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22 Cards in this Set
- Front
- Back
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Which of the following is not part of Fed's system of checks and balances?
a) Fed's independence from federal govt and setting up the FRB as incorporated institutions b) ability of 12 regional banks to affect discount policy c) provision of 3 types of directors(A,B,C) that represent 3 different groups d) requirement that all depository institutions keep deposits at the Fed |
D |
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If you are a banker and expect interest rates to rise in the future, would you want to make short or long term loans?
a) short term b/c there's no guarantee that interest rates will rise as expected b) long term to secure higher interest rates for extended period of time c) short term so you can reinvest funds at higher interest rate after their maturity d) both long and short term will be profitable with increasing interest rates |
C |
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If bank has no excess reserves and a customer comes in asking for a loan, should you automatically turn down the customer b/c you don't have excess reserves to loan out? |
No, there are several ways a bank can acquire excess reserves: bank can borrow at discount window or federal funds market, or issue negotiable CDs |
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When Fed conducts an open market purchase it is ______ bonds and _______ quantity of reserves. |
buying
increasing |
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"The Fed can perfectly control the monetary base, but has less control over the composition of monetary base." True, false, uncertain? |
False. Fed cannot control amount of discount lending to financial institutions, so it doesn't have perfect control over the amount of reserves in banking system, hence monetary base. |
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Reserves are:
a) assets for bank b) liabilities for Fed c) deposits at Fed plus vault cash d) all of the above e) none of the above |
D |
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"The FFR can sometimes be higher than the discount rate." True, false, uncertain? |
True. Banks may prefer to pay higher market rate than to borrow from the Fed an incur the perceived stigma. |
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"The only way the Fed can affect the level of borrowed reserves is by adjusting the discount rate." True, false, uncertain? |
False. The Fed can also limit the amount of discount loans that an individual bank can have. |
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Why is the Fed's balance sheet a potentially important aspect of monetary policy during a crisis? |
Fed can influence interest rates and provide more targeted liquidity. |
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If you use an online payment system like PayPal to purchase goods and services on the internet, this will affect M1 and M2 how? |
No effect on either M1 or M2 |
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Why has the development of overnight loan markets made it more likely that banks will hold fewer excess reserves? |
The presence of overnight loan markets reduces the costs associated with deposit outflows. |
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A central bank that has the freedom to take the long view into account is |
- Not under political influence, so they do not have to pander to politicians |
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If Jane closes her account at the bank and uses the money to open a money market mutual fund account, what happens to M1? |
No change in M1 because the funds going to the money market mutual fund account must be deposited into the mutual fund's bank account. |
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If a bank finds that its ROE is too low because it has too much bank capital, what can it do to increase ROE? |
-Decrease capital by buying back stock -Reduce retained earnings by paying out more dividends -Acquire assets and increase loans |
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If the bank doubles the amount of its capital and the ROA remains constant, what will happen to ROE? |
ROE = ROA x EM
ROE = net profit after taxes/ equity capital
equity capital (denominator) increases by 2, so ROE decreases by twofold |
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In a financial panic, you would expect the money multiplier to _____, and the money supply to _____, which would cause the excess reserve ratio to _____. Thus depositors are likely to _____ their holdings of currency. |
m = decrease M = decrease e = increase c = increase |
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Supply and demand analysis for market for reserves: What would happen to FFR if there was a switch from deposits into currency? |
Less money will be held at banks so deposits decrease and required reserves will decrease. Thus demand will decrease because banks are required to hold less rr.
Deposits decreased and goes elsewhere out of banking system so supply also decreases.
FFR increases |
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Supply and demand analysis for market for reserves: What would happen to FFR if households started transferring money from savings to checking, leading to an increase in the amount of checkable deposits. |
Demand shifts right because deposits increase and therefore RR increases, banks must hold more in RR. But supply remains unchanged, so FFR increases |
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Why is paying interest on reserves an important tool for the Fed to manage crises? |
It allows the Fed to increase its lending as much as it wants without reducing the the FFR. |
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When Fed increases the reserve requirements, it reduces the money supply by causing: |
Money multiplier to fall
m = (1+c)/(c+rr+e)
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If float decreases below normal level, why might the manager of domestic operations consider it more desirable to use repurchase agreements to affect the MB rather than an outright purchase of bonds? |
Changes in float are usually temporary and are for defensive operations |
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Reverse repos serve as temporary open market sale in which the Fed temporarily sells assets to |
Reduce its balance sheet, thus decreasing money supply and raising short term interest rates |
