Money and Banking 2nd Midterm 13-25

The members of the board generally cannot be reappointed to their​ position; they do not need to do favours in order to keep their job in the future.

tru

The many regional Federal Reserve banks resulted from a compromise between parties​ favoring:

a private central bank and those favoring a government institution.

The Fed can still be influenced by political​ pressure:

fal

The​ Fed's lack of accountability may make the Fed more​ irresponsible:

fal

The Fed promotes secrecy by not releasing the minutes of the FOMC meetings to Congress or the public immediately. Based on this​ statement, indicate whether the following are arguments for​ (pros) or arguments against​ (cons) this policy.

see below

As financial​ intermediaries, banks:

accept deposits and make loans

Under​ 100% reserve​ banking, the money multiplier will​ be:

1

Which of the following players can affect the money supply by its holdings of currency versus deposits question mark

A. Depositors.

'The independence of the Fed leaves it completely unaccountable for its​ actions.' Why is this statement not​ true?

All of the above are correct

Increasing the independence of a central bank would​ probably:

All of the above are correct

In what ways can the regional Federal Reserve Banks influence the conduct of monetary​ policy?

All of the above are correct.

Reserves​ are:

All of the above are correct.

The theory of bureaucratic behavior suggests that the Federal Reserve LOADING... ​will:

All of the above are correct.

Why is the New York Federal Reserve always a voting member on the​ FOMC?

All of the above are correct.

Which of the following players can affect the money supply by its holdings of excess reserves?

Banks

By​ definition, when the Fed conducts an open market​ purchase, it​ is:

Both B and C are correct. buying bonds. increasing the quantity of reserves.

Assume that the required reserve ratio on checkable deposits is​ 10%, banks do not hold any excess​ reserves, and the​ public's holdings of currency do not change. If the Fed reduces reserves by selling​ $5 million worth of bonds to the​ banks, what will the​ T-account of the banking system look like when the banking system is in​ equilibrium? What will have happened to the level of checkable​ deposits?

C Checkable deposits fall by​ $50 million and the​ T-account is: Reserves minus​$5 million Securities plus​$5 million Loans minus​$50 million Checkable deposits minus​$50 million

What happens to checkable deposits in the banking system when the Fed sells​ $2 million of bonds to the First National​ Bank, assuming that the required reserve ratio on checkable deposits is​ 10%, banks do not hold any excess​ reserves, and the​ public's holdings of currency do not​ change?

Checkable deposits decline by​ $20 million.

If a bank sells​ $10 million of bonds to the Fed to pay back​ $10 million on the loan it​ owes, what will be the effect on the level of checkable​ deposits? Assume that the required reserve ratio on checkable deposits is​ 10%, banks do not hold any excess​ reserves, and the​ public's holdings of currency do not change.

Checkable deposits do not change.

If you decide to hold​ $100 less cash than usual and therefore deposit​ $100 more cash in the​ bank, what effect will this have on checkable deposits in the banking system if the rest of the public keeps its holdings of currency​ constant? Assume the required reserve ratio is​ 10% and banks do not hold any excess reserves.

Checkable deposits increase by​ $1,000.

Suppose that the Fed buys​ $1 million of bonds from the First National Bank. If the First National Bank and all other banks use the resulting increase in reserves to purchase securities only and not to make​ loans, what will happen to checkable​ deposits? Assume the required reserve ratio is 10 percent.

Checkable deposits increase by​ $10 million.

If the Fed buys​ $1 million of bonds from the First National​ Bank, but an additional​ 10% of any deposit is held as excess​ reserves, what is the total increase in checkable​ deposits? Assume that the required reserve ratio on checkable deposits is​ 10% and the​ public's holdings of currency do not change.

Checkable deposits increase by​ $5 million.

What happens to checkable deposits in the banking system when the Fed lends an additional​ $1 million to the First National​ Bank, assuming that the required reserve ratio on checkable deposits is​ 10%, banks do not hold any excess​ reserves, and the​ public's holdings of currency do not​ change?

Checkable deposits rise by​ $10 million.

"The Fed can perfectly control the amount of reserves in the​ system." Is this statement​ true, false, or​ uncertain? Explain your answer.

False. A shift from deposits to currency will affect the amount of​ reserves, and since other players are involved in this​ process, the Fed ultimately cannot control the level of reserves in the system.

​"The Fed can perfectly control the amount of the monetary​ base, but has less control over the composition of the monetary​ base." Is this statement​ true, false, or​ uncertain? Explain your answer.

False. Since the Fed cannot control the amount of discount lending to financial​ institutions, it does not have perfect control over the amount of reserves in the banking system and hence the monetary base.

If the Fed sells​ $2 million of bonds to the First National​ Bank, what happens to reserves and the monetary​ base? Complete the​ T-accounts below to explain your answer.

First National Bank: reserves -$2 million Securities +$2 million Federal Reserve System: Securities -2million reserves -2million

If the Fed lends five banks an additional total of​ $100 million but depositors withdraw​ $50 million and hold it as​ currency, what happens to reserves and the monetary​ base? Use​ T-accounts to explain your answer.

Five Banks Reserves +50M Discount loans +100M Deposits-50M Federal Reserve System Discount loans +100M Reserves +50M Currency +50M

In October​ 2008, the Federal Reserve began paying interest on the amount of excess reserves held by banks.​ How, if at​ all, might this affect the multiplier process and the money​ supply?

Holding the monetary base​ constant, paying interest on reserves should raise the excess reserves​ ratio, which reduces the money multiplier and reduces the money supply.

What effect might a financial panic have on the money multiplier and the money​ supply? Why?

In a financial​ panic, you would expect the money multiplier to decrease and the money supply to decrease ​, which would cause the excess reserves ratio to increase . Thus depositors are likely to increase their holdings of currency.

Which of the following statements about central bank structure and independence is​ true?

In recent​ years, there has been a remarkable trend toward increasing independence.

If the Fed sells​ $2 million of bonds to Irving the​ Investor, who pays for the bonds with a briefcase filled with​ currency, what happens to reserves and the monetary​ base? Use​ T-accounts to explain your answer.

Irving the Investor Currency -2M Securities +2M Federal Reserve System Securities -2M Currency -2M

Which of the following is not an important reason for the regional Federal Reserve bank presidents to attend the FOMC​ meetings, even if they are nonvoting​ members?

It provides a greater opportunity for nonvoting members to become voting members in the future.

The presidents of each of the district Federal Reserve banks​ (including the New York Federal Reserve​ bank) are currently not required to undergo a formal political appointment and approval process. Do you think this is​ appropriate?

Maybe. A formal approval process is​ lengthy, which might leave some Federal Reserve districts without​ leadership, possibly creating more problems than it solves.

Do the​ fourteen-year nonrenewable terms for governors effectively insulate the Board of Governors from political​ pressure?

No. In order to gain additional power to regulate the financial​ system, the governors need the support of Congress and the president to pass favorable legislation.

For November 2015​, determine which district had the highest unemployment rate.

Of the twelve​ districts, the 12 th district had the highest unemployment rate at 5.440​%.

For November 2015​, determine which district had the lowest unemployment rate.

Of the twelve​ districts, the 9 th district had the lowest unemployment rate at 3.181​%.

Advocates of Fed independence fear that subjecting the Fed to direct presidential or congressional control​ would:

Only A and B are correct. impart an inflationary bias to monetary policy. force monetary authorities to sacrifice the​ long-run objective of price stability.

If a bank depositor withdraws​ $1,000 of currency from an​ account, what happens to​ reserves, checkable​ deposits, and the monetary​ base? Assume that the required reserve ratio on checkable deposits is​ 10% and banks do not hold any excess reserves.

Reserves fall by​ $1,000, checkable deposits fall by​ $10,000, and the monetary base remains unchanged.

^^^^^^^^^^^^ Show the​ T-account for the banking system in equilibrium.

Reserves+$1 billion Discount loans+$1 billion Loans+$10 billion Checkable deposits +$10 billion

Which of the following functions is not performed by the twelve Federal Reserve​ Banks?

Setting the reserve requirement.

Despite the important role that the Board of Governors has in setting monetary​ policy, seats to serve on the Board of Governors can sometimes be empty for several years. How could this​ happen?

Since members of the Board of Governors are appointed by the president and confirmed by the​ Senate, these seats may remain vacant due to the arduous and lengthy political approval process that candidates must endure.

Which of the following players can affect the money supply by issuing loans to financial institutions​?

The central bank.

Which of the following players can affect the money supply through open market operations​?

The central bank.

Which of the following does not explain why it is unlikely that the policy recommendation put forth by the chairman of the Board of Governors would ever be voted down by the rest of the​ FOMC?

The chairman always has the final vote when making monetary policy decisions.

Which of the following entities in the Federal Reserve System controls the discount rate​?

The Board of Governors

Which of the following entities in the Federal Reserve System sets reserve​ requirements?

The Board of Governors

Which is more​ independent, the Federal Reserve or the European Central​ Bank? Why?

The European Central Banklong dashIts charter cannot be changed through​ legislation, making it more independent than the Federal Reserve.

Which of the following entities in the Federal Reserve System directs open market operations?

The FOMC

If the Federal Reserve has a specific mandate from Congress to achieve​ "maximum employment and​ low, stable​ prices," then how does the Fed have goal​ independence?

The Fed is free to interpret exactly what these objectives mean.

How does the Federal Reserve have a high degree of instrument​ independence?

The Federal Reserve can choose any method it wants in order to achieve a given set of policy objectives.

Why is the Twelfth Federal Reserve district so geographically​ large, while the Second Federal Reserve district is so small by​ comparison?

The districts represent the population and economic interests in 1913 when the Federal Reserve Act was created.

Did the federal funds target rate increase or​ decrease?

The federal funds target rate increased from a target range of between 0.75​% and 1.00​% to a range of between 1.00​% and 1.25​%.

If the central bank sells euro1 million of bonds and banks reduce their borrowings from the central bank by euro1 ​million, predict what will happen to the money supply.

The monetary base would fall by euro2 ​million, leading to a decline in the money supply

Predict what will happen to the money supply if there is a sharp rise in the currency ratio.

The money supply falls

If the economy starts to boom and loan demand picks​ up, what do you predict will happen to the money​ supply?

The money supply will increase

What do you predict would happen to the money supply if expected inflation suddenly​ increased?

The money supply will increase

The Fed buys​ $100 million of bonds from the public and also lowers the reserve requirement r. What will happen to the money​ supply?

The money supply will increase.

Did the primary credit rate increase or​ decrease?

The primary credit rate increased from 1.5​% to 1.75​%.

Which of the following is not part of the checks and balances of the Federal Reserve System​?

The requirement that all depository institutions keep deposits at the Fed.

Based on the information in the graphs​ above, which of the following statements is​ true?

The rise in c results in a decline in the overall level of multiple deposit expansion and the rise in e reduces the amount of reserves available to support​ deposits, both leading to a smaller money multiplier.

What is the primary tool that Congress uses to exercise some control over the​ Fed?

The threat that Congress will acquire greater control over the​ Fed's finances and budget.

Why was the Federal Reserve System set up with twelve regional Federal Reserve banks rather than one central​ bank, as in other​ countries?

The writers of the Federal Reserve Act wanted to ensure the​ Fed's power was not centralized in a single location.

Assume that the required reserve ratio on checkable deposits is​ 10% and the​ public's holdings of currency do not change. If reserves in the banking system increase by​ $1 billion as a result of discount loans of​ $1 billion, and checkable deposits increase by​ $9 billion, why​ isn't the banking system in​ equilibrium?

There are​ $100 million of excess reserves that banks will seek to lend out.

The money multiplier declined significantly during the period​ 1930-1933 and also during the recent financial crisis of​ 2008-2010. Yet the M1 money supply decreased by​ 25% in the Depression period but increased by more than​ 20% during the recent financial crisis. What explains the difference in​ outcomes?

There was a significant increase in the monetary base during the recent financial crisis.

Which of the following statements regarding Federal Reserve independence is​ incorrect?

The​ 14-year non-renewable terms for governors effectively insulate the Board of Governors from political pressure

The Fed is the most independent of all US government agencies. What is the main difference between it and other government agencies that explains the​ Fed's greater​ independence?

The​ Fed's source of revenue is free from the appropriations process

"The Federal Reserve System resembles the U.S. Constitution in that it was designed with many checks and ​balances." Is this statement​ true, false, or​ uncertain? Explain your answer.

True. Because of public hostility and the centralization of​ power, the Federal Reserve System was created with many checks and balances to diffuse power.

Should the Federal Reserve be subject to periodic auditing of its​ policies, procedures, and​ finances? Why or why​ not?

Uncertain. Auditing could make the Federal Reserve more accountable but less independent.

Should the Federal Reserve redraw its district​ boundaries, similar to how congressional districts are periodically​ realigned?

Uncertain. This would require Congress to rewrite the Federal Reserve​ Act, which could create opportunities for political interests to interfere with the monetary policy process.

Why did the Bank of England up until 1997 have a low degree of​ independence?

Until​ 1997, the power to set interest rates was determined exclusively by Her​ Majesty's Treasury.

The last time the fed funds target was adjusted​ was:

Wednesday, June​ 14, 2017.

he last time the primary credit rate changed​ was:

Wednesday, June​ 14, 2017.

Reserves fall by $2 million ​, and the monetary base falls by $2 million .

^^^^^^^^^^^

Reserves remain unchanged ​, and the monetary base falls by $2 million .

^^^^^^^^^^^

Reserves increase by $50 million ​, and the monetary base increases by $100 million .

^^^^^^^^^^^^^^^^

Loans that the Fed makes to banks appear on the balance sheet as part of its​ __________, and deposits made by banks appear on the​ Fed's balance sheet as part of its​ ____________.

assets; liabilities

The Federal Reserve System is the​ ___________ for the United​ States, which is defined as the government agency responsible for​ __________.

central​ bank; the conduct of monetary policy

This policy encourages the Fed to be less accountable for its​ actions:

con

This policy reduces transparency because people cannot figure out what the goal of the Fed​ is:

con

The monetary base is comprised​ of:

currency in circulation and reserves.

Classify the following transaction as affecting either​ assets, a​ liabilities, or neither for each of the​ "players" in the money supply processlong dashthe Federal​ Reserve, banks, and depositors. You deposit $ 400 into your checking account at the local bank.

depositors. assets are unaffected

Two primary assets of the Federal Reserve System​ are:

government securities and loans to commercial banks.

The European System of Central Banks​ (ESCB) is similar to the Federal Reserve System in​ that:

it is structured such that the central banks for each country have a similar role to that of the Federal Reserve banks.

While legislation enacted in 1998 granted the Bank of Japan new powers and greater​ autonomy, its critics contend​ that:

its independence is limited by the Ministry of​ Finance's veto power over part of the​ Bank's budget

The theory of bureaucratic behavior suggests that the objective of a bureaucracy is to​ maximize:

its own welfare.

In England​, the Chancellor of the Exchequer left parenthesis the equivalent of the US Secretary of Treasury right parenthesis sets the goal of monetary​ policy, a target for inflation.​ Thus, when compared to the​ Fed, the Bank of England ​has:

less 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 LOADING...​, the ECB​ is:

more independent.

This policy allows the Fed more independence in making monetary policy​ decisions:

pro

This policy should reduce inflationary pressures and political business​ cycles:

pro

The president of the United States can exert influence over the Federal Reserve in all of the following ways except​:

reducing the​ Fed's net earnings.

​'The independence of the Fed has meant that it takes the long view and not the short​ view.' Assume this statement is correct and answer the following questions.

see below

Eliminating the​ Fed's independence might lead to a more pronounced political business cycle because a politically exposed Fed would be more concerned with​:

short-run objectives and thus be more likely to engage in expansionary policies designed to lower unemployment and interest rates before an election.

The players in the money supply process include all of the following except​:

the Treasury.

A dilemma challenging the existing structure of the European Central Bank​ (ECB) has been brought on​ by:

the possibility of expanding the membership in the Eurosystem

When the charter of the Second Bank of the United States expired in​ 1836:

there was no lender of last resort to provide reserves to the banking system.

The public interest view of central bank behavior suggests that the objective of a bureaucracy is to​ maximize:

the​ public's welfare.

The primary reason for the creation of the Federal Reserve System ​was:

to reduce or eliminate future bank panics.

The​ Fed's personnel are not directly affected by the outcome of the next ​election; therefore, it has some level of ​ independence

tru

The First National Bank receives an extra​ $100 of reserves but decides not to lend any of these reserves. How much deposit creation takes place for the entire banking​ system?

​$0

​'The money multiplier is necessarily greater than​ 1.' Is this statement true or​ false?

​True, because, in​ reality, the required and excess reserves ratios typically add up to less than one