1. The Federal Reserve arranged for JPMorgan Chase & Co._________ to Bears Stearns during the financial crisis in 2008.
2. The float in the banking system is the difference between the Federal Reserve’s _________and _________when clearing checks.
3. Two actions the Fed took after September 11, 2001, to ensure the financial system operated smoothly were and _________.
4. Required Reserves during the Great Depression. During the Great Depression, banks held excess reserves because they were concerned depositors might be more inclined to withdraw funds from their accounts. At one point, the Fed became concerned that excess reserves were too high and raised the reserve requirements for banks.
a. Assuming banks were holding excess reserves for precautionary purposes, do you think they would continue to want to hold them even after reserve requirements were raised? Explain.
b. What do you think happened to the money supply after the Fed raised reserve requirements?
5. Crisis in the Short-Term Credit Market. In 1973, several major companies went bankrupt and were not going to be able to pay interest on their short-term loans. This caused a crisis in the market. There was concern that the short-term credit market would collapse, and that even healthy corporations would not be able to borrow. How do you think the Fed should have handled that situation?
6. The Federal Reserve Loan to JPMorgan Chase & Co. When the Federal Reserve makes a loan to a bank or financial institution, it requires the institution to specify certain assets the Federal Reserve can take possession of if the loan is not repaid. These assets are known as collateral. When the Federal Reserve made its $30 billion loan to JPMorgan, it allowed JPMorgan to use some of the assets of Bears Stearns as collateral. Why was this risky for the Federal Reserve and a good deal for JPMorgan?
7. Check Clearing and September 11. How did the Federal Reserve manipulate the check-learning process to increase liquidity in response to the potential financial crisis following the terrorist attacks of September 11, 2001?
8. Bailouts? Some critics of the Fed s actions with AIG and Bear Stearns said that the government was just bailing out failing financial firms that should have been allowed to fail. It is true that owners of both firms did benefit from these actions. Nonetheless, can you defend the Fed?