Global Capital Markets
Bank A has demand deposits of $140 million, vault cash equaling $1 million, and deposits at the Fed equaling $14 million. If the required reserve rate is 10 percent, what is the amount of excess reserves Bank A is holding?
$1 million
Principles of Central Bank Design
- Independence - Decision-making by committee - Policy framework - Accountability
Criteria for judging central banks independence:
1. Budgetary independence 2. Irreversible decisions 3. Long terms in office
Objectives of Modern Central Bank
1. Low, stable inflation - inflation creates confusion and makes planning difficult. When inflation is high, growth is low 2. High, stable growth - stable, predictable growth is higher than unstable, unpredictable growth 3. Financial system stability - stable financial markets and institutions are a necessity for an economy to operate efficiently 4. Stable interest rates - interest-rate volatility creates risk for both lenders and borrowers 5. Stable exchange rates - variable exchange rates make the revenues from foreign sales and the cost of purchasing important goods hard to predict.
Differences between ECB and the Fed
1. Organizational Structure: - The implementation of monetary policy is accomplished at all the national central banks, rather than being centralized as in the U.S. - The ECB's budget is controlled by the National Central Banks, not the other way around. - The ECB still provides a large volume of reserves through collateralized lending to the banks, in addition to sales and purchases of securities.16-16© McGraw Hill LLC. All Rights Reserved.
he Federal Reserve was created in
1913
The Treaty of Maastricht was signed in
1992
U.S. real economic growth has averages around
2 percent per year.
Differences between ECB and the Fed
2. Price Stability Objective and Monetary Policy Strategy - The ECB's Governing Council defines price stability as an inflation rate of close to, but less than, 2 percent, based on a euro-area-wide measure of consumer prices - This is the harmonized index of consumer prices (HICP) and is similar to the CPI - It is the average of retail price inflation in all the countries of the monetary union, weighted by the size of their gross domestic products
The number of times a year that the FOMC typically meets is
8
Executive board members of the European System of Central Banks are appointed by
A committee made up of heads of state of member countries.
Sweden is
A member of the European Union but not a member of the Eurosystem.
The federal funds rate is stated as
A nominal interest rate.
The central bank for the euro area tries to achieve accountability and transparency through
A standard numerical objective for inflation over the medium term.
Most economists agree that the target rate of inflation for central banks should be
Above zero for fears of deflation.
The Board of Governors of the Fed performs which one of the following functions?
Acting as the rule-writing agency for consumer credit protection laws
Changes in the federal funds rate influence the economy's growth rate through all of the following except by
Altering the real interest rate when inflation is changing quickly.
The ECB's Governing Council has price stability as a primary objective and has defined price stability as
An inflation rate below, but close to, 2 percent over the medium term.
Origin of Central Banks
Banker's bank, Government's Bank
The stability of the financial system is enhanced by the ability of central banks to
Be a lender of last resort.
The attendees at the FOMC meetings receive information prior to the meetings that is contained in books with colorful names. The information that is released to the public prior to the meetings is from the
Beigebook only
Criteria used to judge a central bank's independence include each of the following except which one?
Cabinet or ministry level of authority
Compared to an independent central bank, elected officials are likely to
Choose monetary policies that are overly accommodative.
The method used by the ECB to measure inflation for meeting its objectives
Could result in a contractionary monetary policy being used in a country where inflation is already very low.
The key to the success of forward guidance as a monetary policy tool is
Credibility
In the United States, the Federal Reserve is asked to
Deliver price stability as one of a number of objectives.
Which one of the following would give the most importance to the goal of exchange rate stability?
Emerging market countries where exports and imports are central to the structure of the economy
Exchange rate stability is likely to be a more important goal for the central banks of
Emerging market economies than the central bank of the United States.
Based on the rankings of members of the Eurosystem by nominal GDP in 2021, the median country is likely to be
Fairly small.
In the U.S., the authority to issue currency is held by the
Federal Reserve.
The Federal Reserve Act explicitly requires that the Board of Governors represents each of the following except which one?
Foreign interests
Function of Central Banks
Government's bank: - Execute financial transactions for the government - Controls availability of money and credit availability through interest rates Banker's Bank: - Guarantees sound intermediaries can do business by lending to them even during times of crisis - Operates payment systems for interbank payments - Oversees financial institutions to ensure sound and secureness
The specific goals of central banks include all of the following except which one?
High stock prices
The FOMC controls the real interest rate
If inflation doesn't change quickly.
In the United States, one problem with central bank independence is that
In a representative democracy, monetary policymakers must be held accountable to the public.
Which one of the following is evidence of the link between persistent increases in public debt and slower long-run growth?
Increased concern about debt sustainability
For fiscal policymakers, one of the results of an independent central bank is that
Increased government spending has to be financed with either higher taxes or increased government borrowing.
Everything else equal, if the growth rate of a country exceeds its sustainable rate, the central bank
Is likely to raise interest rates to slow the rate of growth.
One monopoly that modern central banks have is in
Issuing currency.
Fiscal policymakers may actually welcome some inflation for all of the following reasons except which one?
It weakens the independence of the central bank.
The main asset held by a central bank in its role as the bankers' bank is
Loans
In its role as bank for the U.S. government, the Federal Reserve performs all of the following services except which one?
Making discount loans
Which one of the following is the best analogy? Inflation is like a
Minute having fewer seconds.
Which one of the following statements is not true?
Periods of growth below the potential level are periods of low unemployment.
The autonomy of modern central banks means that governments cannot increase their spending by
Printing money.
In its role as the bankers' bank, a central bank performs each of the following except which one?
Providing deposit insurance
A primary goal of central banks is to
Reduce systematic risk.
Monetary policy operations for central banks are run through changes in which liability category?
Reserves
Potential output depends on which of the following?
Technology
Which of the books used at the FOMC meetings contains anecdotal information collected by the Federal Reserve Banks?
The Beigebook
Consider the price paid for debt issued by the State of California. Which one of the following would lead to a decrease in the value of State of California bonds?
The State of California experiences a fiscal crisis that makes it less likely it will be able to honor its interest payments.
Successful monetary policy relies most on
The institutional environment.
One problem for the Federal Reserve regarding setting policy stems from the fact that
There are multiple goals that may be inconsistent with each other.
The likelihood that the Fed will implement a change that will seriously harm the economy is minimized by the fact that
There is decision making by committee.
The Federal Reserve Bank of New York is unique from other Reserve banks because it is
Where the Federal Reserve System's portfolio is managed.
Which one of the following would not be an example of a secondary financial market transaction?
You go to the bank and purchase a $5,000 certificate of deposit.
An open market sale of U.S. Treasury securities by the Fed will cause the Fed's balance sheet to show
a decrease in the asset of securities and a decrease in the liability of reserves.
A liability of the central bank in functioning as the bankers' bank is
accounts of commercial banks.
Financial markets enable the transfer of risk by
allowing individuals and firms less willing to bear risk to transfer risk to other individuals and firms more willing to bear risk.
When the Fed makes a discount loan, the impact on the Fed's balance sheet will reflect
an increase in assets and liabilities.
Which of the following combinations each has the same impact on the Fed's balance sheet?
an open market purchase and an increase in loans by the Fed to banks
share of Microsoft stock would best be described as which one of the following?
an underlying instrument
Over-the-counter (OTC) markets
are networks of security dealers linked electronically.
Reserve demand becomes horizontal at the IOER rate because
banks will not make loans at less than the IOER rate.
Brokerage commissions
can differ reflecting the different services being offered.
Financial intermediaries handle a larger flow of funds than do primary markets mainly because financial intermediaries
can lower transaction costs and increase liquidity for savers.
The Fed can do which of the following in the economy?
change both interest rates and the supply of money
to determine what would happen if the inflation rate in the economy were to fall by 2 percent below the target inflation rate. Then, the target federal funds rate would
decrease by 3.0 percent.
Rufina decides to withdraw $750 out of her checking account. The impact of this transaction on the banking system's balance sheet will be to
decrease demand deposits by $750.
During the 1990s, the money multipliers for M1 and M2
decreased.
Harry gets $1,000 in currency from his grandfather when he graduates from college. He deposits these funds into his checking account. What is the impact of Harry's deposit on the monetary base? The monetary base
did not change.
During the 1990s many countries developed a monetary policy framework that focused on inflation targeting. This is an example of policymakers focusing
directly on an objective
The conventional policy tools available to the Fed include each of the following:
discount rate target federal funds rate range reserve requirement
If people increase their currency holdings, all else the same, the monetary base
does not change but the quantity of M2 will decrease.
One trait a central bank has over other businesses, including banks, is that it
doesn't have stockholders
Until 2008, the Fed could make the market federal funds rate equal the target rate by
entering the federal funds market as a borrower or a lender.
If the Fed sees no need to engage in expansionary monetary policy, then
eventually, the Fed will shrink its balance sheet by letting securities it holds expire.
The Federal Reserve failed to keep the financial system operational during the 1930s because it
failed to recognize the link between changes in the Fed's balance sheet and the growth rate of money.
Equity markets are markets
for stock
The fact that there is a market for federal funds enables banks to
hold a lower level of excess reserves than they would otherwise hold.
Inflation targeting does all of the following:
increase policymakers' credibility increase policymakers' accountability communicate policymakers' objectives clearly and openly
During the Great Depression, the monetary base in the United States
increased.
The process of financial intermediation
increases the economy's ability to produce.
The owner of a small business applies for a bank loan and tells the loan officer that the funds will be used to expand inventory for the upcoming holiday season. The small business finds itself in need of additional funds to meet the monthly rent for the next quarter, and the owner uses the loan proceeds to pay the rent. This is an example of
information asymmetry.
All of the following are depository institutions, except
insurance companies.
A financial intermediary
is a third party that facilitates a transaction between a borrower and a lender.
Discount lending by the Fed
is usually small except in times of crisis.
The experience of the Marcos presidency in the Philippines in 1986 showed that
it is important to keep the central bank independent from political pressure.
reserve demand is volatile, in order for the central bank to keep interest rates from being volatile, it must
let the quantity of reserves fluctuate.
For most of the Fed's history, the Fed
loaned reserves at an interest rate below the target federal funds rate.
Unconventional policy tools are useful when
lowering the target interest rate to zero is not sufficient to stimulate the economy.
Debt instruments that have maturities less than one year are traded in the
money market.
Tom decides to withdraw $300 out of his checking account. The impact of this transaction on the Fed's balance sheet will be
no change in total assets or total liabilities, but an increase in the liability of currency and a decrease in the liability of reserves by $300, respectively.
Consider a $2 billion open market purchase of U.S. Treasury securities by the Federal Reserve. The banking system's balance sheet will specifically show
no net change in assets or liabilities, only a change in the composition of assets with securities decreasing and reserves increasing by $2 billion, respectively.
If Bank A sells a $100,000 U.S. Treasury bond to the Fed, Bank A's required reserves will
not change.
A primary financial market is
one where the borrower obtains funds directly from the lender for newly issued securities.
Seasonal credit provided by the Fed is not as common as it used to be because
other sources for long-term loans have developed for banks in these areas.
The measure for the actual rate of inflation used in the Taylor rule is the
personal consumption expenditure index.
Many governments give their central bank control over issuing currency because
printing currency can be profitable for a government, providing a strong incentive to print too much.
The European Central Bank's Marginal Lending Facility is used to provide
short-term loans at rates above the target refinancing rate.
When an individual withdraws funds from a checking account the bank's balance sheet
shrinks, and the size of the Fed's balance sheet is not affected.
The pool of information collected by financial markets is usually
summarized in the form of a price.
Taylor Rule:
target federal funds rate = natural rate of interest + current inflation + ½(inflation gap) +½(output gap)
The principal tool the Fed uses to keep the federal funds rate close to the target is
the IOER (interest rate on excess reserves).
Which of the books used at the FOMC meetings is/are treated as secret documents and not released to the public until after a number of years have passed?
the Tealbook
The money multiplier is much lower today than it was 25 years ago because
the currency-to-deposit ratio is much higher today.
A good monetary policy instrument is
tightly linked to monetary policy objectives.
Commissions paid to a stock broker are an example of
transaction costs.
Federal funds loans are
unsecured loans.
The fundamental characteristics influencing the value of a financial instrument include each of the following except
where the instrument is traded.
