Money and Banking 13-16

Changes in the Tools of Monetary Policy Affect the Federal Funds Rate

-An open market purchase causes the federal funds rate to fall -open market sale causes the federal funds rate to rise (when intersection occurs at the downward sloped section). -Open market operations have no effect on the federal funds rate when intersection occurs at the flat section of the demand curve.

Factors That Determine the Money Supply

-Changes in the required reserves ratio -The money supply is negatively related to the required reserve ratio.

Other Factors That Affect the Monetary Base

-Float -Treasury deposits at the Federal Reserve -Interventions in the foreign exchange market

The Fed started paying interest on excess reserves only in ...

2008

There are ________ members of the Board of Governors of the Federal Reserve System.

7

key element of a successful monetary policy

A strong nominal anchor

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

Both theory and experience suggest that more independent central banks produce better monetary policy.

Three Players in the Money Supply Process

Central bank (Federal Reserve System) Banks (depository institutions; financial intermediaries) Depositors (individuals and institutions)

The central bank which is generally regarded as the most independent in the world because its charter cannot be changed by legislation is the

European Central Bank.

The Federal Reserve entity that makes decisions regarding the conduct of open market operations is the

Federal Open Market Committee.

Four items in the Fed's balance sheet are essential to our understanding of the money supply process:

Liabilities - (currency in circulation, reserves), assets -(securities and loans to financial institutions)

Changes in excess reserves

The money supply is negatively related to the amount of excess reserves

Changes in borrowed reserves from the Fed

The money supply is positively related to the level of borrowed reserves, B R, from the Fed

Banks subject to reserve requirements set by the Federal Reserve System include

all banks whether or not they are members of the Federal Reserve System.

The output gap in the Taylor rule can be interpreted as

an indicator of future inflation, as stipulated in Phillips curve theory.

The strongest argument for an independent Federal Reserve rests on the view that subjecting the Fed to more political pressures would impart

an inflationary bias to monetary policy.

Members of the Board of Governors are

appointed by the president and confirmed by the senate

The interest-on-excess-reserves tool came to the rescue during the crash as

banks were accumulating huge quantities of excess because it can be used to raise the federal funds rate

The banking system can create a multiple expansion of deposits, because

because as each bank makes a loan and creates deposits, the reserves find their way to another bank, which uses them to make loans and create additional deposits.

Types of Open Market Operations

dynamic; defensive

The political business cycle refers to the phenomenon that just before elections, politicians enact ________ policies. After the elections, the bad effects of these policies (for example, ________ ) have to be counteracted with ________ policies.

expansionary; a higher inflation rate; contractionary

The Taylor rule indicates that

federal funds rate should be set equal to the inflation rate plus an "equilibrium" real fed funds rate plus a weighted average of two gaps: (1) an inflation gap, current inflation minus a target rate; and (2) an output gap, the percentage deviation of real GDP from an estimate of its potential (natural rate) level.

Decisions by depositors to increase their holdings of currency or by banks to hold excess reserves will result

in a smaller expansion of deposits than is predicted by the simple model.

The effect of an open market purchase on the monetary base always what?

increases the monetary base by the amount of the purchase.

Inflation targeting has several disadvantages

inflation is not easily controlled by the monetary authorities; it might impose a rigid rule on policymakers; a sole focus on inflation may lead to larger output fluctuations, or lower economic growth

Inflation targeting has several advantages

it can reduce the likelihood of the time-inconsistency problem; it is readily understood by the public and is highly transparent; it increases accountability of the central bank; more stable inflation

The lessons from the crisis also suggest that monetary policy should

lean against credit booms but not asset-price bubbles.

Because interest-rate and aggregate policy instruments are incompatible, a central bank must choose between them on the basis of three criteria:

measurability, controllability, and their ability to affect goal variables predictably.

Federal Reserve set an implicit, not an explicit what

nominal anchor

Two components in supply in the market for reserves are

nonborrowed and borrowed reserves

The Federal Reserve controls the monetary base through

open market operations and extensions of loans to financial institutions and has better control over the monetary base than over reserves.

The six basic goals of monetary policy are

price stability (the primary goal), high employment (output stability), economic growth, stability of financial markets, interest-rate stability, and stability in foreign exchange markets.

Members of Congress are able to influence monetary policy, albeit indirectly, through their ability to

propose legislation that would force the Fed to submit budget requests to Congress, as must other government agencies.

The Federal Reserve Banks are ________ institutions since they are owned by the ________.

quasi-public; private commercial banks in the district where the Reserve Bank is located

Which of the following functions is NOT performed by any of the twelve regional Federal Reserve Banks?

setting interest rates payable on time deposits

Which of the followings is a duty of the Board of Governors of the Federal Reserve System?

setting margin requirements, the fraction of the purchase price of the securities that has to be paid for with cash

The Federal Open Market Committee consists of the

seven members of the Board of Governors and five presidents of the regional Fed banks.

Member commercial banks have purchased stock in their district Fed banks; the dividend paid by that stock is limited by law to ________ percent annually.

six

The lessons of the global financial crisis provide

support for more flexible inflation targeting, possibly with a higher inflation target

Which of the following is NOT an entity of the Federal Reserve System?

the Comptroller of the Currency

The monetary base is linked to the money supply using

the concept of the money multiplier, which tells us how much the money supply changes when the monetary base changes.

Critics of the current system of Fed independence contend that

the current system is undemocratic.

All three players—the Fed, banks, and depositors—are important in

the determination of the money supply.

Changes in currency holdings

the money supply is negatively related to currency holdings

A single bank can make loans up to the amount of its excess reserves,

thereby creating an equal amount of deposits

quantitative easing

when the Fed buys longer-term government bonds or other securities

The effect of an open market purchase on reserves depends on what?

whether the seller of the bonds keeps the proceeds from the sale in currency or in deposits.