Exam 2

Question 1

What is the interest rate called on loans from one commercial bank to another?

Answer 1

Federal Funds Rate

Question 2

What is the interest rate called on loans from the Federal Reserve to commercial banks?

Answer 2

Discount Rate

Question 3

How many Federal Reserve Banks are in the Federal Reserve System?

Answer 3

Twelve

Question 4

How many Federal Reserve Bank Presidents vote on the FOMC?

Answer 4

Five

Question 5

What are the liabilities of Central Banks?

Answer 5

Currency in Circulation and Reserves

Question 6

What are the assets of Central Banks?

Answer 6

Securities, Loans to financial institutions (discount loans)

Question 7

What are the liabilities of Commercial Banks?

Answer 7

Checkable Deposits and Discount Loans

Question 8

What are the assets of Commercial Banks?

Answer 8

Securities, Reserves, Loans

Question 9

What are Open Market Operations?

Answer 9

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

Question 10

How many individuals sit on the Board of Governors?

Answer 10

Seven

Question 11

What are the three agents in the money supply process?

Answer 11

Central Banks, Banks, Depositors

Question 12

How does tightening monetary policy affect the Federal Funds Rate?

Answer 12

It raises it

Question 13

How does easing monetary policy affect the Federal Funds Rate?

Answer 13

It lowers it

Question 14

What ensures the independence of the Federal Reserve?

Answer 14

1. Member’s of the Board of Governors serve 14 year terms; alleviating political pressure. 2. The Fed makes its own money through loans and holding securities.

Question 15

Currency in Circulation

Answer 15

The amount of currency in the hands of the non-bank public

Question 16

Reserves

Answer 16

The deposits in Banks’ accounts at the Fed, along with currency that the depository institutions are holding (vault cash)

Question 17

What makes up the Monetary Base?

Answer 17

Currency in Circulation (C) plus Total Reserves (R) in the banking system. MB = C + R

Question 18

Dynamic OMO

Answer 18

Intended to change the level of reserves and the monetary base during normal times.

Question 19

Defensive OMO

Answer 19

Intended to maintain current conditions in the face of outside disruptions to the targeted interest rate or money supply

Question 20

Repurchase Agreement (Repo’s)

Answer 20

Fed purchases securities with an agreement that the seller will repurchase them in a short period of time (one to fifteen days).

Question 21

Reverse Repo

Answer 21

Fed buys securities with the intent of buying them back in the near future.

Question 22

Price Stability

Answer 22

Low, stable inflation rates

Question 23

Nominal Anchor

Answer 23

A nominal variable such as the inflation rate or money supply, which ties down the price level in order to achieve price stability

Question 24

Time-Inconsistency Problem

Answer 24

Monetary Policy that is conducted on a discretionary, day-by-day basis, leading to poor long run outcomes

Question 25

Goals of Central Banks

Answer 25

1. Price Stability 2. High Employment 3. Economic Growth 4. Interest Rate Stability 5. Stability in Foreign Exchange Markets

Question 26

Dual Mandate (Fed)

Answer 26

Price Stability and High Employment

Question 27

Taylor Principle

Answer 27

Monetary authorities should raise nominal interest rates by more than the increase in the inflation rate