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economics of money banking and financial markets

Questions and Answers of Economics Of Money Banking And Financial Markets

Why is the composition of the Fed’s balance sheet a potentially important aspect of monetary policy during a crisis?
What are the advantages and disadvantages of quantitative easing as an alternative to conventional monetary policy when short-term interest rates are at the zero lower-bound?
Why was the Term Auction Facility more widely used by financial institutions than the discount window during the global financial crisis?
Compare the use of open market operations, loans to financial institutions, and changes in reserve requirements to control the money supply on the basis of the following criteria: flexibility,
“Considering that raising reserve requirements to 100%makes complete control of the money supply possible, Congress should authorize the Fed to raise reserve requirements to this level.” Discuss.
“If reserve requirements were eliminated, it would be harder to control interest rates.” Is this statement true, false, or uncertain?
How can the procyclical movement of interest rates(rising during business cycle expansions and falling during business cycle contractions) lead to a procyclical movement in the money supply as a
You often read in the newspaper that the Fed has just lowered the discount rate. Does this signal that the Fed is moving to a more expansionary monetary policy?Why or why not?
What are the disadvantages of using loans to financial institutions to prevent bank panics?
“Discount loans are no longer needed because the presence of the FDIC eliminates the possibility of bank panics.” Is this statement true, false, or uncertain?
Following the global financial crisis in 2008, assets on the Federal Reserve’s balance sheet increased dramatically, from approximately $800 billion at the end of 2007 to $3 trillion in 2011. Many
Most open market operations are typically repurchase agreements. What does this tell us about the likely volume of defensive open market operations relative to dynamic open market operations?
Why are repurchase agreements used to conduct most short-term monetary policy operations, rather than simply buying and selling securities outright?
Why is paying interest on reserves an important tool for the Federal Reserve to manage crises?
“The federal funds rate can never be below the interest rate paid on reserves.” Is this statement true, false, or uncertain? Explain your answer.
“The federal funds rate can never be above the discount rate.” Is this statement true, false, or uncertain? Explain your answer.
“The only way that the Fed can affect the level of borrowed reserves is by adjusting the discount rate.” Is this statement true, false, or uncertain? Explain your answer.
If float decreases below its normal level, why might the manager of domestic operations consider it more desirable to use repurchase agreements to affect the monetary base than an outright purchase
If the Treasury has just paid a large bill to defense contractors and as a result its deposits with the Fed fall, what defensive open market operations will the manager of the open market desk
During the holiday season, when the public’s holdings of currency increase, what defensive open market operations typically occur? Why?
If the manager of the open market desk hears that a snowstorm is about to strike New York City, making it difficult to present checks for payment there and so raising the float, what defensive open
An important aspect of the supply of money is reserve balances. Go to www.federalreserve.gov/Releases/h41/ and locate the most recent release. This site reports changes in factors that affect
Go to www.federalreserve.gov/releases/h6/hist/ and find the historical report of M1 and M2. Compute the growth rate in each aggregate over each of the past three years (it will be easier to do if you
Go to www.federalreserve.gov/boarddocs/hh/ and find the most recent annual report of the Federal Reserve.Read the first section of the annual report that summarizes Monetary Policy and the Economic
Suppose that currency in circulation is $600 billion, the amount of checkable deposits is $900 billion, and excess reserves are $15 billion.a. Calculate the money supply, the currency deposit ratio,
If the Fed sells $1 million of bonds and banks reduce their borrowings from the Fed by $1 million, predict what will happen to the money supply.
If the Fed reduces reserves by selling $5 million worth of bonds to the banks, what will the T-account of the banking system look like when the banking system is in equilibrium? What will have
If reserves in the banking system increase by $1 billion as a result of Fed lending to financial institutions of $1 billion, and checkable deposits increase by $9 billion, why isn’t the banking
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? (Hint: Use
Using T-accounts, show what happens to checkable deposits in the banking system when the Fed sells $2 million of bonds to the First National Bank.
Using T-accounts, show what happens to checkable deposits in the banking system when the Fed lends an additional $1 million to the First National Bank.
If the Fed lends five banks an additional total of $100 million but depositors withdraw $50 million and hold it as currency, what happens to reserves and the monetary base? Use T-accounts to explain
If the Fed sells $2 million of bonds to Irving the Investor, who pays for the bonds with a briefcase filled with currency, what happens to reserves and the monetary base? Use T-accounts to explain
If the Fed sells $2 million of bonds to the First National Bank, what happens to reserves and the monetary base? Use T-accounts to explain your answer.
The money multiplier declined significantly during the period 1930–1933 and also during the recent financial crisis of 2008–2010. Yet the M1 money supply decreased by 25% in the Depression period
In October 2008, the Federal Reserve began paying interest on the amount of excess reserves held by banks.How, if at all, might this affect the multiplier process and the money supply?
During the Great Depression years from 1930–1933, both the currency ratio c and the excess reserves ratio e rose dramatically. What effect did these factors have on the money multiplier?
What effect might a financial panic have on the money multiplier and the money supply? Why?
“The money multiplier is necessarily greater than 1.”Is this statement true, false, or uncertain? Explain your answer.
Describe how each of the following can affect the money supply: (a) the central bank; (b) banks; and(c) depositors.
The Fed buys $100 million of bonds from the public and also lowers the required reserve ratio. What will happen to the money supply?
“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.
“The Fed can perfectly control the amount of reserves in the system.” Is this statement true, false, or uncertain?Explain.
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
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?
If a bank depositor withdraws $1,000 of currency from an account, what happens to reserves, checkable deposits, and the monetary base?
Suppose that the Fed buys $1 million of bonds from the First National Bank. If the First National Bank and all other banks use the resulting increase in reserves to purchase securities only and not
The First National Bank receives an extra $100 of reserves but decides not to lend out any of these reserves. How much deposit creation takes place for the entire banking system?
Classify each of these transactions as either an asset, a liability, or neither for each of the “players” in the money supply process—the Federal Reserve, banks, and depositors.a. You get a
Go to the previous site and click on Monetary Policy.Then click on Reports and then go on Beige Book.According to the summary of the most recently published book, is the economy weakening or
Go to www.federalreserve.gov/ and click on About the Fed. Next click on The Federal Reserve System and then on Structure. According to the Federal Reserve, what is the most important responsibility
Why did the Bank of England up until 1997 have a low degree of independence?
Which is more independent, the Federal Reserve or the European Central Bank? Why?
The Fed promotes secrecy by not releasing the minutes of the FOMC meetings to Congress or the public immediately.Discuss the arguments for and against this policy.
“The independence of the Fed has meant that it takes the long view and not the short view.” Is this statement true, false, or uncertain? Explain your answer.
“The independence of the Fed leaves it completely unaccountable for its actions.” Is this statement true, false, or uncertain? Explain your answer.
Why might eliminating the Fed’s independence lead to a more pronounced political business cycle?
“The theory of bureaucratic behavior indicates that the Fed never operates in the public interest.” Is this statement true, false, or uncertain? Explain your answer.
In the 1960s and 1970s, the Federal Reserve System lost member banks at a rapid rate. How can the theory of bureaucratic behavior explain the Fed’s campaign for legislation to require all
Should the Federal Reserve be subject to periodic auditing of its policies, procedures, and finances? Why or why not?
What is the primary tool that Congress uses to exercise some control over the Fed?
The Fed is the most independent of all U.S. government agencies. What is the main difference between it and other government agencies that explains the Fed’s greater independence?
How does the Federal Reserve have a high degree of instrument independence? If it has a specific mandate from Congress to achieve “maximum employment and low, stable prices,” then how does the
Why is it unlikely that the policy recommendation put forth by the chairman of the Board of Governors would ever be voted down by the rest of the FOMC?
How is the president of the United States able to exert influence over the Federal Reserve?
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?
Do you think that the fourteen-year nonrenewable terms for governors effectively insulate the Board of Governors from political pressure?
The presidents of each of the district Federal Reserve banks (including the New York Federal Reserve bank)are currently not required to undergo a formal political appointment and approval process. Do
Why is the New York Federal Reserve always a voting member on the FOMC?
Why is it important for the regional Federal Reserve bank presidents to attend the FOMC meetings, even if they are nonvoting members?
In what ways can the regional Federal Reserve Banks influence the conduct of monetary policy?
Which entities in the Federal Reserve System control the discount rate? Reserve requirements? Open market operations?
“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.
Should the Federal Reserve redraw its district boundaries, similar to how congressional districts are periodically realigned? Why or why not?
Why is the Twelfth Federal Reserve district so geographically large, while the Second Federal Reserve district is so small by comparison?
Why was the Federal Reserve System set up with twelve regional Federal Reserve banks rather than one central bank, as in other countries?
Despite the regulations that protect banks from failure, some do fail. Go to www2.fdic.gov/hsob/index.asp.Select the tab labeled Failures and Assistance Transactions.How many bank failures occurred
Go to www2.fdic.gov/hsob/index.asp. Select Commercial Bank Reports, then Number of Institutions, Branches, and Total Offices. If you look at the trend in bank branches, does the public appear to have
Why is there only one U.S. bank among the ten largest banks in the world?
If the bank at which you keep your checking account is owned by foreigners, should you worry that your deposits are less safe than if the bank were owned by Americans?
How could the approval of international banking facilities(IBFs) by the Fed in 1981 have reduced employment in the banking industry in Europe?
What incentives have regulatory agencies created to encourage international banking? Why have they done this?
What factors explain the rapid growth in international banking?
What has been the likely effect of the Gramm-Leach-Bliley Act on financial consolidation?
How did competitive forces lead to the repeal of the Glass-Steagall Act’s separation of the banking and securities industries?
What are the advantages and disadvantages of interstate banking?
Why has the number of bank holding companies dramatically increased?
Unlike commercial banks, savings and loans, and mutual savings banks, credit unions did not have restrictions on locating branches in other states. Why, then, are credit unions typically smaller than
Why is there a higher percentage of banks with less than $25 million of assets among commercial banks than among savings and loans and mutual savings banks?
“The commercial banking industry in Canada is less competitive than the commercial banking industry in the United States because in Canada only a few large banks dominate the industry, while in the
Why have banks been losing income advantages on their assets in recent years?
Why have banks been losing cost advantages in acquiring funds in recent years?
Why is loophole mining so prevalent in the banking industry in the United States?
If reserve requirements were eliminated in the future, as some economists advocate, what effects would this have on the size of money market mutual funds?
How do sweep accounts and money market mutual funds allow banks to avoid reserve requirements?
“If inflation had not risen in the 1960s and 1970s, the banking industry might be healthier today.” Is this statement true, false, or uncertain? Explain your answer.
“The invention of the computer is the major factor behind the decline of the banking industry.” Is this statement true, false, or uncertain? Explain your answer.
Why did new technology make it harder to enforce limitations on bank branching?
How does the emergence of interest-rate risk help explain financial innovation?
Which regulatory agency has the primary responsibility for supervising the following categories of commercial banks?a. National banksb. Bank holding companiesc. Non–Federal Reserve member state

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