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)

What was the Federal Reserve act of 1913?

Created the Federal Reserve System with 12 regional reserve districts

T/F After 1813, private institutions became the lender of last resort and it went well.

False; led to severe banking panics

The Fed was designed to be

The banker’s bank, 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

The 12 district banks in the Federal Reserve System.
a. Federal Advisory Council
b. Federal Open Market Committee (FOMC)
c. Board of Governors of the Federal Reserve System
d. Federal Reserve Banks

Federal Reserve Banks (district banks)

A board with seven governors (including the chair) that plays an essential role in decision making within the Federal Reserve System

a. Board of Governors of the Federal Reserve System
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; composed of the seven members of the Board of Governors of the Federal Reserve System, the president of the Federal Reserve Bank of New York, and the presidents of four other Federal Reserve banks (on a rotating basis).

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

The Federal Reserve Bank of New York plays a special role on the Federal Reserve System for four reasons:
1.
2.
3.
4.

1. It’s the largest

2. Involved in foreign exchange markets

3. Represents U.S. on an international committee

4. Has really important top management

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
Currency management
Financial regulations/operations

Open Market Operations (OMO)

The Fed’s buying or selling of securities in the open market.

This board directs the 12 Federal Reserve Banks and plays a crucial role in the Federal Reserve System. Each bank has nine directors divided into three classes: A, B, and C.

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 were the two changes enacted in the Depository Institutions Deregulation and Monetary Control Act (DIDMCA)?

All banks keep Fed mandated required reserves
All banks can use discount loans

What was the purpose of the DIDMCA act in 1980?

To end the decline in fed membership (made the distinction between member and nonmember banks smaller)

This board administers/monitors monetary policy. Composed of 7 members that serve 14-year nonrenewable terms.

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. Issues directives to the Federal Reserve Bank NY

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

A business cycle caused by expansionary policies that are pursued prior to an election; causes lower unemployment and interest rates.

Political business cycle

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 of the following entities directs open market operations and sets the federal funds rate?

a. The Federal Advisory Council
b. The FOMC
c. Member commercial banks
d. The Board of Governors

B

Which of hte following entities in the Federal Reserve System sets reserve requirements and the discount rate?
a. The Federal Advisory Council
b. Member commercial banks
c. The FOMC
d. The Board of Governors

D

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

a. Issuing new currency and withdrawing damaged currency

b. Cheque clearing

c. Conducting economic research related to monetary policy

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

Which federal reserve entity meets eight times a year?
a. Federal Reserve banks
b. Board of governors
c. Federal Open Market committee

C