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exam 4 Flashcards

1
Q

Keynesian Policy - Which of the following is true?

A
  • The focus is on fiscal policy and monetary policy accommodates fiscal policy 

  • Developed during a period of high unemployment and deflation 

  • It was the primary focus of government policy during the post WW II period until the 1980’s 

  • the monetary policy prescriptions assume no inflation and so do not incorporate the possibility that investors will use the fisher equation to adjust real rates of return for expected inflation
  • to lower interest rates in the economy, the central bank expands the growth in the money supply, thus shifting the money supply curve to the right, resulting in lower interest rates
  • central bank expands Ms to lower interest rates- market participants are fearful of inflation and see the expansion of the Ms and raise their expectations of future inflation- rising inflationary expectations make lenders demand a higher inflation premium and this results in a higher nominal interest rate demanded (fisher equation) in order to protect themselves against higher inflation and the associated loss of purchasing power- the central bank then increases the Ms even faster to push interest rates lower- cycle continues
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2
Q

Monetarist Policy View - Which of the following is true?

A
  • The Equation of Exchange reveals the relationship between the Money Supply and Inflation. Both sides of the equation are just different ways of stating Nominal Gross Domestic Product 

  • The Monetary base is the sum of currency in circulation and reserve balances at the Fed 
(deposits held by banks and other depository institutions in their accounts at the Federal 
Reserve) 

  • The velocity of Money is the average number of times the money supply turns over in a 
year 

  • In traditional monetary theory, the velocity of money is assumed to be constant over the 
long term but does vary over the shorter term 

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3
Q

What has happened to the velocity of money since the mid-1990’s? Increased? Decreased? Stayed the same?

A

drastically decreased

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4
Q

Austrian Policy View - Which of the following is true?

A
  • The Austrian view focuses on how central bank attempts to manipulate the business cycle create malinvestments and credit fueled bubbles that eventually burst and lead to recessions. 

  • Austrian economists would argue that excessive money creation in the late 1990’s and early 2000’s contributed to the creation of the real estate bubble and the financial crisis of 2008 

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5
Q

If the OMD is a net buyer of treasury securities, all other things constant, the money supply will _____.

A

increase

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6
Q

If the OMD is a net seller of treasury securities, all other things constant, the money supply will _____.

A

decrease

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7
Q

If the OMD is a net buyer of mortgage backed securities (MBSs), all other things constant, the money supply will _____.

A

increase

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8
Q

The Fed acts as a Fiscal Agent for U.S. Government. What does this mean?

A
  • The fed processes a variety of financial transactions involving trillions of dollars
  • Just as an individual might keep an account at a bank, the US treasury keeps a checking account with the federal reserve, through which incoming federal tax deposits and outgoing government payments are handled
  • As part of this relationship, the fed sells and redeems US government securities such as savings bonds and treasury bills, bonds, and notes along which issuing the nation’s coin and paper currency
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9
Q

The Fed acts as a Lender of Last Resort. What does this mean?

A
  • The fed serves as the lender of last resort to institutions who cannot obtain credit elsewhere and the collapse of them would have serious implications for the economy
  • It took this role over from the private sector clearing houses which operated during the free banking era
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10
Q

What is the Beige Book?

A
  • A report published 8 times a year
  • Each FRB gathers anecdotal information on current economic conditions in its district through reports from bank and branch directors and interviews with key business contacts, economists, market experts, and other sources
  • The beige book summarizes this information by district and sector
  • An overall summary of the 12 district reports is prepared by a designated FRB on a rotating basis
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11
Q

Describe how the BOG, FOMC, Monetary Policy Directives, OMD, OMO, Primary Dealers, and other financial institutions and market participants are related.

A
  • The BOG acts as the main policy making body
  • BOG and NY FRB pres have 8 votes
  • Decide monetary policy and send directive to OMD
  • The fed buys and sells treasury securities, MBBs, MBSs (OMO) through the OMD to and from primary dealers
  • Primary dealers buy and sell to other financial market participants
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12
Q

Assume the demand curve for Fed Funds does not move. If the open market desk is directed to target a new lower Fed Funds rate, what will they do?

A
  • Increase the supply of fed funds by buying T-bills in the open market

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13
Q

Now assume the demand curve for Fed Funds is shifting to the right as the economy grows. If the open market desk is directed to target a new lower Fed Funds rate, what will they do?

A
  • Buy enough securities in the open market to shift the fed funds supply curve to the right faster than the demand curve is shifting to the right
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14
Q

Assume the demand curve for Fed Funds does not move. If the open market desk is directed to target a new higher Fed Funds rate, what will they do?

A
  • decrease the supply of fed funds by selling T-bills in the open market
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15
Q

Now assume the demand curve for Fed Funds is shifting to the right as the economy grows. If the open market desk is directed to target a new higher Fed Funds rate, what will they do? 


A
  • Sell only enough securities in the open market to shift the fed funds supply curve to the right more slowly than the demand curve is shifting right
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16
Q

If the Fed OMD starts buying/selling treasury bonds in order to offset some actions the US treasury has undertaken, is this a dynamic or defensive OMO?

A
  • Defensive
  • OMO that are used to offset other exogenous factors that are not under the direct control of the Fed
    • Examples are US treasury activities or changes in the public’s demand for cash in their pockets
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17
Q

If the Fed OMD starts buying/selling treasury bonds in order to target a new Fed Funds rate level, is this a dynamic or defensive OMO?

A
  • Dynamic

- OMO that are used to implement the monetary policy directives handed down from the FOMC

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18
Q

In 1980, the Depository Institutions Deregulations and Monetary Control Act was passed. This Act required that____. 


A

All depository institutions must meet the Fed’s reserve requirements 


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19
Q

How many times has the US actually defaulted on its debt?

A
  • 4
  • On demand notes in early 1862
  • On gold bonds in 1933
  • In 1968 on redemption of silver certificate paper dollars for silver dollars
  • In 1971 by breaking the commitment to redeem USD held by foreign governments for gold under Bretton Woods
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20
Q

Explain how OMD purchases (or sales) of securities impact the supply of federal funds and interest rates in the economy. Youi might want to include references to the supply and demand for loanable funds discussions from earlier in the class.

A
  • The OMD trades with primary dealers (large multinational banks)
  • Then the primary dealers act as a conduit into the financial markets, buying and selling securities with other commercial banks and depository institutions such as S&Ls and credit unions, as well as insurance companies, big investors, foreign governments, pension funds, and corporations
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21
Q

What is the difference between dynamic and defensive OMD?

A
  • OMO that are used to implement the monetary policy directives handed down from the FOMC are dynamic
  • OMO that are used to offset other exogenous factors not under the direct control of the fed are defensive
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22
Q

Which of the following is included in the calculation of the M1 money supply measure?

A
  • Currency and coin

- Demand deposits

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23
Q

Which of the following is included in the calculation of the M2 money supply measure?

A
  • Currency and coin
  • Demand deposits
  • Savings accounts and small time deposits
  • MMDAs
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24
Q

What organization is responsible for setting monetary policy in the Eurozone?

A
  • The European central bank (ECB), based in Frankfurt

- ECB primary goals are price and currency stability

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25
Q

What does “monetizing the debt” mean?

A
  • The process of creating new money to finance the issue of debt by the federal government
  • Avoids crowding out in the short-term by keeping interest rates low but runs the risk of creating an inflation problem that will lead to higher interest rates as investors demand a larger inflation premium in their interest rate-based returns
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26
Q

Explain the difference between crowding out effect and monetizing the debt.

A
  • Crowding out effect occurs when given a finite amount of loanable funds supplied to the market (through savings), excessive government demand for these funds tend to “Crowd out” the private demand (by consumers and corporations) for funds
    • The federal government may be willing to pay whatever is necessary to borrow these funds, but the private sector may not
  • Monetization of the debt refers to the process of creating new money to finance the issue of debt by the federal government
  • This can avoid crowding out in the short term by keeping interest rates low but runs the risk of creating an inflation problem that will lead to higher interest rates as investors demand a larger inflation premium in their interest rate-based returns
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27
Q

If the OMD is a net seller of mortgage backed securities (MBSs), all other things constant, the money supply will _____.

A

decrease

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28
Q

If the Federal Reserve increases the reserve requirement, what will happen to the Money Supply in the banking system?

A

decrease

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29
Q

Which of the following is the favorite monetary tool of the Fed

A

OMO

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30
Q

Which of the following is under the direct control of the Fed? 


A
  • OMO
  • Discount Window Lending
  • RR
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31
Q

Which of the following is not under the direct control of the Fed?

A

treasury activities

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32
Q

The President’s proposed tax plan will lower the amount of income taxes people pay, thus lowering the average balances on deposit at the Fed that are held in the U.S. Treasury accounts. What will this decrease in Treasury holdings on deposit do to the money supply? (Assuming everything else is held constant).

A

Increase the money supply

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33
Q

If the public’s demand for cash were to increase, what could the Fed do to offset the impact on the money supply?

A
  • Buy T-bills through the OMD

- Increase discount window lending

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34
Q

dynamic OMO

A

OMO that are used to implement the monetary policy directives handed down from the FOMC

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35
Q

defensive OMO

A

OMO that are used to offset other exogenous factors not under the direct control of the fed

36
Q

Describe why the Fed was created with 12 separate district banks instead of a single central bank.

A

RI Senator Nelson Aldrich proposed a central banking system in 1912 but to decentralize it somehow or it would be attacked by local politicians and bankers like the first and second banks of the US were

37
Q

Price Indices - Which of the following is true?

A
  • The consumer price index for urban consumers (CPI-U) will report a higher level of inflation than the Chained Consumer Price Index for urban consumers (C-CPI-U)
  • The consumer price index for urban consumers (CPI-U) will report a higher level of inflation than the Chained Consumer Price Index for urban consumers (C-CPI-U)
38
Q

How many Federal Reserve Districts are there?


A

12

39
Q

Which Federal Reserve Bank is the most important? Why?

A
  • NY
  • Bc the NY FRB conducts the daily operations of the OMD and it is the conduit in which the federal reserve interacts with the financial markets in its transmission of monetary policy to the rest of the markets
40
Q

Which Federal Reserve Bank District is Florida located in?

A

6 - Atlanta

41
Q

If the public’s demand for cash were to decrease, what could the Fed do to offset the impact on the money supply?

A
  • Sell T-bills through the OMD

- Decrease discount window lending

42
Q

Which of the following is the best statement concerning the impact of Federal Funds Market activity on the amount of legal reserves in the banking system?

A

Fed Funds market activity makes more efficient use of legal reserves in the system. 


43
Q

The Fed FOMC sets both the Discount Rate and the Fed Funds rate. True or false?

A

false
-Individual Federal Reserve Banks set their own discount rate but obtain approval from the BOG and the FOMC sets the Target Fed Funds rate.

44
Q

The FRB’s set the Discount rates (and those rates are approved by the BOG) but supply and demand forces determine the effective Fed Funds rate on a daily basis.
 True or false?

A

True

- but the Fed targets the Fed Funds rate and uses OMO to try to maintain that target rate or target range.

45
Q

The Fed sets the Fed Funds rate but supply and demand forces determine the Discount rate at FRB’s - true or false?

A

false

46
Q

The Fed targets the Fed Funds rate but does not set the effective Fed Funds rate on a daily basis. True or false?

A

True

47
Q

If the Fed targets a Fed Funds rate below the current Fed Funds rate, how can they achieve their goals?

A

Increasing the supply of Fed Funds by selling T-Bills in the open market.

48
Q

In 1980 the Depository Institutions Deregulation and Monetary Control Act (DID-MCA) was passed. The MCA side of the law required that all institutions that accepted deposits (“depository institutions”) had to meet the Fed’s reserve requirements whether they were members of the Federal Reserve or not. True or false?

A

true

49
Q

The MCA part of the DID-MCA law was enacted to increase the Federal Reserve’s control over fiscal policy. True or false?

A

false

50
Q

The MCA part of the DID-MCA law was enacted to increase the Federal Reserve’s control over monetary policy. True or false?

A

true

51
Q

Who selects a member of the Fed’s Board of Governors to be the Chairman?

A

the POTUS

52
Q

What is ZIRP and how is it related to recent monetary policy?

A
  • zero interest rate policy
  • when a central bank sets its target short-term interest rate at or close to 0%
  • the goal is to spur economic activity by encouraging low-cost borrowing and greater access to cheap credit by firms and individuals
53
Q

What is financial repression and how is it related to recent monetary policy? 


A
  • A term that describes measures by which governments channel funds to themselves as a form of debt reduction
  • Comprises “policies that results in savers earning returns below the rate of inflation” in order to allow banks to “provide cheap loans to companies and governments, reducing the burden of repayments”
    • It can be particularly effective at liquidating government debt dominated in domestic currency
    • It can also lead to a large expansion in debt “to levels evoking comparisons with the excesses that generated Japan’s lost decade and the 1997 Asian financial crisis”
54
Q

What does it mean when we say the Fed is “injecting liquidity” into the financial system?

A
  • The injection of new money in the form of LRs into the financial system
  • This is a standard federal reserve response to any crisis whether it is a financial crisis or some other shock to the financial system
55
Q

How big is the Fed’s consolidated balance sheet? (approximately) 


A

$8.5 trillion

56
Q

How big was the Fed’s balance sheet before the financial crisis that started in 2007/8 began?

A

under $1 trillion - approximately $900 million

57
Q

Which financial institutions are lenders in the Fed Funds markets?

A

Institutions with excess LRs

58
Q

Which of the following is true about Fed Funds?

A
  • Borrowers buy fed funds

- Lenders sell fed funds

59
Q

What will be the Fed’s most likely action relating to their bond buying program for the rest of the year providing the economy were to evolve broadly as anticipated?

A

reducing buying

60
Q

Which of the following have been a factor in the Fed’s current plans regarding the future of their bond buying program?

A
  • Increasing inflation

- Decreasing unemployment

61
Q

What is velocity?

A
  • Velocity is a ratio of nominal GDP to a measure of the money supply (M1 or M2). It can be thought of as the rate of turnover in the money supply–that is, the number of times one dollar is used to purchase final goods and services included in GDP.
62
Q

What are the effects of an expansionary (or stimulative) monetary policy, assuming no inflation? (Note I use the “expansionary” term)

A
  • Effects on the treasury (risk-free) rate influences cost of debt and cost of equity
  • Cost of capital is reduced, reducing required return on cost of products
  • Encourages firms to spend more money, hire more employees
  • If US economic conditions are weak, a strong dollar will not provide the stimulus needed to improve conditions
  • The fed may need to implement monetary policy
63
Q

Describe the shifts in monetary policy over the 2001-2003 period, the 2004-2007 period, and the 2008-2013 period.

A
  • Focus on improving a weak economy in 2001-2003
  • Focus on reducing inflation in 2004-2007

  • Focus on improving weak economy in 2008-2013
64
Q

What are the two components of legal reserves?

A
  • Vault cash

- Deposits at a FRB

65
Q

What is the BIS and what do they do?


A
  • the banks for International Settlements
  • is an international organization that serves central banks and other financial authorities across the globe to support their pursuit of monetary and financial stability through international cooperation
  • it also acts as a bank for central banks
66
Q

What are leakages?


A

Leakages in the expansion system represent either the cash holdings held outside of banks that are not loaned out of “excess legal reserves” that are held by banks at the fed and are not loaned out and so do not enter the expansion process

67
Q

What U.S. government agency that makes sure banks, lenders, and other financial companies treat you, the consumer, fairly?

A

The Consumer Financial Protection Bureau, which is a government agency that makes sure banks, lenders, and other financial companies treat consumers fairly

68
Q

What is the FOMC? How many times a year does it meet? What does it do with respect to management of the money supply in the economy and interest rates? What is “policy directive”?

A
  • The Federal Open Market Committee
  • Required to meet at least 4 times a year but typically meets 8
  • Has the power to direct all OMO of the FRBs
  • Sets monetary policy considering the international financial situation, the domestic economy, and long range objectives
  • Devise strategies to achieve these objectives and formulate monetary policy directives that are transmitted to the NY FRB OMD for implementation
  • Policy directives are statements of and instructions for implementing important, high-level internal direction and positions that guide organization decisions and actions
  • These policies impact:
    • Money supply, future inflation rates, interest rates
    • Economic growth
    • Forex value of the USD
    • Balance of trade and finance flows in and out of the USD
69
Q

What is the Open Market Desk (OMD)? What does it do? What Fed Bank operates it?

A
  • The trading desk managed by the NY FRB and used to trade US treasury securities (and since 2008, also mortgage backed securities)
  • Major objective is to carry out all OMOs for the FOMC
  • Minor objectives are to smooth markets and act as an agent for the treasury
  • Trades with primary dealers, who are large multinational banks
70
Q

If the Fed targets a Fed Funds rate below the current Fed Funds rate, how can they achieve their goals?

A

Increasing the supply of Fed Funds by buying T-Bills in the open market.

71
Q

What is the current Fed Funds target rate of interest (or range of interest rates)? 


A

0 - 0.25%

72
Q

Which Federal Reserve District are depository institutions in Florida located in? 


A

6 - Atlanta

73
Q

What are the two main roles (or goals of monetary policy) for the Federal Reserve Board of Governors? 


A
  • Maximum employment

- Stable prices

74
Q

Which Federal Reserve Bank is always represented on the FOMC? Why?

A
  • NY FRB

- Because of its daily operations and the OMD


75
Q

About two weeks before the scheduled FOMC meeting, a consolidated report of regional economic conditions is compiled and given to FOMC members. What is the name of this report?

A

the beige book

76
Q

What is a FOMC policy directive and who or what receives the directives? 


A
  • The FOMC is the principal organ of the US national monetary policy
  • They set monetary policy by specifying the short-term objective for the Fed’s OMO, which is usually a target level for the federal funds rate (the rate that commercial banks charge between themselves for overnight loans)
77
Q

What is the money multiplier. How is it calculated?

A
  • A heuristic used to demonstrate the maximum amount of broad money that could be created by commercial banks for a given fixed amount of base money and reserve ratio
  • MM = 1 / reserve requirement
78
Q

What are the three traditional monetary policy tools controlled by the Fed?

A
  • OMO
  • Discount rate/discount window loans
  • Reserve requirement
79
Q

Which of the following is true about Open Market Operations (OMO)? 


A
  • They are carried out by the Open Market Desk
  • The OMD manly buys and sells Treasury Securities but they also have been buying mortgage backed bonds since 
2008 

  • They are the most important monetary policy tool
80
Q

The Fed can carry out Open Market Operations that are designed to offset the effects of U.S. Treasury Operations 
- true or false?

A

true

81
Q

If the OMD is a net buyer of treasury securities, all other things held constant, the legal reserves in the banking system will _____.

A

increase

82
Q

If the OMD is a net seller of treasury securities, all other things constant, the legal reserves in the banking system will _____. 


A

decrease

83
Q

If the fed reserve is a net buyer of treasury securities or MSBs in its OMO activities, the fed pays for the securities by creating new legal reserves (LR) in the banking system. True or false?

A

True

  • These new LRs are then used as the basis for the money expansion process
  • Thus, if the fed is a net buyer, the Ms will expand, all other things held constant
84
Q

If the fed reserve is a net seller of treasury securities in its OMO activities, the fed receives payment for the securities by destroying legal reserves in the banking system. True or false?

A

True

  • As the amnt of legal reserves in the banking system shrinks, a money contraction process takes place, and the money supply will shrink
  • Thus if the fed is a net seller, the money supply will decrease, all other things held constant
85
Q

Who is the current Fed chairman?

A

Jerome Powell

86
Q

If the Fed OMD is a net seller of $100 million of T-bills and the reserve requirement is 20%, what will happen to the amount of Legal Reserves in the banking system?



A
  • Decrease by $100,000,000

- If the fed OMD sells, it gets paid by destroying LRs so the LRs in the system will decrease by $100 million

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