Exam 2 Flashcards
The Federal Reserve Bank of New York special roles
1.) Its district contains many of the largest commercial banks in the United States
2.) It has active involvement in the bond and foreign exchange markets
3.) It is the only Federal Reserve Bank to be a member of the Bank for International Settlements (BIS)
4.) The president of the FR Bank of New York is the only permanent voting member of the FOMC
Where does the Fed get its income (revenue)?
Government securities
What is the president’s influence on the Fed members?
The president…
1 - appoints governors
2 - appoints chair
3 - can influence FOMC members
How can congress affect the Fed?
They can get rid of the Fed or change its structure
What is the case FOR independence of the Fed? (They are currently independent)
1.) It keeps the Fed independent of political pressures
2.) Political business cycle
3.) Too important to leave to politicians
4.) Accommodation: not independent, need to finance large budget deficits
What is the case AGAINST independence of the Fed?
1.) Undemocratic - an elite group of bankers
2.) Unaccountable - responsible to no one
3.) Hard to coordinate monetary and fiscal policy
Board of Governors - how many members, headquartered where?
7 members headquartered in Washington, D.C.
Board of Governors - how are they appointed?
Appointed by the president, confirmed by the Senate
Board of Governors - what does their term look like?
14 year term, non-renewable
Board of Governors - what are the district requirements?
They are required to come from different districts
Board of Governors - what about the chairman?
The chairman is chosen by the governors and serves a four-year term (renewable)
Board of Governors - duties?
1 - Serve on the open market committee and conduct open market operations
2 - Set reserve requirements
3 - Control the discount rate
4 - Set margin requirements
5 - Sets salaries of the president and officers
6 - Approves bank mergers and acquisitions
7 - Specifies permissible bank activities of bank holding companies
8 - Specifies activities of foreign banks working in the U.S.
Federal Open Market Committee (FOMC) - how many members? Meets how many times a year?
12 members (7 Board of Governors members, president of the FR Bank of NY, presidents of 4 (of 11) other reserve banks), 8 times a year
The chairman of the ______ is also the chairman of the ______
Board of Governors, FOMC
What are the three components of the Fed?
1 - The Governors
2 - The FR Banks
3 - The FOMC
What are the four tools of the Fed?
1 - Open Market Operations
2 - Discount Rate
3 - Required reserve rate
4 - Interest on Excess Reserves
What are open market operations?
Buying and selling U.S. treasury bills
What do open market operations do to the interest rates?
Buying T-bills decreases the interest/Fed funds rate
Selling T-bills increases the interest/Fed funds rate
Who sets the required reserve ratio?
The governors
What is the current required reserve ratio?
10% of checkable deposits
Who is the chair of the FOMC and Board of Governors?
Jerome Powell
Where are Flagstaff’s required reserves kept?
San Francisco FR Bank
The Fed controls the _____ _____
Money Supply
Who are the three players in the Money Supply Process?
1 - The Central Bank
2 - Banks
3 - Depositors
The Fed’s Balance Sheet
Liabilities:
1 - Currency in Circulation
2 - Reserves
Assets:
1 - Government Securities
2 - Discount Loans
What is the equation for the Monetary Base?
MB = C + R
C - Currency in circulation
R - Total Reserves
What is the effect of an open market purchase on the monetary base?
Always increases the MB by the amount of the purchase.
What is M1?
M1 = Currency in circulation + Checkable Deposits + Traveler’s Checks
What is the Money Multiplier?
1/required reserve ratio (as decimal)
What are the currency checkable deposit ratio and excess reserves checkable deposit ratio?
c = C/D (currency, checkable deposits)
e = ER/D (excess reserves)
Total reserves equation:
Required reserves equation:
R = RR + ER
RR = r x D (required reserve ratio, checkable deposits)
What is the equation for the money multiplier?
m = (1+c)/(r + e + c)
What are the two types of open market operations?
Dynamic, defensive
What are dynamic open market operations?
They are intended to change the interest rates (week of Nov. 4, a 25% cut (25 basis points))
What are defensive open market operations?
They are intended to keep interest rates from changing
What is a repurchase agreement (repo)?
The Fed purchases securities with the agreement that the seller will repurchase them in a short period of time (typically 1-15 days)
What is a reverse repo (matched-sale purchase transaction)?
The Fed sells securities and the buyer agrees to sell them back to the Fed in the near future.
What does an open market sale do to reserves? Purchase?
Decreases the reserves (selling securities)
Increases the reserves (selling bonds)
What are 4 of the 6 Goals of the Fed?
1 - Price stability
2 - Full employment
3 - Economic growth
4 - Financial market stability
What are 2 advantages and 2 disadvantages of inflation targeting?
Advantages:
1 - Easily understood
2 - Improved performance
Disadvantages:
1 - Delayed signaling
2 -Too much rigidity
What is the Fed’s inflation target?
2%
What are 5 of the 9 functions of the Federal Reserve Banks?
1 - Issues new currency
2 - Withdraws damaged currency
3 - Clear checks
4 - Collect data on local business conditions
5 - Evaluate proposed mergers and applications for banks to expand their activities
What are the 3 types of Federal Credit (discount loans)?
Primary, secondary, seasonal
What is the taylor rule?
Federal Funds Rate Target = Inflation rate + equilibrium real Fed funds rate + 1/2(inflation gap) + 1/2(output gap)
What does the taylor rule do?
Automatically sets the Fed funds target rate
What is the equation for Money Supply? (M superscript S)
The change in Money Supply?
M^S = m x MB
deltaM^S = m * (deltaR + deltac)
What are the 4 advantages of open market operations?
1 - Flexible and precise
2 - Easily reversed
3 - Quickly implemented
4 - Controlled by the Fed
What is a trifecta?
Any party holding the house, senate, and the president (any change is possible)
What are the 3 goals of any economy?
Price stability, economic growth, full employment
What are the indicators of the 3 goals (economy)?
“core” PCE deflator, real GDP growth rate, unemployment rate
What are the values of the indicators of the 3 goals?
2.7% (not good, getting better), 2.8%, 4.1% (great!)
What is the Fed funds rate target?
4.5% - 4.75%
What is the interest on excess reserves?
4.65%
How many federal reserve banks are there?
12
What are reserves?
Currency at banks
What is an open market purchase? Sale?
Selling securities
Selling bonds
Reserves at a bank are…
…vault cash
Any change in _____ or _____ will affect the _____ _____
Currency, reserves, money supply
What is the discount policy?
Interest the Fed charges for not borrowing form other banks (borrowing in the markets)
What is the current discount rate?
4.75%
Lowering the _____ _____ has no effect if it is not in the _____ section.
Discount rate, horizontal
Study the Reserves Market graph!
Now!
Study the graphs from quiz 21!
Now!
What is the amount of total assets held by the Fed?
$6.92 trillion
What are the ECB’s requirements for a country’s fiscal policies (by the Maastricht Treaty)?
A fiscal cap of 3% of GDP
A public debt target of 60%
What is the dual mandate of the Fed?
Price stability, full employment
Arbitrage
Buy low, sell high
In 1913, Congress and the president did not envision that the Fed would control…
1 - the money supply
2 - discount loans
3 - lender-of-last-resort activity
4 - broad control over most aspects of money and the banking system
4 - broad control over most aspects of money and the banking system
If a member of the Board of Governors is limited to one 14-year term, how did Alan Greenspan serve 19 years on the Board of Governors?
1 - A special exemption was approved for him
2 - The rule was not in place at the time
3 - He completed the remaining years left on someone else’s term and then served one 14-year term
4 - He didn’t serve consecutive terms
3 - He completed the remaining years left on someone else’s term and then served one 14-year term
How many Federal Reserve districts are there?
12
How does the Fed reach its target for the federal funds rate?
1 - by changing the discount rate
2 - by changing reserve requirements
3 - by buying and selling Treasury securities
4 - by directly setting the federal funds rate
3 - by buying and selling Treasury securities
A majority of the members of the boards of the 12 Federal Reserve Banks are…
1 - elected by bankers
2 - appointed by the president
3 - appointed by the Fed chairman
4 - elected by the District Bank presidents
1 - elected by bankers
In the federal funds market diagram, an open market sale by the Fed…
1 - shifts the reserve supply curve to the right
2 - shifts the reserve supply curve to the left
3 - decreases the equilibrium federal funds rate
4 - increases the volume of federal funds traded
2 - shifts the reserve supply curve to the left
In order to increase its target for the federal funds rate, the Fed would normally…
1 - conduct open market sales
2 - conduct open market purchases
3 - increase the discount rate
4 - increase reserve requirements
1 - conduct open market sales
How can the Fed increase banks’ holdings of reserves and potentially lower the money supply?
1 - lowering the discount rate
2 - raising the interest it pays on reserves
3 - reducing the federal funds rate
4 - conduct open market purchases
2 - raising the interest it pays on reserves
During the financial crisis, the Fed introduced three new policy tools connected with bank reserve accounts. Which of the following is NOT one of those three new tools?
1 - interest on reserve balances
2 - open market operations
3 - overnight reserve repurchase agreement facility
4 - term deposit facility
2 - open market operations
As a result of an open market purchase, bank reserves…
1 - rise and interest rates fall
2 - fall and interest rates rise
3 - and interest rates both rise
4 - and interest rates both fall
1 - rise and interest rates fall
A matched sale-purchase transaction is also known as a…
1 - reverse repo
2 - discount loan
3 - put option
4 - federal funds loan
1 - reverse repo
