ECON 333 Final (quizlet)

Federal Reserve Bank

The central bank for the U.S.

Who created the Federal Reserve Bank and when?

The Federal Reserve Act in 1913

What is the Federal Reserve Bank responsible for?

Bank supervision, monetary policy, services to banks, and the government

How many individual banks is the Federal Reserve Bank?

12 regional

Who heads each regional bank?

Presidents, which chosen by a private board

Who chooses the governors?

POTUS and the U.S. Senate

Who makes the policies at the Fed?

The Federal Open Market Committee

How many people are in the Federal Open Market Committee?

12 members total, a board of governors, president of NY Fed, and 4 others

Fed is ________ of from the rest of the U.S. government

Independent, they control their own budget and earn enough to pay for their own operations. Their regional presidents are chosen by private citizens.

How long of terms are their governors chosen for?

14-year, non-renewable terms- not subject to political business cycle

Advantages of Federal independence

Avoid political business cycle, able to focus on long term, those controlling money supply different from those who spend money, Fed policy is strictly economic - Fed is economists and bankers, not lawyers.

Disadvantages of Federal independence

Fed policy-makers are un-elected and accountable, may pursue policies that benefit their own business (banking), economic policy affects everyone

Why isn't the Fed completely accountable?

Because congress could change laws and take over the budget

What makes the Fed a good central bank?

Accountability, transparency of policy decisions, decisions by committee, independence, and good policy framework

What does it mean "The Fed is responsible for Monetary Policy"?

Changing the Money Supply

The Fed ______ controls M1

Indirectly

What does the Fed control?

The Monetary Base

What is the Monetary base?

Currency in circulation + bank reserves

What happens when you change the monetary supply?

It will create changes in the money supply because they're related

Monetary Base x Deposit Multiplier = ______________

Money Supply

What is the Money Supply?

Currency in circulation + demand deposits

Difference between monetary base and money supply?

Instead of total bank reserves it's demand deposits

What kind of banking system is the US banking system?

A fractional reserve system

What is the reserve ratio?

The fraction of deposits set aside

What are the total reserves?

Cash in the vault + deposit at Fed

What are the components of required reserves?

Reserve ratio x deposits

What are excess reserves?

Reserves available for lending "Total reserves - required reserves"

What is the Money creation process

Banks making loans

What is the result of loans creating new deposits?

New money "M1 = demand deposits + currency in circulation"

Why is lending repeated until all reserves are held as required reserves?

Because only a fraction of each new deposit must be set aside as required reserves

How to calculate the total amount of lending using the deposit multiplier

1 / reserve ratio

How to calulcate total deposits

Total reserves x deposit multiplier

How to calculate new loans

Excess reserves x deposit multiplier

The multiplier process works regardless of what?

The number of banks in the system

The Bank Reserve Position

Total reserves, required reserves, and excess reserves

What happens if banks don't keep excess reserves at 0 or people hold more money at cash?

The deposit multiplier gets smaller

What ways can the Fed influence money creation?

By setting the reserve requirement, opening market operations, and setting the discount rate and federal funds rate target

When is the multiplier less effective?

When banks hold more excess reserves and/or people hold more currency

What does change in the reserve ratio do?

It changes the multiplier

What does the Open Market Operations do?

It changes reserves and creates new loans

What does Discount Rate change encourage or discourage?

Bank lending

components of discount loans

Primary credit, secondary credit, and seasonal credit

What 2 step process does the Fed employ to move toward intermediate targets?

It sets long terms goals and adjusts operating targets

What is the complete Fed process?

Sets goals

sets operating instruments

checks intermediate targets

evaluates progress towards goals

What are the 2 goals of the Federal Reserve Act?

Economic growth and price stability

What is the sought-after result of economic growth?

Low unemployement

What is the sought-after result of price stability?

Low inflation

Why is there a conflict among goals of employment and price stability?

Because there is a negative relationship as shown by the Philips Curve. Thus requiring opposite policies

What does the Fed use to measure progress?

Targets of Monetary Policy aka values, numbers, and data

What are Operating Instruments (or targets)?

Things the Fed can control directly through operations

What are the two components of Operating Instruments

Fed Funds Rate and Bank Reserves

What does the Fed use Open Market Operations for?

To either maintain a target Federal Funds Rate or maintain a target level of bank reserves

What about the Federal Funds Rate or target level of bank reserves does the market for bank reserves illustrate?

That Open Market Operations can't do both at the same time

What are Intermediate Targets?

Things the Fed can influence but not directly control

What are the components of Intermediate Targets?

Other market interest rates and monetary aggregates (M1 and M2)

Why does Fed let time pass?

To observe changes in targets and to do research about the economy

Which policy does increasing the Money Supply follow?

Expansionary

Which policy does decreasing the Money Supply follow?

Contractionary

Does lowering the reserve ratio increase or decrease the money supply?

reserve ratio-increase it

Does raising the reserve ratio increase or decrease the money supply?

reserve ratio-decrease it

Does buying securities increase or decrease the money supply?

securities-increase it

Does selling securities increase or decrease the money supply?

securities-decrease it

Does lowering the Federal Funds rate increase or decrease the money supply?

federal funds rate-increase it

Does raising the Federal Funds rate increase or decrease the money supply?

federal funds rate-decrease it

Does lowering the Discount rate increase or decrease the money supply?

discount rate-increase it

Does raising the Discount rate increase or decrease the money supply?

discount rate-decrease it

The asymmetric information problem between savers and borrowers

means that borrowers have better information than savers

If Dave buys stock from Carnival cruise lines company, which uses the funds to build new cruise ships, then in macroeconomic terms

Carnival is investing and Dave is saving

Moral hazard occurs when

People in general have incentive to engage in risky behavior if they don't bear the full cost if something goes wrong

In one year you will receive a $100 bill. If the interest rate today suddenly rises from 5% to 10%, the $100 bill you will receive one year from now becomes worth

Less today (lower present value)

If instead of the loan in #41 (simple loan of $1,000 that pays a single lump sum of $1,200 in 4 years) it is a fixed payment loan of $1,000 that pays back $300 each year for 4 years, the interest rate for the fixed payment loan

Will be higher than in #41 because of the opportunity to use some of the money sooner

Interest rates are pro-cyclical because

the change in bond supply is greater than the change in bond demand

The yield curve

Relates the yield on a security to its time to maturity

Which of the following assigns widely-followed bond ratings

Private companies like Moody's or Standard & Poor's Corporation

The National Bank Act of 1863

Was ineffective in stabilizing the banking industry because it was not required for all banks

A banking system in which the government offers deposit insurance is more likely to have financial crises

Because banks have more incentive to take on too much risk with savers' money

Each Federal Reserve District president reports to the __________________.

-senate

-board of directors

-governors

-finance committee

board of directors

Which of these is NOT an advisory council to the Federal Reserve Board of Governors?

-thrift institutions advisory council

-federal advisory council

-state advisory council

-consumer advisory council

state advisory council

How many districts make up the Federal Reserve System?

-10

-12

-15

-18

12

The Board of Governors, the governing body of the Federal Reserve System, is set up to consist of how many members?

-5

-7

-10

-12

7

Which of these cities does NOT have a Federal Reserve Office?

-New York

-San Diego

-Chicago

-Minneapolis

San Diego

T/F

Federal Reserve Bank employees are considered to be government employees.

false

T/F

Member banks are required to hold stock in Reserve Banks that they can sell or trade.

false

Which Federal Reserve district serves the largest number of states?

-Cleveland

-Atlanta

-Dallas

-San Francisco

San Francisco

Federal Reserve head offices each have a _________ member board of directors.

-4

-9

-14

-20

9

The profit (revenues in excess of costs) of the Federal Reserve is given to the ______________.

-treasury

-IRS

-U.S. President

-state governments for each federal reserve

treasury

T/F
The Federal Reserve is the 3rd attempt at our nation's central bank.

true

Which organization established the Federal Reserve System?

-congress

-the controller of currency

-banks

-the financial confederacy

congress

What is the Federal Reserve's primary source of income?

-tax revenues

-fees for check processing

-treasury department

-interest on government securities

interest on government securities

What percent of commercial banks in the U.S. are members of the Federal Reserve System?

-7%

-15%

-38%

-75%

38%

Which of these is NOT a function of the Federal Reserve?

-Provide financial services to banks

-Manage the federal deficit

-Supervise and regulate banks

-Conduct monetary policy

Manage the federal deficit

What is the difference between Monetary Policy and Fiscal Policy? In what ways are they the same? Why is there a distinction made between a "central bank" and the "national government"?

Monetary Policy involves changing the interest rate and influencing the money supply while fiscal policy involves the government changing tax rates and levels of government spending to influence aggregate demand in the economy. Their similarities are both types of policy will try to increase aggregate demand when times are bad and slow its growth when times are good. Monetary policy is typically implemented by a central bank, while fiscal policy decisions are set by the national government.

Describe the purposes of stimulative and restrictive Monetary Policy.

Restrictive monetary policy is how the central banks slow economic growth and stimulative monetary policy is to improve the economy's rate of growth of output.

Describe the difference in Federal Reserve Policies in 1999-2000 and 2001. What were the reasons for the different policies? Looking at Chart 1, how would you describe the Fed's policy in 1991?

1999-2000 policies were for restraining the growth of demand which transitioned in 2001 as to counteract the recession.

What are the goals of monetary Policy as set by the Federal Reserve Act? In what way do the tools of Monetary Policy achieve these goals?

The goals are maximum employment, stable prices, and moderate long-term interest rates. The tool it uses most commonly is open market operations (buying and selling U.S. Treasury securities): The Fed conducts open market operations almost daily to maintain the federal funds rate, the rate at which banks make overnight loans to each other, at its target rate (which is set by the Federal Open Market Committee). You can track daily open market operations on the website of the Federal Reserve Bank of New York, where the open market desk is located. The Federal Reserve also sets the discount rate, which is the short-term rate at which the Fed loans directly to financial institutions. For the Federal Reserve, reserve requirements are by far the least used tool of monetary policy.

Which type of policy, Fiscal or Monetary, takes effect more quickly (see endnotes)? Given that the Federal Open Market Committee meets and makes a policy decision in 2 days, which policy is most likely implemented more quickly? (hint: how often does the U.S. Congress make a decision in 2 days?)

Fiscal takes effect more quickly meanwhile monetary is most likely to be implemented more quickly.

Is buying stock consuming, investing, or saving?

Saving

If Carnival builds new cruise ships would that be consuming, investing, or saving?

Investing

Why wasn't the National Bank Act of 186 effective in stabilizing the banking industry?

Because it wasn't required for all banks.

What did the Federal Reserve Act create in 1913?

The Federal Reserve Bank