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