Final Exam Memorization of Facts

Question 1

Check Clearing Process

Answer 1

• Under regional Fed bank responsibilities
• checks taken at the end of day from banks and taken to check warehouse
• sorts checks out by depositor’s banks
• “Float” money: check receiver get credited before check writer debited

Question 2

12 Regional Federal Bank Functions

Answer 2

1. clear checks
2. issue new currency
3. withdraw old/damaged currency
4. discount loan to banks in their district (discount rate too)
5. evaluate bank mergers and acquisitions in district
6. collect and examine data on local business conditions
7. examine and regulate banks

Question 3

Board of Governors Functions

Answer 3

1) Set reserve requirements
2) Set margin requirements
3) Set monetary policy
4) Set discount rate

Question 4

Evaluating Independence of the Fed

Answer 4

• little political bias
• dual mandate (goal dependence here)
• autonomy in policy choices
  • instrument independence
  • goal independence apart from mandate

Question 5

Against Fed Independence

Answer 5

• nondemocratic , elitist

- hard to coordinate fiscal and monetary policy

Question 6

For Fed Independence

Answer 6

• no political bias

- dependence would lead to increased Treasury debt and accommodation

Question 7

Open Market Purchase (from Banks)

Answer 7

• buy securities from banks, give them $
• increases bank’s reserves
• increases Fed’s reserves and securities
• Increase MB

Question 8

Open Market Purchase from Public

Answer 8

• Increase in MB

Question 9

Discount Loans

Answer 9

• bank borrows from Fed
• increases bank’s reserves
• bank uses the money from loan to buy securities
• increase in MB

Question 10

Market for Reserves in Fed Funds Market: Demand

Answer 10

• official rate paid on deposits/ IR received from excess reserves stored at Fed = price floor
• banks must choose between loaning funds to other banks and earning IR (i ff) or storing funds at fed

Question 11

Market for Reserves in Fed Funds Market: Supply

Answer 11

• two types of reserves: non-borrowed, borrowed

- interest rate on borrowing from Fed always higher than borrowing from other banks (I ff < i D)

Question 12

Conventional Monetary Policy Tools

Answer 12

1) Open Market Operations
2) Discount Window
3) Reserve Requirements
4) Interest on Reserves (2008 start)

Question 13

Unconventional Monetary Policy Tools

Answer 13

1. Liquidity Provision 
A. enhanced discount window
B. term auction facility 
C. new lending programs
2. Asset Purchases
a. Stage 1: Fed buys Mortgage Backs Securities
b. Stage 2: Fed buys L-term Treasuries
3. Commitment to Future Policy Actions

Question 14

Monetary Policy Goals/ Strategy

Answer 14

(1) Price Stability
(2) Full Employment
(3) Economic Growth
(4) Stability of Financial Markets
(5) IR Stability
(6) Stability in FX Market

Question 15

Advantages & Disadvantages to Inflation Targeting

Answer 15

Advantages:

• increased transparency
• increased accountability
• if followed, no time-inconsistency problem
• easily understood

Disadvantages:

• too much rigidity
• output fluctuations/ bix cycles
• high unemployment, low output during disinflation periods

Question 16

Holistic Approach - Advantages & Disadvantages

Answer 16

1. Forward-looking behavior (forecasting)
2. Pre-emptive strikes (Defensive OMO)
   Advantages:
   - it works
   - uses a lot of information in forecasting
   Disadvantages:
   - lack of accountability
   - inconsistent with democratic principles
   - opaque

Question 17

Lessons From Financial Crisis

Answer 17

i. development/ innovations in financial markets have bigger effects on real econ than previously thought
ii. Zero-Lower Bound on IR can be a serious problem
iii. Financial crises clean up -> costly
iv. Price stability and output stability does not equal financial stability

Question 18

Bubbles

Answer 18

• pronounced increase in asset prices that depart from fundamental values
  caused by:
  • irrational exuberance
  • credit driven bubble

Question 19

Taylor Rule

Answer 19

Federal Funds Rate = inflation rate + equilibrium Federal Funds Rate + [ 1/2( inflation gap) * 1/2( output gap) ]