GEB6895 Federal Reserve and Monetary Policy

Explain the difference between crowding out effect and monetizing the debt.

Crowding out is when the treasury will pay any rate. Monetizing debt is when you print money.

Who selects a member of the Fed's Board of Governors to be the Chairman?

The President of the USA

What is the money multiplier. How is it calculated?

The money multiplier is a heuristic used to demonstrate the maximum amount of broad money that could be created by commercial banks for a given fixed amount of base money + reserve ratios (MM = 1/Reserve requirements)

How big was the Fed's balance sheet before the financial crisis that started in 2007/8 began?

$11,000 billion

How big is the Fed's consolidated balance sheet? (approximately)

$21,804 billion

Total legal reserves in the banking system are $5 trillion. We assume the money expansion process always reaches its theoretical limit. If the average reserve requirement is 10%, what is the size of the total money supply? If the average reserve requirement is increased to 12%, what is the size of the total money supply after the money expansion process finishes the adjustment process? What is the impact on the money supply of an increase in the reserve requirement?

$50 tril $41.7 tril Money Supply will decrease.

Assume the equation of exchange holds. If the money supply grows at 10% over the long term and the real rate of economic growth is 23% over the long term, what happens to prices over the long term?

%DM + %DV = %DP + %DQ -13%

Assume the equation of exchange holds. If the money supply grows at 3% over the long term and the real rate of economic growth is 2% over the long term, what happens to prices over the long term?

%DM + %DV = %DP + %DQ 1%

Price Indices - Which of the following is true?

- The consumer price index for urban consumers (CPI-U) will report a higher level of inflation than the Chained Consumer Price Index for urban consumers (C-CPI-U) -The consumer price index for urban consumers (CPI-U) will report a higher level of inflation than the Personal Consumption Expenditure (CPE) Index

Which of the following is included in the calculation of the M2 money supply measure?

-Demand deposits (these are checking accounts or Negotiable Order of Withdrawal (NOW) accounts) -Savings accounts and small time deposits -Money Market Deposit Accounts (MMDA's)

What is the difference between dynamic and defensive OMD?

-Dynamic operations are implemented to increase or decrease the level of funds - Defensive operations offset the impact of other conditions that affect the level of funds

What is the FOMC? How many times a year does it meet? What does it doe with respect to management of the money supply in the economy and interest rates? What is "policy directive"?

-Federal Open Market Committee -8 times/year -It sets targets for the money supply + interest rates -A change in monetary policy handed down to the trading desk

Austrian Policy View - Which of the following is true?

-The Austrian view focuses on how central bank attempts to manipulate the business cycle create malinvestments and credit fueled bubbles that eventually burst and lead to recessions. -Austrian economists would argue that excessive money creation in the late 1990's and early 2000's contributed to the creation of the real estate bubble and the financial crisis of 2008

Monetarist Policy View - Which of the following is true?

-The Equation of Exchange reveals the relationship between the Money Supply and Inflation. Both sides of the equation are just different ways of stating Nominal Gross Domestic Product -The M1 measure of the money supply is the most basic measure of the money supply -The Monetary base is the sum of currency in circulation and reserve balances at the Fed (deposits held by banks and other depository institutions in their accounts at the Federal Reserve) -The velocity of Money is the average number of times the money supply turns over in a year -In traditional monetary theory, the velocity of money is assumed to be constant over the long term but does vary over the shorter term

Keynesian Policy - Which of the following is true?

-The focus is on fiscal policy and monetary policy accommodates fiscal policy -Developed during a period of high unemployment and deflation -It was the primary focus of government policy during the post WW II period until the 1980's -The monetary policy prescriptions assume no inflation and so do not incorporate the possibility that investors will use the fisher equation to adjust real rates of return for expected inflation -To lower interest rates in the economy, the central bank expands the growth in the money supply, thus shifting the money supply curve to the right, resulting in lower interest rates

What is the Open Market Desk (OMD)? What does it do? What Fed Bank operates it?

-The trading desk @ the new york federal reserve bank. -Controls money supply by buynig + selling treasury securities -The new york

What is the current Fed Funds target rate of interest (or range of interest rates)?

0.00-0.25

What U.S. government agency that makes sure banks, lenders, and other financial companies treat you, the consumer, fairly?

Consumer Financial Protection Bureau

What are the three traditional monetary policy tools controlled by the Fed?

1. Open Market Operations - the buying and selling of securities by the OMD directly affect the amount of legal reserves in the banking system. 2. Discount rate / Discount window loans - discount window loans are loans of legal reserves from the Fed to depository institutions. The making and repayment of these loans directly impact the legal reserves in the banking system. 3. Reserve Requirement - the percentage requirement that determines the $ amount of legal reserves any particular depository intuition must hold against its deposits inversely impacts the money multiplier and the extent of the money expansion process.

Describe how the BOG, FOMC, Monetary Policy Directives, OMD, OMO, Primary Dealers, and other financial institutions and market participants are related.

1.BOG (7 members) The BOG acts as main policy making body. The BOG+NYFRB Pres. have 8 votes decides monetary policy + sends directives. 2.FOMC (12 members) 3.Monetary Policy Directives 4.OMD Buy + sells treasury securities and mortgages backed bonds (MBBs) Mortage backed securities. 5.OMO 6.Primary Dealers 7.Other financial Market participants

How many Federal Reserve Districts are there?

12 Federal Reserve Districts

Assume the equation of exchange holds. If the money supply grows at 20% over the long term but velocity decreases by 15% and the real rate of economic growth is 2% over the long term, what happens to prices over the long term?

3%

Which Federal Reserve Bank District is Florida located in?

6

Which Federal Reserve District are depository institutions in Florida located in?

6

What is a FOMC policy directive and who or what receives the directives?

A change in monetary policy to the trading desk (open market desk) @ the NY Fed.

What is the Beige Book?

A report given by each district of economic data in all 12 districts

What are the effects of an expansionary (or stimulative) monetary policy, assuming no inflation? (Note I use the "expansionary" term)

Cost of capital is reduced, encourages firms to spend more money, higher more employees.

In 1980, the Depository Institutions Deregulations and Monetary Control Act was passed. This Act required that____.

All depository institutions must meet the Fed's reserve requirements

Which of the following statements are true?

All depository institutions must meet the Fed's reserve requirements.

About two weeks before the scheduled FOMC meeting, a consolidated report of regional economic conditions is compiled and given to FOMC members. What is the name of this report?

Beige book

Which of the following is true about Fed Funds?

Borrowers buy Fed Funds

What is the BIS and what do they do?

Bureau of industry + securities. They support central banks' pursuits of monetary + Financial stability through international cooperation, and to act as a bank for central banks.

Now assume the demand curve for Fed Funds is shifting to the right as the economy grows. If the open market desk is directed to target a new lower Fed Funds rate, what will they do?

Buy enough securities in the open market to shift the Fed Funds supply curve to the right faster than the demand curve is shifting to the right.

If the Federal Reserve increases the reserve requirement, what will happen to the Money Supply in the banking system?

Decrease

If the OMD is a net seller of mortgage backed securities (MBS's), all other things constant, the money supply will _____.

Decrease

If the OMD is a net seller of treasury securities, all other things constant, the legal reserves in the banking system will _____.

Decrease

If the OMD is a net seller of treasury securities, all other things constant, the money supply will _____.

Decrease

If the public's demand for cash were to decrease, what could the Fed do to offset the impact on the money supply?

Decrease Discount Window lending Sell T-bills through the open market desk

If the Federal Reserve Banks decrease their aggregate Discount Window lending by $100 million and the reserve requirement is 10%, what will happen to the Money Supply? (Assuming the expansion / contraction process reaches its theoretical limit and all other things held constant).

Decrease by $1 billion

If total reserves equal $1 billion and the reserve requirements are changed from 5% to 10%, what is the impact on the money supply? (Assuming the expansion / contraction process reaches its theoretical limit both before and after the change and all other things held constant).

Decrease by $10 billion

If the Fed OMD is a net seller of $100 million of T-bills and the reserve requirement is 20%, what will happen to the amount of Legal Reserves in the banking system?

Decrease by $100 million

If the Fed OMD is a net seller of $100 million of T-bills and the reserve requirement is 20%, what will happen to the Money Supply? (Assuming the expansion / contraction process reaches its theoretical limit).

Decrease by $500 million

What are the two components of legal reserves?

Legal reserves = vault cash + deposits at the fed.

The President's proposed tax plan will lower the amount of income taxes people pay, thus lowering the average balances on deposit at the Fed that are held in the U.S. Treasury accounts. What will this decrease in Treasury holdings on deposit do to the money supply? (Assuming everything else is held constant).

Decrease the money supply.

What has happened to the velocity of money since the mid-1990's? Increased? Decreased? Stayed the same?

Decreased

If the Fed targets a Fed Funds rate above the current Fed Funds rate, how can they achieve their goals?

Decreasing the supply of Fed Funds by selling T-Bills in the open market.

If the Fed OMD starts buying or selling treasury bonds in order to offset some actions the U.S. Treasury has undertaken, is this a dynamic or defensive open market operation?

Defensive operation (reacting)

Which of the following is included in the calculation of the M1 money supply measure?

Demand deposits (these are checking accounts or Negotiable Order of Withdrawal (NOW) accounts)

If the Fed OMD starts buying or selling treasury bonds in order to target a new Fed Funds rate level, is this a dynamic or defensive open market operation?

Dynamic

The Fed FOMC sets both the Discount Rate and the Fed Funds rate.

False

The Fed sets the Fed Funds rate but supply and demand forces determine the Discount rate at FRB's

False

The MCA part of the DID-MCA law was enacted to increase the Federal Reserve's control over fiscal policy. True or false?

False

Which of the following is the best statement concerning the impact of Federal Funds Market activity on the amount of legal reserves in the banking system?

Fed Funds market activity makes more efficient use of legal reserves in the system.

Explain how OMD purchases (or sales) of securities impact the supply of federal funds and interest rates in the economy. Youi might want to include references to the supply and demand for loanable funds discussions from earlier in the class

Fed Purchase of securities = increase supply Fed Sale of securities = decrease supply

Describe the shifts in monetary policy over the 2001-2003 period, the 2004-2007 period, and the 2008-2013 period.

Focus on improving a weak economy in 2001-2003 Focus on reducing inflation in 2004-2007 Focus on improving weak economy in 2008-2013

If the Federal Reserve decreases the reserve requirement, what will happen to the Money Supply in the banking system?

Increase

If the OMD is a net buyer of mortgage backed securities (MBS's), all other things constant, the money supply will _____.

Increase

If the OMD is a net buyer of treasury securities, all other things constant, the money supply will _____.

Increase

If the OMD is a net buyer of treasury securities, all other things held constant, the legal reserves in the banking system will _____.

Increase

If the public's demand for cash were to increase, what could the Fed do to offset the impact on the money supply?

Increase Discount Window lending Buy T-bills through the open market desk

If the Federal Reserve Banks increase their aggregate Discount Window lending by $100 million and the reserve requirement is 10%, what will happen to the Money Supply? (Assuming the expansion / contraction process reaches its theoretical limit and all other things held constant).

Increase by $1 billion

If the Fed OMD is a net buyer of $100 million of T-bills and the reserve requirement is 20%, what will happen to the amount of Legal Reserves in the banking system?

Increase by $100 million

If the Fed OMD is a net buyer of $100 million of T-bills and the reserve requirement is 20%, what will happen to the Money Supply? (Assuming the expansion / contraction process reaches its theoretical limit and all other things held constant).

Increase by $500 million

Assume the demand curve for Fed Funds does not move. If the open market desk is directed to target a new lower Fed Funds rate, what will they do?

Increase the supply of money by buying treasury securities.

If the Fed targets a Fed Funds rate below the current Fed Funds rate, how can they achieve their goals?

Increasing the supply of Fed Funds by buying T-Bills in the open market.

Which financial institutions are lenders in the Fed Funds markets?

Institutions with excess legal reserves

Describe why the Fed was created with 12 separate district banks instead of a single central bank.

It must be decentralized somehow.

What are leakages?

Leakages in the expansion system represent either the cash holdings described above that are not loaned out or excessive legal reserves that are held by banks at the fed and are not loaned out + so do not enter the expansion process.

Which Federal Reserve Bank is always represented on the FOMC? Why?

NYFRB President Large financial institutions are in New York.

Which Federal Reserve Bank is the most important? Why?

New York Fed Many Large banks are located in New York

Which of the following is the favorite monetary tool of the Fed?

Open Market Operations

Which of the following is under the direct control of the Fed?

Open Market Operations Discount Window Lending Reserve Requirement

The Fed acts as a Fiscal Agent for U.S. Government. What does this mean?

Paying treasury checks; processing electronic payments; issuing transferring + redeeming U.S. government securities.

What is financial repression and how is it related to recent monetary policy?

Policies that result in savers earning returns below the rate of inflation.

What does "monetizing the debt" mean?

Printing money

Now assume the demand curve for Fed Funds is shifting to the right as the economy grows. If the open market desk is directed to target a new higher Fed Funds rate, what will they do?

Sell only enough securities in the open market to shift the Fed Funds supply curve to the right more slowly than the demand curve is shifting to the right.

What are the two main roles (or goals of monetary policy) for the Federal Reserve Board of Governors?

Supervise activities of many types of private financial institutions. Collects + disseminates economic info (Beige book)

What organization is responsible for setting monetary policy in the Eurozone?

The European central bank (ECB)

Which of the following is true about Open Market Operations (OMO)?

They are carried out by the Open Market Desk The OMD manly buys and sells Treasury Securities but they also have been buying mortgage backed bonds since 2008

What does it mean when we say the Fed is "injecting liquidity" into the financial system?

They are increasing the money supply.

Assume the demand curve for Fed Funds does not move. If the open market desk is directed to target a new higher Fed Funds rate, what will they do?

They will sell securities to decrease the supply of loanable funds.

Which of the following is not under the direct control of the Fed?

Treasury Activities

In 1980 the Depository Institutions Deregulation and Monetary Control Act (DID-MCA) was passed. The MCA side of the law required that all institutions that accepted deposits ("depository institutions") had to meet the Fed's reserve requirements whether they were members of the Federal Reserve or not. True or false?

True

The Fed can carry out Open Market Operations that are designed to offset the effects of U.S. Treasury Operations.

True

The Fed targets the Fed Funds rate but does not set the effective Fed Funds rate on a daily basis.

True

The MCA part of the DID-MCA law was enacted to increase the Federal Reserve's control over monetary policy. True or false?

True

The FRB's set the Discount rates (and those rates are approved by the BOG) but supply and demand forces determine the effective Fed Funds rate on a daily basis.

True - but the Fed targets the Fed Funds rate and uses OMO to try to maintain that target rate or target range

The Fed acts as a Lender of Last Resort. What does this mean?

When no one else will lend money, and there is serious implications for the economy, the fed steps in.

What is ZIRP and how is it related to recent monetary policy?

Zero Interest Rate Policy The fed dropped rates to zero to encourage economic growth.

Which of the following is true about Open Market Operations (OMO)?

a. They are carried out by the Open Market Desk b. The OMD buys and sells Treasury Securities but they also have been buying mortgage backed bonds since 2008 c. They are the most important monetary policy tool