money and banking (14,16)

13) Why does the Federal Reserve Bank of New York play a special role within the Federal Reserve System? Answer: The New York district contains the largest banks in the country. The New York Fed supervises and examines these banks to insure their soundness and the safety of the nation's financial system. The New York Fed conducts open market operations and foreign exchange transactions for the Fed and Treasury. The New York Fed belongs to the Bank for International Settlements, so its president and the chairman of the Board of Governors represent the U.S. at the monthly meetings of the world's central banks. The New York Fed president is the only president of a regional Fed who is a permanent voting member of the FOMC

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16) Explain two concepts of central bank independence. Is the Fed politically independent? Why do economists think central bank independence is important? Answer: Instrument independence is the ability of the central bank to set its instruments, and goal independence is the ability of a central bank to set its goals. The Fed enjoys both types of independence. The Fed is largely independent of political pressure due to its earnings and the conditions of appointment of the Board of Governors and its chairman. However, some political pressure can be applied through the threat or enactment of legislation affecting the Fed. Independence is important because there is some evidence that independent central banks pursue lower rates of inflation without harming overall economic performance.

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19) Make the case for and against an independent Federal Reserve. Answer: Case for: 1. An independent Federal Reserve can shield the economy from the political business cycle, and it will be less likely to have an inflationary bias to monetary policy. 2. Control of the money supply is too important to leave to inexperienced politicians.

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Case against: 1. It is undemocratic to have monetary policy be controlled by a small number of individuals that are not accountable. 2. In the past, an independent Fed has not used its freedom wisely. 3. Its independence may encourage it to pursue its own self-interest rather than the public's interest.

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16) A swap that involves the exchange of one set of interest payments for another set of interest payments is called

A) an interest rate swap.

11) The Federal Open Market Committee consists of the

A) five senior members of the seven-member Board of Governors.

5) Suppose you are currently in the long position of a long-term bond. In this case, to hedge against a

A) interest-rate forward; sell

6) Forward contracts are of limited usefulness to financial institutions because

A) of default risk

11) Options are contracts that give the purchasers the

A) option to buy or sell an underlying asset.

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

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

8) By taking the short position on a futures contract of $100,000 at a price of 115 you are agreeing to ________ a ________ face value security for ________.

A) sell; $100,000; $115,000.

18) Critics of the current system of Fed independence contend that

A) the current system is undemocratic.

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

B) The Comptroller of the Currency

9) Members of the Board of Governors are positions.

B) appointed by the newly elected president of the United States, as are cabinet positions.

3) A long contract requires that the investor?

B) buy securities in the future.

18) A advantage of using swaps to hedge interest-rate risk is that swaps

B) can be written for long horizons.

17) 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.

B) expansionary; a higher inflation rate; contractionary

14) If, for a $1000 premium, you buy a $100,000 call option on bond futures with a strike price of 114, and at the expiration date the price is 110, your ________ is ________.

B) loss; $1000

17) If Second National Bank has more rate-sensitive assets than rate-sensitive liabilities, it can reduce interest-rate risk with a swap that requires Second National to

B) receive fixed rate while paying floating rate

2) Hedging risk for a long position is accomplished by.

B) taking a short position.

10) Assume you are holding Treasury securities and have sold futures to hedge against interest-rate risk. If interest rates rise

B) the decrease in the value of the securities equals the increase in the value of the futures contracts.

8) Prior to 1980, member banks left the Federal Reserve System due to

B) the high cost of required reserves

14) Instrument independence is the ability of ________ to set monetary policy ________.

C) Congress; instruments

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

C) Regulating credit with the approval of the president under the Credit Control

7) Which of the following functions is not performed by any of the twelve regional Federal Reserve Banks?

C) Setting interest rates payable on time deposits

13) If you buy a call option on Treasury futures at 115, and at expiration the market price is 110, the ________ will ________ exercised.

C) call; not be

7) When <a title="Click to Continue > by Text-Enhance" id="_GPLITA_0" style="text-decoration:underline" href="#" in_rurl="http://i.trkjmp.com/click?v=VVM6MjU4NjQ6MjA6aW50ZXJlc3QgcmF0ZXM6ODNiZGRlN2UwZTdhNzdkNzhlNWJhNTM2MWVmOTRiNmY6ei0xMDQxLTEwNzU1MzpxdWl6bGV0LmNvbToxNTY1NjpmYzc1NmRmZWRjYzkwZjE2ZjBlYjMyOTI5MWQ4ZjAzZg" in_hdr="">interest rates</a> fall, a bank that perfectly hedges its portfolio of Treasury securities in the futures market

C) has no change in its income

4) To say that the forward market lacks liquidity means that

C) it may be difficult to make the transaction.

1) The payoffs for financial derivatives are linked to

C) previously issued securities.

9) On the expiration date of a futures contract, the price of the contract converges to the

C) price of the underlying asset

12) Although neither ________ nor the ________ are officially set by the Federal Open Market Committee, decisions concerning these policy tools are effectively made by the committee.

C) reserve requirements; discount rate

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

C) six

12) The price specified on an option at which the holder can buy or sell the underlying asset is called the

C) strike price

4) The nine directors of the Federal Reserve Banks are split into three categories: ________ are professional bankers, ________ are leaders from industry, and ________ are to represent the public interest and are not allowed to be officers, employees, or stockholders of banks.

D) 3; 3; 3

6) The president from which Federal Reserve Bank always has a vote in the Federal Open Market Committee?

D) New York

1) The financial panic of 1907 resulted in such widespread bank failures and substantial losses to depositors that the American public finally became convinced that

D) a central bank was needed to prevent future panics

15) The ability of a central bank to set monetary policy goals is .

D) instrument independence.