CA51021 Module 3: The Federal Reserve System, Monetary Policy, and Interest Rates

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what is the reserve requirement in the US and philippines?

10% (US) and 12% (philippines)

how many federal reserve banks does the federal reserve system have?

12

how many members does the board of governors have?

7

TRUE OR FALSE: BSP has three regional offices and 17 branches across the country performing cash operations, cash administration, loans and rediscounting, bank supervision, and gold buying operations

FALSE - 19 branches

TRUE OR FALSE: as a monetary policy tool, a change in the discount rate offered to financial institutions can affect aggregate money demand

FALSE - aggregate money supply

TRUE OR FALSE: if the target level of interest rate is not achieved, the central bank influences money supply by using expansionary monetary policy

FALSE - contractionary monetary policy

TRUE OR FALSE: based on the supply for money, the general interest rate levels may fluctuate

FALSE - demand for money

TRUE OR FALSE: open market purchases of government securities decreases money supply

FALSE - increases money supply

TRUE OR FALSE: federal banks introduced a lending program that increased the cost of borrowing but made borrowing a lot harder to access because of regulated terms

FALSE - made borrowing more accessible under eased terms

TRUE OR FALSE: liquidity management is influencing the money supply through the implementation of fiscal policies with the primary objective of maintaning the price stability

FALSE - monetary policies

TRUE OR FALSE: open market operations are particularly important because they are primary determinants of changes in currency in circulation and thus, directly impact the money supply or the level interest

FALSE - primary determinants of changes in excess bank reserves

TRUE OR FALSE: the board of directors of each federal reserve bank set and change the discount window on loans that are transacted through the federal bank's discount rate

FALSE - set and change the discount rates on loans that are transacted through the federal bank's discount window

TRUE OR FALSE: supply of money is influenced by the market depending on whether it achieves the target interest rate while demand for money is influenced by the central bank

FALSE - supply of money is influenced by the central bank; demand for money is market driven

TRUE OR FALSE: BSP's main complex houses the office of the governor, monetary board, and the different operating departments of the central bank; while the security plant complex houses the banknote printing plant, securities printing plant, a mint, and a gold refinery, it is in charge of printing currency notes and minting coins

TRUE

TRUE OR FALSE: additional legislations expanded the federal reserve's system to include economic growth in line with its potential to expand, a high level of employment, stable prices, and moderate long-term interest rates

TRUE

TRUE OR FALSE: central bank influences short-term interest rates in order to meet its targeted inflation rate

TRUE

TRUE OR FALSE: central bank targets the desired interest rate level, and the central bank's intervention on the money supply is only a by-product of its main objective

TRUE

TRUE OR FALSE: central bank targets the desired money supply level, and lets the equilibrium interest rate fluctuate freely based on market conditions

TRUE

TRUE OR FALSE: central banks around the world use different target variables to control economic activity in their respective countries, which will determine the appropriate monetary policy to use

TRUE

TRUE OR FALSE: decrease or (increasing) the reserve requirements results in a multiplier increase or (decrease) in the supply bank deposits and thus, money supply

TRUE

TRUE OR FALSE: decreased liquidity by financial institution may also restrict its ability to extend loans and therefore, money supply decreased

TRUE

TRUE OR FALSE: in general, discount rate changes are only used when the federal bank wants to send a strong message to financial markets to show that it is serious in implementing monetary policy targets

TRUE

TRUE OR FALSE: research projects are often used in the federal reserves conduct of its monetary policies

TRUE

TRUE OR FALSE: the bangko sentral ng pilipinas extends discounts, loans, and advances to banking institutions for liquidity purposes

TRUE

TRUE OR FALSE: the president designates two members of the board to be the chair and vice chair for a four-year term

TRUE

TRUE OR FALSE: when we implement monetary policies, it is all about affecting the supply of money in the economy

TRUE

objectives of federal banks

a) assistance in the conduct of monetary policy; b) supervision and regulation; c) consumer protection and community affairs; d) government services; e) check clearing; f) wire transfer services; g) research services

treasury securities are commonly used in open market operations because of the following reasons

a) availability of a secondary market; b) highly liquid; c) established group of primary dealers

supervision and regulation of the federal reserve bank

a) conduct examinations and inspection on member banks; b) authority to issue warnings for unsafe and unsound banking activities; c) authority to approve various bank and bank holding company applications for expansions

major functions of the federal reserve

a) conducting monetary policy; b) supervising and regulating depository institutions; c) maintaining the stability of the financial system; d) providing payment and other financial services to the US government

the federal reserve bank is in charge of the following

a) determines how much money to print; b) ensure lenders and borrowers have access to credit; c) provides economic advice; d) influence access to money through adjustments in interest rates; e) focused in implementing monetary policy; f) controlling of money supply to avoid inflationary pressures in the economy

why is changing discount rates rarely used as a monetary policy tool?

a) difficulty in predicting changes in discount window borrowing; b) strong "signaling" impact may greatly affect financial markets

responses made by major central banks to the financial crisis

a) expansion of retail deposit; b) direct injections of capital to improve bank's balance sheets; c) debt guarantees; d) asset purchases/guarantees; e) stress test of banks

decrease in reserve requirements will lead to

a) fewer required reserves to be maintained by banks; b) more excess reserves available for credit; b) increase in money supply and bank's deposit base

primary responsibilities of the board

a) formulation and conduct of monetary policy; b) supervision and regulation of banks

major functions of the bangko sentral ng pilipinas

a) liquidity management; b) currency issue; c) lender of last resort; d) financial supervision; e) management of foreign currency reserves; f) determination of exchange rate policy; g) other activities

different monetary policy frameworks used by the central bank

a) monetary aggregate targeting; b) interest rate targeting; c) inflation rate targeting

the deputy governor heads the following operating sector of the BSP

a) monetary and economic sector; b) financial supervision sector; c) currency management sector; d) corporate services sector

increase in reserve requirements will lead to:

a) more required reserves to be maintained by banks; b) less excess reserves available for credit; c) decrease in money supply

different kinds of monetary policy tools

a) open market operations; b) discount rate; c) reserve requirements

the US department of treasury is in charge of the following

a) printing money and minting coins; b) issues government securities; c) management of the government finances; d) focused on implementing fiscal policy

major assets of the federal reserve bank

a) treasury securities; b) US government agency securities; c) gold and foreign exchange; d) interbank loans

factors that affect demand for loanable funds

a) utility derived from purchased asset using borrowed money; b) restrictiveness of non-price conditions; c) economic conditions

consumer protection and community affairs of the federal reserve bank

a) writing and interpreting regulations; b) reviewing bank's compliance with these laws; c) addressing issues concerning consumer protection; d) conducting community activities

where is BSP's security plant complex? a) la union b) east avenue, quezon city c) roxas boulevard, manila

b) east avenue, quezon city

in an contractionary monetary policy: there is a __________ in excess reserves held by depository institutions, _______________ in money supply and credit availability, an _______________ in interest rates, and a _______________ in security prices and inflation rate

decrease; decrease; increase; decrease

as a result of the open market sale, reserves by financial institutions in the federal reserve banks _______________, and therefore, _______________ are restricted and liquidity of financial institutions is contracted

decrease; excess reserves

interest rate on loans extended by federal reserve banks to financial institutions

discount rate

level of interest rate that the federal reserve bank charges on loans extended to financial institutions within their respective districts

discount rate

facility through which the federal reserve banks extend loans to financial institutions

discount window

major monetary policy-making body of the federal reserve bank; carries out open market operations as its main policy tool to achieve monetary targets

federal open market committee

makes key decisions affecting the availability of money and credit in the economy; carries out significant monetary actions

federal open market committee

most important federal reserve bank in the US

federal reserve bank of new york

provides America with a safer, more flexible, and more stable monetary and financial system

federal reserve system

changes in the discount rate sends a signal to the market and to the economy as to what the ________________ would be

general level of interest rate

the ________________ the exchange rate, the weaker the _______________

higher; local currency

as a result of the open market purchase, the reserves by financial institutions in the federal reserve banks _______________, and therefore, it may _______________ its excess reserves which can be withdrawn by the banks to generate _______________

increase; increase; additional liquidity

in an expansionary monetary policy: there is a __________ in excess reserves held by depository institutions, _______________ in money supply and credit availability, a _______________ in interest rates, and an _______________ in security prices and inflation rate

increase; increase; decrease; increase

central bank assesses the monetary conditions and sets the target inflation rate for a particular monetary policy action

inflation rate targeting

loans extend to the financial institutions by the federal reserve bank through its discount window facility

interbank loans

announces the target discount rate for the federal bank's discount window lending facility in order to influence short-term interest rates

interest rate targeting

the bangko sentral ng pilipinas seeks to maintain sufficient _______________ to meet any foreseeable net demands for the foreign currencies in order to preserve _______________ and ______________ of the philippine peso

international reserves; international stability; convertibility

_______________ is responsible for the operations/activities related to monetary policy formulation, implementation, and assessment while _______________ is responsible for the regulation of banks and other BSP supervised financial institutions

monetary and economic sector; financial supervision sector

exercises the powers and functions of the bangko sentral ng pilipinas, such as the conduct of monetary policy and supervision of the financial system

monetary board

the central bank announces an annual growth in monetary aggregates or the desired level of money supply in the economy

money aggregate targeting

acquisition of treasury securities may be a result of _______________ which involves the buying and (selling) of these securities in an attempt increase or (decrease) the money supply

open market operations

refers to the purchase or (sale) of government securities issued by the US treasury department and other federal government agencies

open market operations

in an expansionary monetary policy: there is an open market ________________ of securities, a _______________ in discount rate, and a _______________ in required reserve ratio

purchase; decrease; decrease

_______________ the discount rate signals a tightening of monetary conditions and ______________ interest rates

raising; higher

lowering the discount rate signals a ________________ of monetary conditions and _______________ interest rates

relaxing; lower

bangko sentral ng pilipinas was founded under _______________

republic act no. 265 (the central bank act)

major liabilities of the federal reserve bank

reserve deposits made by financial institutions (required and excess reserves) and currency in circulation

determine the minimum amount of reserve assets that depository institutions must maintain with the federal banks to back transaction deposits/protection of depositors

reserve requirements

in an contractionary monetary policy: there is an open market _______________ of securities, _______________ in discount rate and an _______________ in required reserve ratio which leads to a _______________ in excess reserves

sales; increase; increase; decrease

board of governors of the federal reserve bank is a _______________ board headquartered in _______________ appointed by the president and confirmed by the senate

seven; washington D.C.

normally, in an open market operation, the federal reserve bank buys or sells ________________ in an effort to influence the _______________

short-term government securities; short-term interest rates

the US federal reserve system was founded under _______________

the federal reserve act of 1913

why changing reserve requirements are rarely used as a monetary policy?

unpredictable changes in money supply

federal reserve banks and their member banks are electronically connected through the federal reserve communication system; allows the transfer of funds and securities nationwide

wire transfer services

multiplier effect formula

(1/new reserve requirement ratio) x change in reserves

two electronic wire transfer systems operated by federal reserve bank; ones who facilitate real time transfers of funds between federal reserves and banks

ACH and Fedwire

maintains monetary stability in the philippines, preserves the international value of the peso, and its convertability into other freely convertible currencies, and promotes a rising level of production, employment, and real income in the philippines

bangko sentral ng pilipinas

the bangko sentral ng pilipinas functions as the _________________, _______________, and. _______________ of the government

banker, financial advisor, official depository

current chairman of the BSP monetary board

benjamin diokno

where is BSP's main complex located? a) la union b) east avenue, quezon city c) roxas boulevard, manila

c) roxas boulevard, manila

government member of the BSP monetary board

carlos dominguez III (secretary of finance)

determine, implement, and control the monetary policy in their home counntries; mostly independent by nature

central bank

where interbank checks are routed to depository institutions on which they are written and transfer the appropriate funds from one bank to another

central check clearing system

restricts the flow of money and drives interest rates higher

contractionary monetary policy

if actual inflation rate is higher, central bank will use _______________; if actual inflation rate is _______________, then central bank will use expansionary monetary policy or does not change existing monetary policy

contractionary monetary policy; lower

independence of central banks allow it to operate with more _______________ and _______________

credibility; integrity

_________________ is responsible for the forecasting, production, distribution and retirement of philippine currency while ___________ is responsible other functions of the bangko sentral ng pilipinas

currency management sector; corporate services sector

where is BSP's regional offices located? a) la union b) cebu city c) davao city d) all of the above

d) all of the above

the lesser the ______________, the _______________ the local currency

exchange rate; stronger

inject more money in the society to drive interest rates at a lower level

expansionary monetary policy

two types of monetary policy

expansionary monetary policy and contractionary monetary policy


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