econ 311 exam 3

asset bubble

When the price of an asset increases at a rapid pace beyond the asset's fundamental value

negative demand shock

unexpected change that reduces consumption/investment spending

negative supply shock

unexpected change that makes production across the economy more difficult

natural federal funds rate

rate where monetary policy is neither expansionary or contractionary

neutral rate estimate (now)

2.6% nominal

0.6% real (accounts for inflation)

federal funds rate (now)

3.5-3.75 %

central bank

controls money and credit, provides financial services for the federal government, maintains stability of economy and currency (USA is federal reserve)

1907 panics

banks failed and private investors like JP morgan had to bail them out --> he advocated for a central bank

1913/1914 compromise

the year/years the federal reserve started

functions of the federal reserve

maintain payments system

supervise and regulate financial institutions

monitor stability of the financial system

conduct monetary policy(dual mandate)

how many fed reserves are there

12 regional banks that are privately owned

24 branches

(36 total)

average lifespan of 1$ bill

18 months

FED BANKS

regional FRBs are owned by private companies, where the president is appointed by the board

each has 9 directors, 6 picked by bankers and 3 are appointed by the government

establish the discount rate (right above ffr)

beige books

select federal advisory council

collect date and monitor conditions

new york FRB

international financial capital

supervise and regulate

open market desk (buy and sell bonds)

prez has perm voting seat

board of governors

Washington D.C. (public)

funded by interest from bonds

7 members appointed by president cnfm by sen.

14 year terms (YOUR OWN)

role of BOG

serve on FOMC

FOMC chair appointed for 4 year term by prez

effectively set discount rate

set margin requirement for securities

set salaries for fed prez, officers

approve most bank mergers

Federal Open Market Comittee (FOMC)

meet 8 times a year (every 6 weeks) for 2 days

7 BOG and 12 FRB presidents

sets the FFR and reserve requirements

sets interest on the reserve

only 12 vote: 7BOG, NY prez, 4 rotating prez

current reserve requirement

0%

Pros of Central Bank Independence

focus on long term objective

not influenced by politics

prevent political business cycle

expertise

pursue unpopular policies in public interest

Cons of Central Bank Independence

Undemocratic

monetary policy affects all

lack of accountability

public holds congress/prez accountable

fiscal and monetary policy can cross purpose

self interest vs. public interest

Federal Reserve Independence (Rubin Doctrine)

fed independence should be respected by the President (they shouldn't comment)

Fed reserve transparency/accountability/credibility

release of minutes

inflation targets (anchoring)

forecast horizon 3 years + lr projections

press conferences after meetings

Who pays for fed?

Fed money comes from the banks

BOG money comes from interest on bonds

if Fed earns profit, it goes to the treasury

reserve

cash held by banks in their vault or in an account w/ the fed

required reserve ratio

percent of deposits that must be held in reserve

total reserves equation

total reserves = required + excess

monetary base

monetary base = currency + reserves

controlled by OMO (buying/selling bonds

Federal Reserve Assets

securities and loans to commercial banks and thrift institutions

repurchase agreement

Federal Reserve buys securities from a counterparty subject to an agreement to resell the securities at a later date, thus temporarily increasing the supply of reserves in the banking system.

reverse repurchase agreement

Federal Reserve sells securities to a counterparty subject to an agreement to repurchase the securities at a later date, thus temporarily decreasing the supply of reserves in the banking system.

money supply

money supply = monetary base * money multiplier