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ECON 135 > Midtern #2 .2 > Flashcards

Midtern #2 .2 Flashcards

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1
Q

What does “lender of last resort” mean?

A

During financial crisis government acts as a lender for banks to stimulate the market
Origins of FRS

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2
Q

What is the primary fear that led to resistance against establishing a central bank?

A

Fear of centralized power

This resistance was highlighted by the regular nationwide bank panics.

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3
Q

What significant event in 1907 influenced public opinion towards establishing a central bank?

A

The Panic of 1907 was so severe that it led the public to demand a central bank.

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4
Q

What is the The Federal Reserve Act of 1913?

A

Legislation that established the Federal Reserve System as a decentralized structure made up of checks and balances

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5
Q

How many federal reserve banks are there?

A

12 private federal reserve banks.

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6
Q

Who comprises the Board of Governors of the Federal Reserve System?

A

7 members from different districts appointed by the president and confirmed by the Senate.

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7
Q

Who comprises the Federal Reserve Bank Directors?

A

3 are professional bankers
3 are prominent leaders from industry, labor, agriculture, or consumer sector
3 appointed by the Board of Governors

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8
Q

Who cannot serve as a Federal Reserve Bank Director?

A

Officers, employees, or stockholders of banks

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9
Q

Role of Federal Reserve Bank Director

A

Each districts nine directors appoint the president of the bank

Subject to Board of Governors approval

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10
Q

Which state has two federal reserve banks?

A

Missouri

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11
Q

What is the Federal Open Market Committee (FOMC)?

A

A committee that includes members of the Board of Governors and presidents of Federal Reserve Banks responsible for monetary policy.

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12
Q

What is the role of the Federal Reserve Banks?

A

They clear checks, issue new currency, withdraw damaged currency, administer discount loans, and collecting data on banking system and business conditions

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13
Q

Which Federal Reserve Bank has a special role in the system?

A

The Federal Reserve Bank of New York.

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14
Q

What unique feature does the Federal Reserve Bank of New York have?

A

It is the only Federal Reserve Bank that is a member of the Bank for International Settlements (BIS).

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15
Q

What are the roles/tasks of the president of the New York Federal Reserve?

A

The only permanent voting member of the FOMC among the FRB presidents
They serve as the vice-chair of the committee
They do not rotate off

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16
Q

Where are the gold vaults located?

A

New York Federal Reserve

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17
Q

Who “establishes” the federal discount rate?

A

The Federal Reserve Bank Directors

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18
Q

What is the function of the Federal Advisory Council?

A

It consults with the Board of Governors and provides information to help conduct monetary policy.

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19
Q

True or False: All national banks are required to be members of the Federal Reserve System.

A

True.

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20
Q

What does the Depository Institutions Deregulation and Monetary Control Act of 1980 do?

A

The act subjects all banks to the same reserve requirements as member banks as well as grants them full access to Federal Reserve facilities
Levels the playing field

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21
Q

What is the term length for members of the Board of Governors?

A

14-year non-renewable term.

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22
Q

What is the term length for the Chairman of the Board of Governors?

A

4-year term

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23
Q

What are the primary duties of the Board of Governors?

A

Sets reserve requirements and interest paid on excess reserves
Controls the discount rate through “review and determination” process

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24
Q

Who serves as the chairman of the Board of Governors?

A

The chairman is chosen from the governors and advises the president on economic policy.

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25
Rank the four historic Chairpersons of the Board of Governors by term length
1) Alan Greenspan: served 5 terms 2) Ben Bernanke: served 2 terms 3) Jerome Powell: served 2 terms 4) Janet Yellen: served 1 term
26
Who is the largest employer of economist around the world
The US Federal Reserve System
27
What is the biggest enemy of all banks?
Price stability and Inflation
28
Who are the members of the Federal Open Market Committee (FOMC)?
7 members of the Board of Governors President of the FRB of New York Presidents of 4 other Reserve banks
29
True or False: The Chairman of the Board of Governors is different than the chairperson of FOMC.
False
30
What are Real Time Gross Settlements (RTGS)?
A funds transfer system that instantaneously transfers real money and/or securities between banks
31
What is the name of the USA's Real Time Gross Settlement (RTGS) system?
Fedwire
32
What is the turnover rate of Fedwire?
US GDP every 5.5 business days
33
What is the name of the Hong Kong's Real Time Gross Settlement (RTGS) system?
CHATS
34
What is the turnover rate of CHATS?
Hong Kong's GDP every 3 business days
35
What is the name of the UK's Real Time Gross Settlement (RTGS) system?
CHAPS
36
What is the turnover rate of CHAPS?
UK GDP every 6 business days
37
What is Clearing House Interbank Payment System (CHIPS)?
A privately owned large value payment systems that relies on Fedwire securities
38
What is Automated Clearing House (ACH)?
Retail interbank payment system for small and recurring payments Not real time
39
Why would a bank want to delay their payments?
Delaying payments can result in liquidity savings as it allows you to utilize incoming liquidity
40
What are payment delays dangerous?
They can be quite costly and can lead to a complete freeze in the markets
41
What is the dual mandate of monetary policies from the Federal Reserve?
To achieve maximum employment and price stability.
42
Who gets paid Interest on Reserves Balances (IORB) or Interest on Excess Reserves (IOER)?
Commercial Private Banks
43
Who participates in the Federal Funds Market?
Private Commercial Banks, Federal home loan banks (FHLB), and government sponsored enterprises (GSE)
44
Why were FHLB's lending at 5 basis points when IORB was at 2.5 basis points.
Answer: FHLBs didn't get paid IORB. But, why no competition?
45
What is the Interest on Excess Reserves (IOER)?
The rate at which the government pays interest to banks for keeping their balances in Federal accounts
46
What is the "Leaky Floor"?
The real interest rate set below the IOER that was expected to price up
47
What is the Overnight Reverse Repo Rate (ON RRP)?
New interest rate floor below IOER that is directly relevant to a small set of non-banks
48
True or False: The Federal Reserve interest rate system went back to the pre-2008 financial crisis interest systems.
False; Now the FOMC announces a target range and the fed announces their prices for the IOER and ON RRP
49
Who are the three players of the Money Supply Process?
The Central Bank: Federal Reserve System Banks: depository institutions; financial intermediaries Depositors: individuals and institutions
50
What does the Federal Reserve's balance sheet include as liabilities?
Currency in circulation and reserves.
51
Define the term 'monetary base'.
The sum of currency in circulation and total reserves in the banking system. MB = C + R
52
What does the Federal Reserve's balance sheet include as assets?
Government securities (treasuries) and discounted loans
53
What are the effects of an open market purchase on monetary base?
Always increases the monetary base by the amount of the purchase.
54
What are the effects of an open market purchase on reserves?
Depends on if the seller keeps proceeds from the sale in currency or in deposits.
55
What are the effects of an Open Market Sale?
Decrease in monetary base and unchanged in reserves.
56
What is the money supply formula?
Money Supply = monetary base * money multiplier M = MB * m
57
What is the money multiplier formula?
(1+c)/(r+e+c)
58
What is the currency ratio?
Currency ratio = Currency / Deposits c = C/D
59
What is the required reserved ratio?
RR ratio = Required Reserves / Deposits r = RR/D
60
What is the excess reserves ratio?
ER Ratio = Excess Reserves / Deposits e = ER/D
61
Fill in the blank: The Federal Reserve Act established the _______.
Federal Reserve System.
62
What is the role of the Federal Open Market Committee (FOMC)?
To issue directives for the implementation of monetary policy.
63
What is one consequence of delaying payments in banks?
Loss of goodwill and future business.
64
What is the relationship between money supply and currency holdings?
The money supply is negatively related to currency holdings ## Footnote This implies that as currency holdings increase, the money supply decreases.
65
What use to happens to the federal funds rate when the Fed lowered interest rates?
Lowering interest rates increases demand and lowers supply ## Footnote This is a response to the market's adjustment to federal fund rates.
66
True or False: The Fed dictates the federal funds rate.
False ## Footnote The Fed operates within the market but does not dictate the rate.
67
What are dynamic open market operations?
Policies created when the Fed wants to actively change the market ## Footnote These operations are aimed at adjusting liquidity in the financial system.
68
What are defensive open market operations?
Policies created when the Fed wants to offset naturally occurring market changes ## Footnote These typically involve repurchase agreements.
69
Who are primary dealers?
Private banks who act as trading counterparties to Fed Reserve with implementation of monetary policy
70
What is the discount window?
When central bank lends to banks through repo rate ## Footnote It acts as a lender of last resort to prevent financial panics.
71
What are some drawbacks of the lender of last resort policy?
Creates idea of moral hazard problem If people know they are going to get lended money they have no incentive to be smart with money
72
What was Black Tuesday?
Market fell 40% Fed promised before markets opened that they would lend to everyone Avoided a financial panic
73
What are the reserve requirements set by the Depository Institutions Deregulation and Monetary Control Act of 1980?
0% for first $15.5 million 3% from $15.5 to $115.1 million 10% over $115.1 million ## Footnote The Fed can vary the 10% requirement between 8% and 14%.
74
What is one advantage of open market operations?
Complete control over the volume of transactions ## Footnote They are flexible, precise, easily reversed, and quickly implemented.
75
What is the zero-lower-bound problem?
When interest rates cannot be lowered below zero ## Footnote This presents a challenge for monetary policy during economic downturns.
76
What was the liquidity provision that was used during the financial crisis?
The Federal Reserve implemented unprecedented increases in its lending facilities to provide liquidity to the financial markets
77
What were the three large-scale asset purchase programs created during the 08 financial crisis?
Government Sponsored Entities Purchase Program QE2 (government treasuries) QE3 (mortgage-backed securities)
78
What is quantitative easing (QE)?
Large-scale asset purchases to lower interest rates for specific types of credit ## Footnote It was used extensively during the financial crisis to boost liquidity.
79
What is the difference between quantitative easing and credit easing?
QE focuses on lowering interest rates, while credit easing aims at improving the functioning of specific credit markets ## Footnote Both are unconventional monetary policy tools.
80
What is the purpose of forward guidance?
Committing to lower market expectations of future short-term interest rates ## Footnote This can help in reducing long-term interest rates.
81
What are negative interest rates on banks' deposits intended to do?
Stimulate the economy by encouraging banks to lend more ## Footnote This policy is not currently practiced in the US.
82
What is the primary rate?
Another name for the discount window rate
83
What is the nominal anchor/target in monetary policy?
A nominal variable that ties down the price level to achieve price stability ## Footnote It helps achieve price stability.
84
What are the six potential goals of monetary policies?
* Price Stability * High employment and output stability * Economic growth * Stability of financial markets * Interest-rate stability * Stability in foreign exchange markets ## Footnote These goals focus on overall economic stability rather than just value.
85
What is the difference between hierarchical and dual mandates?
Hierarchical mandates prioritize price stability before achieving other objectives Dual mandates aim for price stability and maximum employment at the same time ## Footnote This reflects different approaches to setting monetary policy objectives.
86
What is inflation targeting?
Announcing a target inflation rate to commit to price stability ## Footnote This approach can improve transparency and accountability in monetary policy.
87
What was one of the biggest lessons from the global financial crisis?
Price and output stability does not ensure financial stability ## Footnote Also, the zero-lower-bound on interest rates poses serious challenges.
88
What is an asset-price bubble?
A pronounced increase in asset prices that depart from their true fundamental value ## Footnote Such bubbles eventually burst, leading to market corrections.
89
What was an example of a credit-driven bubbles?
The subprime mortgage bubble
90
What is the argument for why monetary policy should not be used to prick bubbles?
If bubbles are created by non monetary policy reason than you should not use monetary policy to fix them Tightening monetary policy could also cause the bubble to get bigger or more disastrous
91
True or False: Monetary policy should be used to prick credit bubbles.
True
92
What is the Taylor Rule formula?
Federal funds rate target = inflation rate + equilibrium real fed funds rate + ½*(inflation gap) + ½*(output gap) ## Footnote This rule provides a systematic approach to setting interest rates based on economic conditions.
93
What does Non-Accelerating Inflation Rate of Unemployment (NAIRU) represent?
Rate of unemployment at which there is no tendency for inflation to change ## Footnote It represents the rate of unemployment at which inflation does not change.

ECON 135 (2 decks)

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