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money banking financial markets

Questions and Answers of Money Banking Financial Markets

Distinguish between the types of transactions recorded in the current account and those recorded in the financial account. If a country runs a current account deficit, is the value of its exports of
To raise the exchange rate of its currency, would a central bank buy or sell foreign assets? What would be the effect on the monetary base? What would be the effect on domestic interest rates?
An article in the Wall Street Journal in 2016 notes: “Over 30% of euro-denominated investment-grade corporate bonds trade at a negative yield … while 84% yield less than 1%.” What caused so
An article in the Wall Street Journal in 2016 begins: “Hans Peter Christensen got some unusual news when he opened his most recent mortgage statement. His quarterly interest payment was negative
John Taylor has argued: “Considerable empirical work supports the view that interest rates were too low for too long in 2003–2005 and were a major factor in the housing boom and bust that
Using the Taylor rule, calculate the target for the federal funds rate for June 2016, using the following information: equilibrium real federal funds rate of 2%, target inflation rate of 2%, current
In June 2016, the Fed had a target range for the federal funds rate of 0.25% to 0.50%. An article in the Wall Street Journal noted: “It has set the rate it pays on bank reserves at the top of that
The January 22, 2008 press release of the FOMC states that the FOMC “decided to lower its target for the federal funds rate by 75 basis points to 3½ percent.” The press release goes on to say:
In 2016, in a Federal Reserve publication, Federal Reserve Bank President of San Francisco President John Williams wrote that one way to prepare for a future of chronically low real interest rates
According to an article in the Wall Street Journal in June 2016, Congressman Jeb Hensarling of Texas, chair of the House Financial Services Committee, criticized the Fed for paying banks an interest
The December 13, 2005, press release of the Federal Open Market Committee (FOMC) stated that the FOMC “decided today to raise its target for the federal funds rate by 25 basis points to 4¼
Achieving the goal of price stability with low and steady inflation allows the Fed to achieve other goals, such as stable interest rates and stable foreign exchange rates. If the Fed fails to achieve
An article in the Wall Street Journal notes that the Fed sets “the lower bound, or a floor under shortterm rates, with the interest rate it pays institutions like money-market funds on … reverse
Suppose that in equilibrium, the federal funds rate is equal to the interest rate the Fed is paying on reserves. Use a graph of the federal funds market to analyze the effect of an open market sale
What legislative changes and financial innovations occurred after 1979 that affected M1? How did these changes affect the short-run link between money and inflation?
In a speech to the Fed conference in Jackson Hole, Wyoming, mentioned in the chapter opener, Fed Chair Janet Yellen observed that the financial crisis revealed the Fed’s “inability to control the
Use graphs of the federal funds market to analyze each of the following three situations. Be sure that your graphs clearly show changes in the equilibrium federal funds rate, changes in the
U.S. Mint describes the demand for the gold, silver, and platinum coins it produces as being dependent on the prices of these metals as commodities. In addition, the Mint notes: “These commodity
Suppose that JPMorgan Chase sells $100 million in Treasury bills to the Fed.a. Use T-accounts to show the initial effect of this sale on the balance sheets of JPMorgan Chase and the Fed.b. Suppose
An article in the Wall Street Journal notes that by mid- 2016, the Bank of Japan owned about one-third of all Japanese government bonds, “with its balance sheet ballooning to 85% of gross domestic
A columnist for bloomberg.com observes: “The Fed is easily able to tell when unemployment or inflation is high, but inflated asset prices are much, much harder to identify.”a. Briefly explain
A column in the Wall Street Journal mentions the famous billionaire investor “Warren Buffet, who in 1999 and early 2000 was widely derided as ‘a dinosaur’ and ‘out of touch’ for his refusal
If the Fed uses the federal funds rate as a policy instrument, will increases in the demand for reserves lead to an increase or a decrease in the level of reserves? If the Fed uses the level of
In a statement explaining how it intended at some point to normalize monetary policy, the FOMC wrote:The Committee intends that the Federal Reserve will, in the longer run, hold no more securities
Suppose that the FOMC decides to lower its target for the federal funds rate. How can it use open market operations to accomplish this goal? How can the FOMC use open market operations to raise its
A columnist in the Wall Street Journal has argued in favor of changing the Fed’s dual mandate to a single mandate of price stability: “When an economy gets weak enough, extraordinary easing
State whether each of the following variables is most likely to be a goal, an intermediate target, an operating target, or a monetary policy tool:a. M2b. Monetary basec. Unemployment rated. Open
Following its meeting on July 27, 2016, the Federal Open Market Committee issued a statement that contains the following:The Committee is maintaining its existing policy of reinvesting principal
Use graphs of the federal funds market to illustrate the effect on the demand for reserves or the supply of reserves of each of the Fed policy actions listed below. Assume that reserves are scarce
Given that inflation erodes the value of money, should the Federal Reserve pursue a goal of deflation? Would deflation create some of the same problems as inflation in terms of the information
Which interest rates have some foreign central banks set at a negative level? Briefly explain why they have taken this action.
When it passed the Federal Reserve Act in 1913, Congress did not at first expect that the Fed would engage in open market operations. An article in a Federal Reserve publication notes that after the
What does it mean to say that bank reserves are scarce? In a period when bank reserves are not scarce, why have the interest rate the Fed pays on bank reserves and the interest rate the Fed offers on
If you owned a firm that did business internationally, why would large fluctuations in the foreign exchange value of the dollar make planning for your business and financial transactions more
How can the Taylor rule be used as a guide to evaluating Federal Reserve monetary policy over time?
What two groups of financial institutions are eligible to borrow and lend in the federal funds market? Briefly describe the procedures the Fed now uses to increase the federal funds rate.
Go to the web site of the Federal Reserve Bank of St. Louis (FRED) (fred.stlouisfed.org) and download and graph the data series for discount loans (DISCBORR) from January 2000 until the most recent
Briefly explain what determines the supply curve for reserves. Why does the supply curve have a horizontal segment?
Why do fluctuations in interest rates make investment decisions by households and firms more difficult?
Place the following in sequence, from what the Fed has the most influence on to what the Fed as the least influence on: policy goals, policy tools, policy instruments, intermediate targets.
What are the three categories of discount loans? During the financial crisis of 2007–2009, how did the Fed’s discount lending expand?
Go to the web site of the Bank of England, www. bankofengland.co.uk. The interactive database for the Bank of England has a section titled Monetary financial institutions’ balance sheets, income
Why does an increase in the federal funds rate decrease the quantity of reserves demanded? At what interest rate does the demand curve for reserves become perfectly elastic?
Which type of unemployment—frictional, structural, or cyclical—does the Federal Reserve seek to reduce? Why doesn’t the Fed seek to reduce the unemployment rate to zero percent?
What two timing difficulties does the Fed face in using its monetary policy tools?
What is quantitative easing, and why did the Fed begin using it? What effect did quantitative easing have on bank reserves?
What are the Fed’s three traditional monetary policy tools, and which is the most important?
What is the purpose of monetary policy? What is meant by economic well-being? Why is the Fed said to have a “dual mandate”?
What trade-offs does the Fed face, particularly in the short run, in attempting to reach its goals?
How does an open market sale of Treasury securities by the Fed affect the price of Treasury securities, the interest rate on Treasury securities, the monetary base, and the money supply?
A column in the Wall Street Journal in the summer of 2016 discussed gold as an investment. The columnist noted: “The future can always be different from the past. But if gold shoots far up from
Allan Meltzer of Carnegie Mellon University wrote the following about how the Federal Reserve Board’s staff analyzed the likely effects of the large excess reserves banks were holding in the
Consider the following data (where all values are in billions of dollars):Calculate the values for each period for the currency-to-deposit ratio, the ratio of total reserves to deposits, the monetary
Consider the following data:Currency ............................$850 billionCheckable deposits ............700 billionBank reserves .....................700 billiona. Calculate the values for the
A Fed publication refers to the multiple expansion of deposits as “the heart of banking theory.”a. Why is the process of the multiple expansion of deposits important to understanding how the
Consider the following data:Currency ................................$ 100 billionBank reserves ...........................200 billionCheckable deposits ..................800 billionTime deposits
In medieval times, many goldsmiths would offer to store gold in return for a fee. They provided anyone depositing gold with a receipt, which represented a legal claim on the goldsmith to exchange the
An article in the Economist noted that the money supply in China “has grown considerably faster than” the monetary base. The article also noted that the Bank of China had reduced the required
In the following bank balance sheet, amounts are in millions of dollars. The required reserve ratio is 3% on the first $30 million of checkable deposits and 12% on any checkable deposits over $30
An article in the Wall Street Journal in mid-2016 notes the persistence of slow economic growth and very low interest rates seven years after the end of the financial crisis. One consequence was
What will be the value of the money multiplier if banks hold no excess reserves, the currency-todeposit ratio is 1, and the required reserve ratio for checkable deposits is 100%?
Explain whether you agree with the following observation:“If the required reserve ratio were zero, the process of multiple deposit expansion would go on forever.”
Use T-accounts to show the initial effects of each of the following actions on the balance sheets of the Fed and the banking system:a. The Fed increases discount loans by $2 billion.b. The Fed
A Federal Reserve publication notes that when economists analyze the money supply process, they typically assume that the money multiplier is “independent of the policy actions of the central
Go to the web site of the Federal Reserve Bank of St. Louis (FRED) (fred.stlouisfed.org) and download the data series for the St. Louis Adjusted Monetary Base (BASE) from July 1959 until the most
Evaluate the following statement: “Because the Fed does not have to ask Congress for money to fund its operations, the principal–agent view of the Fed’s motivation cannot be correct.”
A column in the Wall Street Journal notes that “every heavily indebted country weighs the cost of repaying debt against the loss of confidence and creditworthiness that default entails.” Whose
Arthur Rolnick of the Federal Reserve Bank of Minneapolis has argued that in their account of the failure of the Bank of United States: Friedman and Schwartz provide the rationale for the policy that
Suppose that a bank with no excess reserves receives a deposit into a checking account of $10,000 in currency. If the required reserve ratio is 0.10, what is the maximum amount the bank can lend out?
Suppose that Wells Fargo lends $100,000 to Jill’s Jerseys. Using T-accounts, show how this transaction is recorded on the bank’s balance sheet. If Jill’s spends the money to buy materials from
An article in the Economist refers to the monetary base in China as “central bank-issued currency.” Do you agree with this definition? Briefly explain.
Briefly explain what happened to the currencyto-deposit ratio (C/D) and the excess reserves-todeposit ratio (ER/D) during the financial crisis of 2007–2009. What effect did these changes have on
Go to the web site of the Federal Reserve Bank of St. Louis (FRED) (fred.stlouisfed.org) and find the most recent value and the value from the same month one year earlier for Excess Reserves of
If the required reserve ratio is 15%, what is the value of the simple deposit multiplier?
Use a T-account for Wells Fargo and a T-account for the Fed to show the result of the Fed buying $1 million in Treasury bills from Wells Fargo.
Briefly explain whether under normal circumstances the money multiplier will increase or decrease following an increase in each of the following, holding other factors constant:a. The
Go to the web site of the Federal Reserve Bank of St. Louis (FRED) (fred.stlouisfed.org) and find the most recent values for the Currency Component of M1 (CURRNS), Total Checkable Deposits (TCDSL),
Why does the Fed’s purchase of Treasury bills lead to “multiple deposit expansion”?
What are the two most important assets and the two most important liabilities on the Fed’s balance sheet? Because currency is valuable, why is it a liability to the Fed rather than an asset?
What are the key differences between the simple deposit multiplier and the money multiplier?
Go to the web site of the Federal Reserve Bank of St. Louis (FRED) (fred.stlouisfed.org) and find the most recent values for the for the M1 Money Stock (M1SL) and the St. Louis Adjusted Monetary Base
Suppose that PNC Bank sells $1 million in Treasury bills to the Fed and then makes a $1 million loan to David’s Donut Emporium and Boat Repair.Use a T-account to show the results of these
How does the monetary base differ from the money supply?
A Federal Reserve document states: “Due to concerns about potential conflicts of interest … Class A directors may not participate in most aspects of the appointment process of Reserve Bank
Defending the presence of bankers on the boards of directors of the Federal Reserve Banks, Jeffrey Lacker, president of the Federal Reserve Bank of Richmond argued: “This hybrid governance model
Suppose that the U.S. Constitution were amended to include the following: “Congress shall establish a central bank that will be responsible for conducting the monetary policy of the United
What is the purpose of the Government in the Sunshine Act? In your opinion, was Fed Chairman Bernanke justified in evading the requirements of this act during the financial crisis of 2007–2009?
When Kentucky Senator Rand Paul was running for the 2016 Republican presidential nomination, an article in the New York Times noted: “Mr. Paul opposes the Federal Reserve’s control of the money
Suppose that Bank of America pays a 2% annual interest rate on checking account balances while having to meet a reserve requirement of 10%. Assume that the Fed pays Bank of America an interest rate
Fed Chair Janet Yellen was quoted in an article in the Wall Street Journal as asserting: “Academic studies establish beyond a shadow of a doubt that independent central banks perform better.”
A representative of the Treasury Department is present at every meeting of the Bank of England’s Monetary Policy Committee. The representative can participate in the discussion but is not allowed
In his memoirs, former Fed Chairman Ben Bernanke discussed the reaction of the Federal Reserve Bank presidents to a congressional proposal that the Reserve Banks no longer be responsible for
Adam Posen, then a member of the Bank of England’s Monetary Policy Committee, was characterized as arguing in a speech that:Central banks’ purchases of government debt … far from undermining
Look again at the Making the Connection “St. Louis and Kansas City? What Explains the Locations of the District Banks?” on page 433 in Section 13.1. Are Michael McAvoy’s and David Wheelock’s
Suppose Congress were to amend the Federal Reserve Act and set up a new commission to reexamine the Federal Reserve district boundaries. What considerations should the commission use in drawing the
David Wheelock of the Federal Reserve Bank of St. Louis describes the following episode at the beginning of the Great Depression:Following the stock market crash [of October 1929], the Federal
According to economist Allan Meltzer of Carnegie Mellon University, who has written about the history of the Federal Reserve:Tension between the [Federal Reserve] Board and the reserve banks began
In 2015, the Bank of Japan announced that it would begin buying exchange-traded funds (ETFs), provided that the stocks included in the funds had been issued by firms that were “proactively making
Thomas Hoenig, former president of the Federal Reserve Bank of Kansas City, remarked about the Federal Reserve System: “It was designed as a public–private partnership, accountable to, and yet
On its web site, the European Central Bank (ECB) states: The European Central Bank and the national central banks together constitute the Eurosystem, the central banking system of the euro area. The

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