CH14: Central Banks and the Bank of Canada

Question 1

Easing of Monetary Policy

Answer 1

The lowering of the federal funds rate

Question 2

Federal Funds Rate

Answer 2

The interest rate on overnight loans of deposits at the Federa Reserve

Question 3

Federal Open Market Committee (FOMC)

Answer 3

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, the presidents of four other Federal Reserve banks (on a rotating basis).

Question 4

Federal Reserve Banks

Answer 4

The 12 districk banks in the Federal Reserve System.

Question 5

Instrument Independence

Answer 5

The ability of the central bank to set monetary policy instruments.

Question 6

Open Market Operations

Answer 6

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

Question 7

Political Business Cycle

Answer 7

A business cycle caused by expansionary policies that are pursued prior to an election.

Question 8

Board of Governors of the Federal Reserve System

Answer 8

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

Question 9

Goal Independence

Answer 9

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

Question 10

Tightening of Monetary Policy

Answer 10

An increase in the federal funds rate

Question 11

Why does the Federal Reserve Bank of New York (FRBNY) play a special role in the Federal Reserve System ?

Answer 11

1. The district (2nd) of the Federal Reserve Bank of New York (FRBNY) contains many of the largest commercial banks in the United States.
2. The FRBNY houses the open market desk, which conducts open market operations - the purchase and sale of bonds - that determine the amount of reserves in the banking system; the foreign exchange desk, which conducts foreign exchange interventions on behalf of the Federal Reserve System and the U.S. Treasury.
3. Proximity of the FRBNY to the New York and American Stock Exchanges.
4. Only Federal Reserve Bank to be a member of the Bank for International Settlements (BIS) allowing the FRBNY to have a special role in international relations with other central banks and with private market participants.
5. The president of the FRBNY is the only permanent member of the FOMC among the Federal Reserve bank presidents, serving as vice-chairman of the committee.

Question 12

Eurosystem

Answer 12

The European Central Bank and national central banks of countries that have adopted the euro.

Question 13

European Central Bank

Answer 13

The central bank of the sixteen euro area countries

Question 14

What is the European System of Central Banks

Answer 14

The European System of Central Banks (ESCB) established under the Treaty on European Union (TEU) is made up of the European Central Bank (ECB) and the national central banks of all the Member States of the European Union (EU), regardless of whether or not they have adopted the euro.

Question 15

What makes up the Federal Reserve System of the United States?

Answer 15

1. The Board of Governors of the Federal Reserve System,
2. The Federal Reserve Banks,
3. The Federal Open Market Committee (FOMC),
4. The Federal Advisory Council, and
5. Approximately 2900 member commercial banks.

Question 16

What makes the Bank of Canada different from the U.S. Federal Reserve and the European Central Bank?

Answer 16

The Bank of Canada has instrument independence
but not goal independence

Question 17

instrument independence

Answer 17

the ability of the central bank to set monetary policy instruments

Question 18

goal independence

Answer 18

the ability of the central bank to set the goals of
monetary policy

Question 19

What kinds of independence does the European Central Bank and U.S. Federal Reserve have?

Answer 19

1. Instrument independence
2. Goal Independence

Question 20

How many districts are there in the U.S. Federal Reserve system?

Answer 20

12

Question 21

When did the Bank of Japan become formally independent of the government?

Answer 21

April 1998 under the new Bank of Japan Law
(Bank of Japan formely operated under the Ministry of Finance prior to April 1998)

Question 22

What is the theory of bureaucratic behaviour?

Answer 22

the objective
of a bureaucracy is to maximize its own welfare

Question 23

What is the strongest argument for an independent Bank of Canada?

Answer 23

Subjecting the Bank to more political pressures would impart an inflationary bias to monetary policy, creating a political business cycle.

Question 24

Define Political Business Cycle

Answer 24

A cycle in which just before an election, expansionary
policies are pursued to lower unemployment and interest rates. After the election, the bad effects of these policies high inflation and high interest rates come home to roost, requiring contractionary policies that politicians hope the public will forget before the next election.

Question 25

When and how was the Bank of Canada created?

Answer 25

The Bank of Canada was created by an act of Parliament in 1934 and began operations on March 11, 1935. Initially it was privately owned but became a Crown corporation in 1938

Question 26

Who has overall responsibility for the operation of the Bank of Canada?

Answer 26

The overall responsibility for the operation of the Bank of Canada rests with a Board of Directors, consisting of the governor, the senior deputy governor, the deputy minister of finance, and twelve outside
directors. The Bank s governor is the chief executive officer and chairman of the Board of Directors.

Question 27

When and why was the U.S. Federal Reserve created?

Answer 27

The Federal Reserve System was created in 1913 to lessen the frequency of bank panics. Because of public hostility to central banks and the centralization of power, the Federal Reserve System was created with many checks and balances to diffuse power.

Question 28

Where is the European Central Bank based and when was it created?

Answer 28

The ECB is based in Frankfurt, Germany, and came into being on January 1, 1999.

Question 29

open market buyback operations

Answer 29

The purchase and sale of government securities that affect both interest rates and the amount of reserves in the banking system

Question 30

Exchange Fund Account

Answer 30

Holds the Canadian’s government’s foreign exchange reserves and is managed by the Bank of Canada. In particular, the Bank assists the Department of Finance in investing these foreign reserves and in borrowing when necessary to maintain an adequate level of reserves.