Money and Banking Ch. 13 Flashcards

Before the 20th century, a major characteristic of American politics was the fear of
a. Majority rule
b. Local government
c. Centralized power
d. Foreign alliances

C

The first two central banks (First Bank of the United States and Second Bank of the United States) were terminated. What problem was created?

a. state governments gained too much control over currency issuance
b. there was no lender of last resort that could provide reserves to the banking system, leading to widespread bank panics
c. excessive foreign investment dominated the U.S. financial system
d. the federal government struggled to collect taxes efficiently

B

Which bank panic finally convinced the public to support the creation of a central bank?
a. the 1837 panic
b. the 1893 panic
c. the 1907 panic
d. the 1873 panic

C

Before the 20th century, many Americans resisted the establishment of a central bank. What were the two reasons why?

a fear of centralized power & moneyed interests (politics influenced by rich companies)

This act created the Federal Reserve System with 12 regional districts

Federal Reserve Act of 1913

The most important purpose of the Fed is to be

the lender of last resort

The writers of the Federal Reserve Act wanted to

a. concentrate authority in the federal government to stabilize the economy
b. diffuse power between private and government sectors
c. give complete control of monetary policy to private banks
d. eliminate state involvement in financial regulation

B

There are [blank] federal reserve banks, each with [blank] directors, six of whom appoint the president of the FRB.

12 federal reserve banks, 9 directors

This board has seven members including the chair, appointed by the president of the US and confirmed by the senate

a. Board of Governors
b. Federal Reserve Bank Presidents Council
c. Federal Advisory Council
d. Federal Open Market Committee

A

The committee that makes decisions regarding the conduct of open market operations

a. Board of Governors of the Federal Reserve System
b. Federal Advisory Council
c. Federal Open Market Committee (FOMC)
d. Reserve Bank Board of Directors

C

Each of the 12 Federal Reserve districts defined by the Federal Reserve Act of 1913 has

a. one main Federal Reserve Bank
b. multiple branches operated by state governments
c. a single Board of Governors representative
d. two regional central banks sharing authority

A

Each district bank has a board consisting of ___ members.

a. 15
b. 12
c. 10
d. 9

D

Disctrict banks have 3 classes of directors. Name all three.

Class A (professional bankers), Class B (leaders from industry), and Class C (represent public interest)

Disctrict Bank Election
1. The member banks elect:
-
-
Fed Board of Governors elect:
-

1. Member banks elect 3 Class A, 3 Class B. Fed elects 3 Class C

The most important job of the directors of the disctrict bank is to

elect the president of the bank (subject to the approval of Board of Governors)

The 12 Federal Reserve Banks carry out many duties related to (3)

Check clearing
Discount Loans
Conducting economic research

The fed’s buying or selling of securities in the open market is called

Open Market Operations

This board oversees the 12 Federal Reserve Banks. Each bank has nine directors divided into three classes: A, B, and C.
a. Board of directors
b. Board of governors
c. FOMC

A; Board of Directors

National Banks that are required to be a part of the Federal Reserve system.

Member banks

Before 1980, member banks were required to keep reserves as deposits at the Federal Reserve Banks. What was the problem created?

a. Reserve requirements didn’t pay interest, leading to disintermediation
b. Reserve requirements were set too low, causing rapid inflation
c. Reserve requirements varied widely across states, creating instability
d. Reserve requirements forced banks to borrow excessively from abroad

A

Before 1980, member banks had to keep required reserves in the Federal Reserve System with no interest paid, which led to a decline in Fed memberships. Why was this an issue?

a. it reduced bank profitability but had little effect on regulation
b. it forced banks to rely on foreign credit markets for liquidity
c. it caused the federal government to lose significant tax revenue
d. it lessened the Fed’s control over the money supply, making it harder to conduct monetary policy

D

What was the Depository Institutions Deregulation and Monetary Control Act (DIDMCA)?
a. established uniform reserve requirements for all banks
b. established higher reserve requirements for member banks
c. established higher reserve requirements for nonmember banks
d. abolished reserve requirements

A

This board Decides the IORB. Composed of 7 members that serve 14-year nonrenewable terms.
a. Board of Directors
b. Board of Governors
c. Open Market Committee
d. Comptroller of the currency

B; Board of Governors

Beyond being involved in the conduct of monetary policies, what are the four other duties of the Board of Governors?

1. Set margin requirements

2. Approve mergers

3. Set bank employee salaries

4. Hire economists

A key component of the Federal Reserve System, responsible for making crucial decisions about monetary policy in the United States. It typically meets eight times a year to discuss and decide on open market operations

Federal Open market Committee

Who are the members of the FOMC?

7 Board of Governors

1 the president of the Federal Reserve Bank of NY

4 presidents from other federal reserve banks on a rotating basis

What are the two functions of the Federal Open Market Committee? (FOMC)

1. Directs open market operations

2. Sets federal funds target rate

Why does the chairman of the board of governors really run the show? (4)

1. Sets the agenda

2. Speaks & votes first

3. Supervises economists

4. Negotiates with the government

The ability of the central bank to set monetary policy instruments is called

a. policy transparency
b. goal independence
c. instrument independence
d. operational accountability

C

The ability of the central bank to set the goals of monetary policy is called

a. operational independence
b. instrument independence
c. accountability in policy setting
d. goal independence

D

Which of the following are true regarding the independence of the Federal Reserve System?

a. The non-renewable terms reduce political influence
b. It cannot be altered by legislation
c. Members are appointed by the President
d. All profits are given to the Treasury
e. The Fed is entirely privately owned and operated

A, C, and D are correct

The federal reserve is ___ (more/less) independent than most agencies of the U.S. Government. What is the caveat?

more; can be altered by legislation

Why could an independent Fed be good? (4)

1. Focus on long-term problems (expansionary policy)

2. Inflationary bias

3. Resist pressure to finance Treasury deficits

4. Too important to leave to politicians

Why could an independent Fed be bad? (4)

1. Hasn’t been successfully independent yet

2. Unaccountable leaders (currently there’s little accountability for consequences)

3. Difficult to coordinate fiscal/monetary policy

4. Undemocratic (controlled by the elite)

suggests that bureaucracies, like the Federal Reserve, aim to maximize their own power and prestige

Theory of Bureacracy Behavior

What are the key predictions of the Theory of Bureaucracy Behavior? Select all that apply.
a. The Fed will avoid conflict with powerful groups
b. The Fed will fight to preserve autonomy
c. The Fed will prioritize maximizing employment at all costs
d. The Fed will always follow the preferences of Congress

A and B are correct

The theory of bureaucratic behavior is great for
a. predicting the motivation behind the Fed’s actions
b. analyzing the structure of congressional committees
c. explaining the historical causes of financial crises
d. forecasting long-term inflation trends

A

The Federal Reserve System was established in 1913

a. because of distrust of moneyed interests and centralized power.

b. to keep the stock markets from crashing.

c. because the public became convinced a central bank was needed to avoid bank panics.

d. to ensure banking services for the Treasury.

C

Which entity in the Federal Reserve System sets reserve requirements and the discount rate?

Board of governors

Which of the following functions is not performed by any of the 12 regional Federal Reserve​ banks?

a. currency management

b. Cheque clearing

c. Discount loans

d. Setting interest rates payable on time deposits

D

The policy tools of the Fed are the following except

a. reserve requirements.

b. open market operations.

c. bond creation.

d. the discount rate.

C

What are the four policy tools of the Fed?

1. Open Market Operations

2. Discount policy

3. Reserve requirements

4. Interest on excess reserves

____ are the most important policy tool the Fed has for controlling the money supply
a. Open Market Operations
b. Discount Rates
c. Reserve Requirements

A

The fed’s organization was shaped by the struggle between advocates regarding its
a. Independence
b. Power
c. Operations

B

After it’s creation the Federal Reserve had only one tool:

Discount Loans

This tool is borrowed from the fed. Always obtained from the regional bank

Discount Loans

Which act required all national banks to become member banks, whilst allowing optional membership for state banks?

Federal Reserve Act of 1913

Why do Board of Governor members rarely last 14 years?

Their knowledge is valuable

What are the 3 steps of the FOMC meeting?

1. Everyone shows up and discusses economics

2. Vote on what to do

3. Announce to the public

The chairman of the Board of Governors is also the chair of the ___

a. FOMC
b. Fed
c. Federal Advisory Council

A

What is the difference between the Fed Funds target rate and Fed Funds rate?
Target rate:
Funds rate:

Target rate: ideal rate set by the open market committee
Funds rate: the rate that banks actually charge

Which of the following is true regarding Federal Reserve banks?
a. There are 9 of them
b. They’re stockholders of the federal reserve
c. They have a board of directors
d. They have a president

B, C, D.

A is wrong because there are 12

Which of the following is likely a result of increased​ interest-rate volatility?

a. An increase in demand for financial services and products

b. An increase in costs for financial products and services

c. A decrease in demand for financial services and products

d. A decrease in costs for financial products and services

A; Increase in demand for financial products and services

What recent change in the economic environment has most significantly altered the demand for financial products?

The increase in interest rate risk

Most of the​ Fed's earnings come from

Interest earned on discount loans

Each of the Federal Reserve banks is considered a​ quasi-public institution because of the following statements except

a. member banks have purchased stock in their district Federal Reserve bank.

b. it is owned by the private commercial banks in its district that are members of the Federal Reserve System.

c. it uses its staff of professional economists to research topics related to the conduct of monetary policy.

d. many of the directors of district banks are elected by member banks.

C

The twelve Federal Reserve Banks are involved in monetary policy in several ways, including which of the following?

a. Issuing bonds
b. Deciding which municipalities can obtain discount loans

c. Voting on the purchase and sale of government securities that affect both interest rates and the amount of reserves in the banking system
d. Being the final authority for the discount rate

C

Today the US has a dual banking system in which banks supervised by the ____ and by the ____ operate side by side

Federal government, states

Which of the following functions is NOT performed by any of the 12 federal reserve banks?
a. issuing new currency
b. setting interest rates payable on time deposits
c. check clearing
d. conducting research

B