Term
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Definition
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Term
| Keynesian Policy – Which of the following is true? |
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Definition
a) The focus is on fiscal policy and monetary policy accommodates fiscal policy
d) Developed during a period of high unemployment and deflation
f) It was the primary focus of government policy during the post WW II period until the 1980’s
g) 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
j) 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 |
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Term
| Describe how Keynesian policy in the late 1960’s and 1970’s contributed to a rising inflation problem |
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Definition
1. Central Bank expands Money Supply (Ms) in order to push down interest rates.
2. Market participants, who are fearful of inflation, see the expansion of the money supply and raise their expectations of future inflation (monetarist view).
3. 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 expected higher inflation and the associated loss of purchasing power.
4. Following Keynesian policy, the Central Bank then increases the Ms even faster to try to push interest rates lower (go back to stage 1)
5. This increases inflationary expectations and puts more upward pressure on nominal interest rates.
This is an excellent explanation of what happened in the U.S. in the late 1960’s and 1970’s. |
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Term
| Monetarist Policy View – Which of the following is true? |
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Definition
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
e) 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)
f) The velocity of Money is the average number of times the money supply turns over in a year
g) In traditional monetary theory, the velocity of money is assumed to be constant over the long term but does vary over the shorter term
h) The long run, sustainable, average growth in real output in any economy (%ΔQ) is about 2% - 3% per year |
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Term
| What has happened to the velocity of money since the mid-1990’s? |
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Definition
| There's a plot of the velocity of the money stock, you see that during the 1990s the velocity of money speeded up quite a bit. And this would have been due to the changes in the technology of processing payments and the initial move movements towards electronic forms of money and allowance, electronic forms of payment, rather than paper-based money transactions and forms of payment, then what we see is we see a decline in the 2001 2002. Recession, a sharp decline from over 2.1, down to about 1.95. And then an increase in velocity again until the onset of the 2008 financial crisis and the resulting deep recession and a very sharp drop off in the velocity of money that drop off and the velocity of money has continued, even past the end of the recession. And now we're down at a historic low of around 1.4 or 1.45 as the velocity for the velocity or the turnover of the money supply. So even though the Fed has been increasing the money supply, since the end of the financial crisis, we've had a sharp decrease in the velocity of money. The rapid monetary growth in the late 90's and early 2000's created a massive housing and financial bubble that burst in 2008. The aftermath of that crash (and the Fed changing methods of inflation calculation) have resulted in relatively low inflation numbers from 2008 to 2020. Now that prices are rising again the Fed is furiously trying to convince us that this inflation is transitory. |
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Term
| Austrian Policy View – Which of the following is true? |
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Definition
a) Focuses on how central bank attempts to manipulate the business cycle create malinvestments and credit fueled bubbles that eventually burst and lead to recessions.
c) 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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Term
| Price Indices - Which of the following is true? |
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Definition
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)
b) The consumer price index for urban consumers (CPI-U) will report a higher level of inflation than the Personal Consumption Expenditure (PCE) Index |
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Term
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Definition
| the sum of currency in circulation and reserve balances (deposits held by banks and other depository institutions in their accounts at the Federal Reserve). |
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Term
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Definition
| the sum of currency held by the public and transaction deposits at depository institutions (which are financial institutions that obtain their funds mainly through deposits from the public, such as commercial banks, savings and loan associations, savings banks, and credit unions). |
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Term
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Definition
| M1 plus savings deposits, small-denomination time deposits (those issued in amounts of less than $100,000), and retail money market mutual fund shares. Data on monetary aggregates are reported in the Federal Reserve's H.3 statistical release ("Aggregate Reserves of Depository Institutions and the Monetary Base") and H.6 statistical release ("Money Stock Measures"). |
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Term
| How many Federal Reserve Districts are there? |
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Definition
| 12 Federal Reserve district banks. New York Fed is considered the most important. |
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Term
| Which Federal Reserve Bank is the most important? Why? |
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Definition
| New York Fed is considered the most important or the lead bank because the NY Fed conducts the daily operations of the open market desk 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. |
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Term
| Which Federal Reserve Bank District is Florida located in? |
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Definition
| District (Atlanta) – District 6 |
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Term
| 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? |
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Definition
| True - Title I of the act is known as the Monetary Control Act of 1980. It required all institutions that accepted deposits (“depository institutions”) to meet reserve requirements. |
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Term
| The MCA part of the DID-MCA law was enacted to increase the Federal Reserve’s control over fiscal policy. True or false? |
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Definition
| FALSE - DID-MCA law was enacted to increase the Federal Reserve’s control over monetary policy. |
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Term
| The MCA part of the DID-MCA law was enacted to increase the Federal Reserve’s control over monetary policy. True or false? |
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Definition
| True - Reserve requirements are an important tool the Fed can use to achieve desired changes in the money supply. Monetary Control - Reserve requirements mandate that depository institutions set aside a certain amount of their funds either in the form of vault cash or the accounts they keep at regional Federal Reserve Banks. The amount they have to keep in reserve is based on the size of their deposits. The act contained an eight-year phase-in of new reserve requirements for nonmember institutions. Also, any institution holding reserves would now be eligible for discount-window borrowing, which had previously only been available to member banks. Additional reporting requirements for depository institutions’ assets and liabilities were also part of the act, again to help the Fed gain greater control of the money supply. |
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Term
| Who selects a member of the Fed’s Board of Governors to be the Chairman? |
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Definition
| Board of Governors - One of the seven board members is selected by the President to be the Federal Reserve Chairman for a 4-year renewable term. |
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Term
| What U.S. government agency that makes sure banks, lenders, and other financial companies treat you, the consumer, fairly? |
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Definition
| The Consumer Financial Protection Bureau is a U.S. government agency that makes sure banks, lenders, and other financial companies treat you fairly. |
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Term
| What is the Federal Open Market Committee (FOMC)? |
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Definition
| Sets targets for the money supply growth level and the interest rate level, and implements monetary policy. |
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Term
| How many times a year does the FOMC meet? |
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Definition
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Term
| What does the FOMC do with respect to management of the money supply in the economy and interest rates? |
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Definition
| • The Fed uses open market operations (the buying and selling of securities) as a means of adjusting the money supply. The Fed purchases securities to increase the money supply and sells them to reduce the money supply. Sets targets for money supply growth and interest rate level. |
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Term
| What is “policy directive”? |
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Definition
| Statements of and instructions for implementing important, high-level internal direction and positions that guide organization decisions and actions. The FOMC formulates Monetary Policy Directives that are transmitted to the New York Federal Reserve Bank Open Market Desk (NY FRB OMD) for implementation (If a change in monetary policy is appropriate, the FOMC decision is forwarded to the Trading Desk (Open Market Desk) at the NY Fed through a policy directive). |
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Term
| What is the Open Market Desk (OMD)? |
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Definition
| Trading Desk managed by the NY FRB and used to trade U.S. Treasury Securities (since 2008 also mortgage-backed securities). This is called Open Market Operations (OMO) |
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Term
| What does the Open Market Desk (OMD) do? |
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Definition
• Responsible for:
o Fed purchase of securities – To lower the federal funds rate, traders purchase Treasury securities from securities dealers. The dealers’ bank account balances increase causing an increase in the supply of funds.
o Fed sale of securities – To increase the federal funds rate, traders sell government securities to government securities dealers. As the dealers pay for the securities, their bank balances decrease leading to a decrease in the supply of funds.
o Fed trading of repurchase agreements - Purchases Treasury securities from government securities dealers with an agreement to sell back the securities at a specified date in the near future.
o Trades with "Primary Dealers"; large multinational banks. The Primary Securities Dealers are just very large banks that have been given permission to trade with the OMD
o Consideration of technical factors – Technical factors include currency in circulation and Federal Reserve float . The manager of the Trading Desk incorporates the expected impact of technical factors on funds into the instructions to traders.
• Major objectives - to carry out all OMOs for FOMC
• Minor objectives - smooth markets, act as agent for Treasury
• Control of M1 versus M2 (Exhibit 4.4)
o The optimal form of money should (1) be controllable by the Fed and (2) have a predictable impact on economic variables when adjusted by the Fed.
M1 includes currency held by the public and checking deposits (such as demand deposits, NOW accounts, and automatic transfer balances) at depository institutions.
M2 includes everything in M1 as well as savings accounts and small-time deposits, MMDAs, and some other items.
M3 includes everything in M2 in addition to large time deposits and other items.
• If a change in monetary policy is appropriate, the FOMC decision is forwarded to the Trading Desk (Open Market Desk) at the NY Fed through a policy directive. |
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Term
| Explain how OMD purchases (or sales) of securities impact the supply of federal funds and interest rates in the economy. |
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Definition
• Fed purchase of securities – To lower the federal funds rate, traders purchase Treasury securities from securities dealers. The dealers’ bank account balances increase causing an increase in the supply of funds. Federal purchase of securities – increase supply
• Fed sale of securities – To increase the federal funds rate, traders sell government securities to government securities dealers. As the dealers pay for the securities, their bank balances decrease leading to a decrease in the supply of funds. Federal sales of securities – decrease supply
• Even though most interest rates are market determined, the Fed can have a strong influence on these rates by controlling the supply of loanable funds.In the absence of Fed interference in the markets, the supply and demand theories examined in the interest rate module will determine the equilibrium level of rates in different user segments of the markets (government, business, and consumer) and maturity segments (ST, MT, and LT) of each user segment. Once the Fed decides to "interfere" in the markets to "manage" credit, economic growth, and employment, they will influence the supply of loanable funds through OMO. |
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Term
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Definition
| are implemented to increase or decrease the level of funds |
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Term
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Definition
| offset the impact of other conditions that affect the level of funds. |
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Term
| Describe why the Fed was created with 12 separate district banks instead of a single central bank. |
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Definition
| Rhode Island Senator Nelson Aldrich proposed a central bank. Aldrich asserted that a central bank had to be, paradoxically, decentralized somehow, or it would be attacked by local politicians and bankers as had the First and Second Banks of the United States. In the U.S., the idea of a decentralized system was put forth and what we will see is that the decentralized system ended up with 12 Regional central banks or Federal Reserve Banks. |
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Term
| The Fed acts as a Fiscal Agent for U.S. Government. What does this mean? |
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Definition
• As the government's bank or fiscal agent, the Fed processes a variety of financial transactions involving trillions of dollars.
• For the federal government, the Reserve Banks act as fiscal agents, paying Treasury checks; processing electronic payments; and issuing, transferring, and redeeming U.S. government securities. |
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Term
| The Fed acts as a Lender of Last Resort. What does this mean? |
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Definition
• A lender of last resort (LOLR) is the institution in a financial system that acts as the provider of liquidity to a financial institution which finds itself unable to obtain sufficient liquidity in the interbank lending market and other facilities or such sources have been exhausted.
• In the United States, the Federal Reserve serves as the lender of last resort to those institutions that cannot obtain credit elsewhere and the collapse of which would have serious implications for the economy.
• In its role as the central bank of the United States, the Fed serves as a banker's bank and as the government's bank. As the banker's bank, it helps to assure the safety and efficiency of the payments system. |
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Term
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Definition
• Pre-meeting economic report (Beige book) - a consolidated report of regional economic conditions in each district.
• Commonly known as the Beige Book, this report is published eight times per year. Each Federal Reserve Bank 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 twelve district reports is prepared by a designated Federal Reserve Bank on a rotating basis. |
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Term
| Federal Reserve Board of Governors (7 Members) |
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Definition
| Acts as the main policy making body |
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Term
| Federal Reserve Federal Open Market Committee (FOMC) (12 Members) |
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Definition
| BOG and NY Federal Reserve Bank President have 8 votes. Decides monetary policy and sends directives to the Open Market Desk |
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Term
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Definition
| Buy and sells Treasury Securities and Mortgage Backed Bonds and Mortgage Backed Securities |
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Term
| What are the effects of an expansionary (or stimulative) monetary policy, assuming no inflation? (Note I use the “expansionary” term) |
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Definition
• Effects on the Treasury (risk-free) rate influences cost of debt and cost of equity. (Exhibit 5.3)
• Cost of capital is reduced, reducing required return on cost of products.
• Encourages firms to spend more money, higher more employees.
• If U.S. economic conditions are weak, a strong dollar will not provide the stimulus needed to improve conditions. The Fed may need to implement a stimulative monetary policy.
• With a stimulative monetary policy, the Fed increases the supply of funds in the banking system, which can increase the level of business investment, and hence aggregate spending in the economy.
Impact on interest rates - The quantity of loanable funds supplied exceeds the quantity of loanable funds demanded. The interest rate will decline to equilibrium.
Logic behind the impact on interest rates - The depository institutions experience an increase in supply of funds. Therefore, they borrow less funds or provide more short-term loans at lower interest rates.
Logic behind the effects of business cost of debt - As business cost of debt decreases, firms implement more projects and spend more money. This results in more income to individuals or other firms which allows more people to invest in the original company.
Effects on business cost of equity - The firms cost of equity is positively related to the risk-free rate. Lower risk-free rate = Lower cost of equity |
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Term
| shifts in monetary policy over the 2001-2003 period |
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Definition
| • Focus on improving a weak economy in 2001-2003 |
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Term
| shifts in monetary policy over the 2004-2007 period |
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Definition
| • Focus on reducing inflation in 2004-2007 |
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Term
| shifts in monetary policy over the 2008-2013 period |
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Definition
| • Focus on improving weak economy in 2008-2013 |
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Term
| What are the two components of legal reserves? |
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Definition
| (Legal Reserves = (1) VAULT CASH + (2) DEPOSITS AT THE FED) |
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Term
| What is the BIS and what do they do? |
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Definition
| The Bank for International Settlements (BIS) 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. |
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Term
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Definition
• “Leakages” in the expansion system represent either the cash holdings described above that are not loaned out or “excess legal reserves” that are held by banks at the Fed and are not loaned out and so do not enter the expansion process. – Dr. C.
• Leakages in the money expansion process are caused by excess legal reserves that are not loaned out by the depository institutions and so do not enter the money expansion process. These leakages would prevent the money expansion process from reaching its theoretical limits that are indicated by the equation above.
• Leakages occur when households hold cash or banks hold excess reserves. In these cases, the money does not multiply as expected. |
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Term
| What is the money multiplier. How is it calculated? |
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Definition
•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.
• This theoretical maximum is never reached, because some eligible reserves are held as cash outside of banks.
• Note: money multiplier = 1 / reserve requirement |
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Term
| What are the three traditional monetary policy tools controlled by the Fed? |
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Definition
1. Open Market Operations – the buying and selling of securities by the OMD directly affect the amount of legal reserves in the banking system.
2. Discount rate / Discount window loans – discount window loans are loans of legal reserves from the Fed to depository institutions. The making and repayment of these loans directly impact the legal reserves in the banking system.
3. Reserve Requirement – the percentage requirement that determines the $ amount of legal reserves any particular depository intuition must hold against its deposits inversely impacts the money multiplier and the extent of the money expansion process. |
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Term
| 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? |
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Definition
| c. reducing buying - A growing portion of the Federal Open Market Committee (FOMC), which sets Fed monetary policy, expressed support for paring down bond buying after several months of high inflation and accelerating job gains, the minutes showed. |
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Term
| Which of the following have been a factor in the Fed's current plans regarding the future of their bond buying program? |
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Definition
a. Increasing inflation
d. decreasing unemployment
• The FOMC has insisted for months that it will not raise interest rates or pare back bond purchases until it sees “substantial further progress” toward an annual inflation rate of 2 percent and full employment. |
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Term
| Who is the current Fed Chairman? |
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Definition
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Term
| Which of the following is true about Open Market Operations (OMO)? |
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Definition
a. They are carried out by the Open Market Desk
b. The OMD buys and sells Treasury Securities but they also have been buying mortgage-backed bonds since 2008
c. They are the most important monetary policy tool |
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Term
| The Fed can carry out Open Market Operations that are designed to offset the effects of U.S. Treasury Operations. |
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Definition
| True - OMO can be classified as either “Dynamic” OMO that are used to implement the monetary policy directives handed down from the FOMC, or they can be classified as “Defensive” OMO that are used to offset other exogeneous factors that not under the direct control of the Fed. |
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Term
| If the OMD is a net buyer of treasury securities, all other things held constant, the legal reserves in the banking system will _____. |
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Definition
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Term
| If the OMD is a net seller of treasury securities, all other things constant, the legal reserves in the banking system will _____. |
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Definition
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Term
| If the OMD is a net buyer of treasury securities, all other things constant, the money supply will _____. |
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Definition
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Term
| If the OMD is a net seller of treasury securities, all other things constant, the money supply will _____. |
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Definition
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Term
| If the OMD is a net buyer of mortgage-backed securities (MBS’s), all other things constant, the money supply will _____. |
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Definition
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Term
| If the OMD is a net seller of mortgage-backed securities (MBS’s), all other things constant, the money supply will _____. |
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Definition
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Term
| 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 Money Supply? (Assuming the expansion / contraction process reaches its theoretical limit). |
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Definition
| b. Decrease by $500 million |
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Term
| If the Fed OMD is a net buyer of $100 million of T-bills and the reserve requirement is 20%, what will happen to the Money Supply? (Assuming the expansion / contraction process reaches its theoretical limit and all other things held constant). |
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Definition
| a. Increase by $500 million |
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Term
| 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? |
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Definition
| Decrease by $100 million - IF THE FED OMD SELLS, IT GETS PAID BY DESTROYING LR’S SO LR’S IN THE SYSTEM DECREASE BY $100 MILLION |
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Term
| If the Fed OMD is a net buyer 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? |
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Definition
| Increase by $100 million - FED BUYS, PAYS WITH NEW LR’S RECREATED OUT OF THIN AIR (COMPUTER ENTRIES) |
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Term
| If the Federal Reserve Banks increase their aggregate Discount Window lending by $100 million and the reserve requirement is 10%, what will happen to the Money Supply? (Assuming the expansion / contraction process reaches its theoretical limit and all other things held constant). (Note: for any single DW loan, the impact on LR and Ms is reversed when the loan is paid back – BUT for DW loans in the AGGREGATE, if the average amt of DW loans outstanding increases, this will increase LR and Ms) |
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Definition
| a. Increase by $1 billion |
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Term
| If the Federal Reserve Banks decrease their aggregate Discount Window lending by $100 million and the reserve requirement is 10%, what will happen to the Money Supply? (Assuming the expansion / contraction process reaches its theoretical limit and all other things held constant). |
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Definition
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Term
| If the Federal Reserve increases the reserve requirement, what will happen to the Money Supply in the banking system? |
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Definition
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Term
| If the Federal Reserve decreases the reserve requirement, what will happen to the Money Supply in the banking system? |
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Definition
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Term
| If total reserves equal $1 billion and the reserve requirements are changed from 5% to 10%, what is the impact on the money supply? (Assuming the expansion / contraction process reaches its theoretical limit both before and after the change and all other things held constant). |
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Definition
| b. Decrease by $10 billion |
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Term
| Which of the following is the favorite monetary tool of the Fed? |
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Definition
| c. Open Market Operations |
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Term
| Which of the following is under the direct control of the Fed? |
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Definition
a. Open Market Operations
b. Discount Window Lending
c. Reserve Requirement |
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Term
| Which of the following is not under the direct control of the Fed? |
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Definition
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Term
| 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). |
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Definition
| a. Increase the money supply. - This means that when the Treasury makes a payment, and the check clears, legal reserves in the banking system increase. When the Treasury collects payments, such as income tax payments, legal reserves in the banking system decrease. This is because settlement of that payment is achieved by transferring funds from a financial institution’s reserve and clearing account into the TGA. |
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Term
| If the public’s demand for cash were to increase, what could the Fed do to offset the impact on the money supply? |
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Definition
a. Increase Discount Window lending
c. Buy T-bills through the open market desk |
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Term
| If the public’s demand for cash were to decrease, what could the Fed do to offset the impact on the money supply? |
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Definition
b. Decrease Discount Window lending=
d. Sell T-bills through the open market desk |
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Term
| 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? |
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Definition
| c. Fed Funds market activity makes more efficient use of legal reserves in the system. - Fed Funds market activity does not affect the amount of legal reserves in the banking system, but it does make more efficient use of existing LR’s by transferring those excess LR’s to institutions that will loan them out or already have LR shortages. This process also allows the money supply expansion process to come closer to the theoretical limits |
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Term
| The Fed FOMC sets both the Discount Rate and the Fed Funds rate. |
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Definition
| Individual Federal Reserve Banks set their own discount rate but obtain approval from the BOG and the FOMC sets the Target Fed Funds rate. |
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Term
| 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. |
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Definition
| True – but the Fed targets the Fed Funds rate and uses OMO to try to maintain that target rate or target range. |
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Term
| The Fed sets the Fed Funds rate but supply and demand forces determine the Discount rate at FRB’s… |
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Definition
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Term
| The Fed targets the Fed Funds rate but does not set the effective Fed Funds rate on a daily basis. |
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Definition
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Term
| If the Fed targets a Fed Funds rate below the current Fed Funds rate, how can they achieve their goals? |
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Definition
| d. Increasing the supply of Fed Funds by buying T-Bills in the open market. |
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Term
| If the Fed targets a Fed Funds rate above the current Fed Funds rate, how can they achieve their goals? |
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Definition
| c. Decreasing the supply of Fed Funds by selling T-Bills in the open market. |
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Term
| Total legal reserves in the banking system are $5 trillion. We assume the money expansion process always reaches its theoretical limit. |
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Definition
| $50,000,000,000,000 (aka 50 trillion dollars) |
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Term
| If the average reserve requirement is increased to 12%, what is the size of the total money supply after the money expansion process finishes the adjustment process? |
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Definition
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Term
| What is the impact on the money supply of an increase in the reserve requirement? |
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Definition
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Term
| What is the current Fed Funds target rate of interest (or range of interest rates)? |
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Definition
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Term
| Which Federal Reserve District are depository institutions in Florida located in? |
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Definition
| All depository institutions must meet the Fed’s reserve requirements. |
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Term
| What are the two main roles (or goals of monetary policy) for the Federal Reserve Board of Governors? |
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Definition
| As a result, the goals of maximum employment and stable prices are often referred to as the Fed’s “dual mandate.” |
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Term
| Which Federal Reserve Bank is always represented on the FOMC? Why? |
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Definition
| New York Fed is considered the most important because of the operations daily and the open market desk. FRB New York (FRB NY) is custodian of the TGA or Federal Reserve Account (U.S. Government’s checking account). |
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Term
| 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? |
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Definition
| Commonly known as the Beige Book, this report is published eight times per year. Each Federal Reserve Bank 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 twelve district reports is prepared by a designated Federal Reserve Bank on a rotating basis. |
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Term
| What is a FOMC policy directive and who or what receives the directives? |
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Definition
| Policy Directives - Policy directives are statements of and instructions for implementing important, high-level internal direction and positions that guide organization decisions and actions. The FOMC formulates Monetary Policy Directives that are transmitted to the New York Federal Reserve Bank Open Market Desk (NY FRB OMD) for implementation (If a change in monetary policy is appropriate, the FOMC decision is forwarded to the Trading Desk (Open Market Desk) at the NY Fed through a policy directive). |
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Term
| 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? |
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Definition
| Increase the supply of Fed Funds by buying T-Bills in the open market. |
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Term
| 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? |
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Definition
| 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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Term
| 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? |
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Definition
| Decrease the supply of Fed Funds by selling T-Bills in the open market. |
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Term
| 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? |
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Definition
| f. 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 to the right. |
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Term
| If the Fed OMD starts buying or selling treasury bonds in order to offset some actions the U.S. Treasury has undertaken, is this a dynamic or defensive open market operation? |
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Definition
| Defensive - OMO that are used to offset other exogeneous factors that not under the direct control of the Fed. Examples of exogenous activities would be the U.S. Treasury activities or changes in the public’s demand for cash in their pockets. |
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Term
| If the Fed OMD starts buying or selling treasury bonds in order to target a new Fed Funds rate level, is this a dynamic or defensive open market operation? |
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Definition
| Dynamic - OMO that are used to implement the monetary policy directives handed down from the FOMC. |
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Term
| In 1980, the Depository Institutions Deregulations and Monetary Control Act was passed. This Act required that____. |
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Definition
| d. All depository institutions must meet the Fed’s reserve requirements |
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Term
| Which of the following is included in the calculation of the M1 money supply measure? |
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Definition
b. Currency and coin
c. Demand deposits (these are checking accounts or Negotiable Order of Withdrawal (NOW) accounts) |
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Term
| Which of the following is included in the calculation of the M2 money supply measure? |
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Definition
a. Currency and coin
c. Demand deposits (these are checking accounts or Negotiable Order of Withdrawal (NOW) accounts)
d. Savings accounts and small-time deposits
e. Money Market Deposit Accounts (MMDA’s) |
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Term
| What organization is responsible for setting monetary policy in the Eurozone? |
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Definition
| The European Central Bank (ECB), based in Frankfurt, is responsible for setting monetary policy for all European countries that use the euro. The ECB’s monetary goals are price and currency stability. |
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Term
| What does “monetizing the debt” mean? |
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Definition
| Monetization of the debt (or monetizing 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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Term
| Explain the difference between crowding out effect and monetizing the debt. |
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Definition
• 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 (or monetizing 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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Term
| What is ZIRP and how is it related to recent monetary policy? |
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Definition
• A zero-interest rate policy (ZIRP) is when a central bank sets its target short-term interest rate at or close to 0%.
• The goal is to spur economic activity by encourage low-cost borrowing and greater access to cheap credit by firms and individuals.
• Because nominal interest rates are bounded by zero, some economists warn that a ZIRP can have negative consequences such as creating a liquidity trap. |
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Term
| What is financial repression and how is it related to recent monetary policy? |
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Definition
• Financial repression is a term that describes measures by which governments channel funds to themselves as a form of debt reduction
• Financial repression comprises "policies that result 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 denominated 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." |
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Term
| What does it mean when we say the Fed is “injecting liquidity” into the financial system? |
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Definition
| When the Federal Reserve uses the term “provision of liquidity” it is referring to the injection of new money in the form of Legal Reserves 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. |
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Term
| How big is the Fed’s consolidated balance sheet? (approximately) |
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Definition
| 8.5 trillion as of Oct 6. |
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Term
| How big was the Fed’s balance sheet before the financial crisis that started in 2007/8 began? |
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Definition
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Term
| Which financial institutions are lenders in the Fed Funds markets? |
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Definition
| The Fed Funds market allows banks with excess reserves to lend them to the banks with reserve shortages. |
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Term
| Which of the following is true about Fed Funds? |
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Definition
| d. Borrowers buy Fed Funds (Lenders sell Fed Funds) |
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Term
| The U.S. government has never defaulted on its debt! - True or False? |
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Definition
| False - If the United States government did default now, it would be the fifth time, not the first. There have been four explicit defaults on its debt before. 1. The default on the U.S. government’s demand notes in early 1862, caused by the Treasury’s financial difficulties trying to pay for the Civil War. 2. The overt default by the U.S. government on its gold bonds in 1933. The United States had in clear and entirely unambiguous terms promised the bondholders to redeem these bonds in gold coin. Then it refused to do so, offering depreciated paper currency instead. 3. Then the U.S. government defaulted in 1968 by refusing to honor its explicit promise to redeem its silver certificate paper dollars for silver dollars. 4. The fourth default was the 1971 breaking of the U.S. government’s commitment to redeem dollars held by foreign governments for gold under the Bretton Woods Agreement. |
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Term
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Definition
| 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. |
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