Money & Banking HW & quiz #5
An open market sale of a $100 security to a bank results to the T-account entries for the Banking System of
+$100 in securities and -$100 in reserves the bank gained $100 in securities because they bought them and lost $100 from reserves because they used their reserves to buy the securities
An open market sale of a $100 government security to a bank results to the T-account entries for the Federal Reserve of
-$100 in securities and -$100 in reserves the fed lost $100 in securities because they sold them and lost $100 in reserves because the bank had to use its reserves to buy the securities so the bank's reserves went down by $100
In what ways can the regional Federal Reserve Banks influence the conduct of monetary policy?
-by having 5 of their presidents sit on the FOMC -by having members serve on the Federal Advisory Council -through their administration of the discount facilities at each bank
The Board of Governors of the Federal Reserve System:
-establishes, within limits, reserve requirements -effectively sets the discount rate -sets margin requirements
Advocates of Fed independence fear that subjecting the Fed to direct presidential or congressional control would:
-impart an inflationary bias to monetary policy -force monetary authorities to sacrifice the long-run objective of price stability
'The independence of the Fed leaves it completely unaccountable for its actions.' Why is this statement not true?
-the Fed has to report to Congress on a semiannual basis to explain its actions -the president can appoint a new chairman of the Board of Governors every 4 years -the legislation that structures the Fed is written by Congress and is subject to change
Reserve requirements are set by the _______ and advised upon by the _______.
Board of Governors; FOMC
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. (1/.10) * 100 = 1000
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. (1/.10) * 1 million = 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.
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
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.
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. If the depositor withdraws $1000 of currency that reduces reserves by $1000 and if the reserve ratio is 10% that automatically means it reduces checkable deposits by $10,000
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 entities in the Federal Reserve System directs open market operations?
The FOMC
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
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 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.
The Board of Governors is not involved in which of the following activities?
approval of bank loans
by definition, when the Fed conducts an open market purchase, it is:
buying bonds & increasing the quantity of reserves because banks used their reserve money to buy securities, now that the Fed is buying them back it goes back to reserves
the interest rate on overnight loans from one bank to another is the _______.
federal funds rate
The ability of a central bank to set monetary policy instruments is ___________, while the ability of a central bank to set goals of monetary policy is _______.
instrument independence; goal independence
a dependent Federal Reserve:
is more likely to produce higher inflation and more likely to produce a political business cycle
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
Critics of Fed independence argue that:
it is undemocratic to have monetary policy controlled by an elite group responsible to no one
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, the ECB is:
more independent
each Federal Reserve district has _______ main Federal Reserve bank/banks.
one
_______ are the most important policy tool the Fed has for controlling the money supply
open market operations
A situation in which monetary policy is expansionary prior to an election and contractionary after an election is known as the:
political business cycle
Which of the following functions is not performed by any of the 12 regional Federal Reserve banks?
setting interest rates payable on time deposits
Which of the following functions is not performed by the twelve Federal Reserve Banks?
setting the reserve requirement
The Federal Open Market Committee is comprised of
the 7 members of the Board of Governors plus 5 of the 12 Federal Reserve Bank presidents
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
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.
