Central Banks & FED

Question 1

CB Responsibilities

Answer 1

(i) issuing currency; (ii) administering monetary policy; (iii) holding deposits representing bank reserves; (iv) executing open market transactions to facilitate smooth functioning of the financial system and protect the public interest.

Question 2

CB Objectives

Answer 2

(i) price stability (controlling inflation); (ii) maintaining sustainable economic growth; (iii) stability of financial markets: interest rates, foreign exchange

Question 3

CB Tools

Answer 3

(1) Monetary Policy: relates to the control of money supply and directly or indirectly, demand for money; (2) Fiscal Policy: related to government activity and is not direct by central banks, although governments take central bank advice into consideration.

Question 4

How CB use Monetary Policy:

Answer 4

(i) increasing or decreasing short- term interest rates; (ii) reserve requirements; (iii) open market operations

Question 5

How to use Fiscal Policy

Answer 5

(i) taxation, (ii) direct government investment and spending, (iii) fiscal policy can have a direct impact on both growth and inflation.

Question 6

What is the FED?

Answer 6

Central Bank of the US| Twelve subsidiary banks; Governed by the Board of Governors; Federal Open Market Committee (FOMC)

Question 7

What does the FED do?

Answer 7

(i) manages the discount rate (rate charged to institutions borrowing from the central bank); FED has a limited direct effect on bank borrowing, but acts as a proxy rate for other short-term rates that impact both institution and individual borrowers.

Question 8

Long Term Objectives of the FED?

Answer 8

(1) Price stability (no specific inflation target); (2) sustainable economic growth