of last resort to prevent a bank panic...
constitutes offering discount loans to distressed banks, but the "bail out of the banks" involved providing funds to the banks in exchange for ownership in those banks
Suppose that you are a bank manager, and the FED raises the required reserve ratio from 10 to 12%. What actions would you need to take? As your actions {...} we would expect that the money supply would end up...?
reduce loans to make up for the necessary increase in reserves. decreasing.
