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Questions and Answers of Banking

Currently, all the national central banks in the Euro system are involved with the day-to-day implementation of monetary policy. What do you think the advantage would be of centralizing the conduct
In 2012, the FOMC stated for the first time that it aims at an inflation rate of 2 percent (based on the price index of personal consumption expenditures). How might this announcement help secure
Do you think the members of the ECB’s Governing Council should take formal votes? Why or why not? If they do vote, how do you think the votes should be allocated?
Do you think, in the interest of transparency, the Chair of the Federal Reserve Board should explain in detail the subtleties surrounding policy decisions? Why or why not?
If you were asked to design a new central bank, what two institutional design features of (a) the Federal Reserve System and (b) the ECB would you adopt? Explain your choices.
Go to the Federal Reserve Board's Web site and locate the FOMC’s most recent statement. What did the committee members say at their last meeting regarding the Federal funds target and the two
Some people have argued that the high inflation of the late 1970s was a consequence of the fact that Federal Reserve Board Chairman Arthur Burns did what President Richard Nixon wanted him to do.
How might the ECB’s pursuit of price stability as its primary objective restrict its response to the sovereign debt crisis in the euro zone?
Why did the “no-bailout” clause of the Maastricht Treaty come under stress during the financial crisis of 2007-2009?
Do you think the current procedures for appointing members to the Board of Governors are consistent with the principles of good central bank design? Explain your answer.
Why do you think the statement released after each Federal Open Market Committee meeting retains the same basic structure?
How large are the public debt burdens of key euro-area economies? Are they rising or falling? Plot without recession bars the debt-to-GDP ratios of Germany (FRED code: GGGDTADEA188N), Italy (FRED
The European Central Bank (ECB) has translated its primary objective of price stability into an explicit, quantitative goal of keeping euro-area annual inflation close to, but below, 2 percent over
In 2012, the Federal Reserve announced an inflation objective of 2 percent “over the longer run” for the price index of personal consumption expenditures (FRED code: PCEPI). However, many
The FOMC statement of December 12, 2012, indicated that the target range for the federal funds rate would continue at least until the rate of unemployment falls below 6½ percent or the projected
In August 2007 and in March 2008, the Federal Reserve Board reduced the discount rate to ease liquidity conditions for banks. Plot discount window borrowing (FRED code: DISCBORR) between January
Follow the impact of a $100 cash withdrawal through the entire banking system, assuming that the reserve requirement is 10 percent and that banks have no desire to hold excess reserves.
Suppose a major bank needs to borrow $20 billion overnight that it cannot obtain from private creditors. The Fed is willing to make a discount loan of $20 billion provided that it will not alter
Does theFederal Reserve frequently purchase or sell gold or foreign exchange as part of its efforts to change the money supply?
When you withdraw cash from your bank’s ATM, what happens to the size of the Fed’s balance sheet? Is there any reason for the Fed to react to your action?
How did the financial crisis of 2007-2009 affect the size and composition of the balance sheet of the Federal Reserve?
Suppose the currency-to-deposit ratio is 0.25, the excess reserve-to-deposit ratio is0.05, and the required reserve ratio is 0.10. Which will have a larger impact on the money multiplier: a rise of
Is the money-multiplier model still useful for policymakers? If not, why not?
Based on Figure explain why the multipliers fell sharply with the onset of the financial crisis of 2007-2009. Why did they remain at this lower level after the crisis ended?
Explain how an incomplete understanding at the Federal Reserve of the relationship between the central bank’s balance sheet and the money supply contributed to the Great Depression. How did the
In which of the following cases will the size of the central bank’s balance sheet change? a. The Federal Reserve conducts an open market purchase of $100 million U.S. Treasury securities.b. A
You pick up the morning newspaper and note a headline reporting a major scandal about the Federal Deposit Insurance Corporation that is likely to undermine the public’s confidence in the banking
Compute the impact on the money multiplier of an increase in the currency-to-deposit ratio from 10 percent to 15 percent when the reserve requirement is 10 percent of deposits, and banks’ desired
Consider an open market purchase by the Fed of $3 billion of Treasury bonds. What is the impact of the purchase on the bank from which the Fed bought the securities? Compute the impact on M1
*Why is currency circulating in the hands of the nonbank public considered a liability of the central bank?
The U.S. Treasury maintains accounts at commercial banks. What would be the consequences for the money supply if the Treasury shifted funds from one of those banks to the Fed?
Suppose you examine the central bank’s balance sheet and observe that since the previous day, reserves had fallen by $100 million. In addition, on the asset side of the central bank’s balance
Do you think the central bank was aiming to increase, decrease, or maintain the size of the money supply by carrying out the changes described to its balance sheet in Problem14? Explain your answer.
Looking again at the situation described in Problem14, do you think the size of the banking system’s balance sheet would be affected immediately by these changes to the central bank’s balance
Do you think the Federal Reserve successfully carried out its role as lender of last resort in the wake of the terrorist attacks on September 11, 2001? Why or why not?
In carrying out open market operations, the Federal Reserve buys and sells U.S. Treasury securities. Suppose the U.S. government paid off all its debt. Could the Federal Reserve continue to carry
Plot on a weekly basis the ratio of currency (FRED code: CURRENCY) to checkable deposits (FRED code: TCD) from the start of 2000 through 2002. Download the data and identify the week of the downward
In the Great Depression, the Fed allowed the money supply to decline. To confirm that the Federal Reserve learned from this lesson, plot since 2000 the M2 multiplier – the ratio of M2 (FRED code:
Prior to the financial crisis of 2007-2009, the Fed seldom reduced its holdings of Treasury securities. Plot for the 2007-2009 period the Fed’s Treasury holdings (FRED code: TREAST) and its total
Thousands of the data series on FRED are provided directly by the Board of Governors of the Federal Reserve System, including hundreds of indicators from the Fed’s weekly balance sheet report
Figure 17.11 shows a sharp decline of the M1 money multiplier in 2008. What caused the drop? Using the indicators for currency (FRED code: CURRENCY), total reserve balances maintained (FRED code:
Suppose, one morning the Open Market Trading Desk drastically underestimates the demand for reserves when deciding the quantity of reserves to supply to the market. Based on analysis of the market
Suppose the Federal Reserve did not pay interest on excess reserves. How would the reserve demand curve differ from that in Figure?
In a graph of the market for bank reserves, show how the Federal Reserve limits deviations of the market federal funds rate from its interest rate target under the channel system. Next, show how the
From 1979 to 1982, the FOMC used money growth as an intermediate target. To do so, the committee instructed the Open Market Trading Desk to target the level of reserves in the banking system. What
Federal Reserve buying of mortgage-backed securities is an example of atargeted asset purchase. Explain how the Fed’s actions are intended to work.
The strategy of inflation targeting, which seeks to keep inflation close to a numerical goal over a reasonable horizon, has been referred to as a policy of “constrained discretion.” What does
The charge given by Congress to the Federal Reserve is to “promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.” Discuss whether the Taylor
Discuss the coefficients on the inflation gap and output gap terms in the Taylor rule given in equation (1). If you could change the relative importance of the coefficients, what would you choose?
Use the following Taylor rule to calculate what would happen to the real interest rate if actual and expected inflation increased by 3 percentage points. Target federal funds rate = 2 + current
The Taylor rule in question 19 is thought to be a reasonably good description of policy behavior in the United States in the absence of unusual financial market conditions or deflationary worries.
Go to the Web site of the Federal Reserve Board at www.federalreserve.gov and find the section describing monetary policy tools. Which unconventional tools employed during the financial crisis of
Use your knowledge of the problems associated with asymmetric information to explain why, prior to the change in the Federal Reserve’s discount lending facility in 2002, banks were extremely
The ECB pays a market-based interest rate on required reserves and a lower rate on excess reserves. Explain why the system is structured this way.
Based on the liquidity premium theory of the term structure of interest rates, explain how forward guidance about monetary policy can lower long-term interest rates today. Be sure to account for both
With the policy interest rate at zero, how might a central bank counter unwanted deflation?
Outline and compare the ways in which the Federal Reserve and the ECB added to or adjusted their monetary policy tools in response to the financial crisis of 2007-2009 and subsequent financial crisis
The central bank of a country facing economic and financial market difficulties asks for your advice. The bank hit the zero bound with its policy interest rate but it wasn’t enough to stabilize the
Suppose ECB officials ask your opinion about their operational framework for monetary policy. You respond by commenting on their success at keeping short-term interest rates close to target but also
Consider a situation where reserve requirements are binding and the Federal Reserve decides to reduce the requirements. How would the Open Market Trading Desk act to maintain the interest rate
How might the Federal Reserve exit from the unconventional policies it employed during the financial crisis of 2007-2009 without causing inflationary problems?
Plot the Taylor Rule since 1990 on a quarterly basis (similar to Figure 18.9). For the output gap, use the percent deviations of real GDP (FRED code: GDPC1) from potential output (FRED code: GDPPOT).
Inflation is expected to rise when the Taylor Rule persistently and significantly exceeds the federal funds rate. Conversely, inflation is expected to decline when the federal funds rate exceeds the
Assess the impact of targeted asset purchases by plotting since 2003 on a monthly basis the Federal Reserve’s holdings of mortgage-backed securities (FRED code: MBST) and (on the right scale) the
In 2002, the Federal Reserve began to set the discount rate above the federal funds rate, reversing its previous practice of keeping the discount rate below the funds rate. To assess the impact,
With nominal interest rates at zero, expectations of deflation raise the real interest rate. Japan has faced the zero-bound-deflation problem for many years. Plot since 2000 the nominal interest rate
Explain the mechanics of a speculative attack on the currency of a country with a fixed exchange-rate regime.
Country A frequently experiences large business cycle swings. Under what conditions might it be appropriate for country A to dollarize?
In the first half of 1997, the Bank of Thailand maintained a fixed exchange rate of 26 Thai baht to the U.S. dollar, but Thai interest rates were substantially higher than those in the United States
Explain why a central bank is usually more effective at holding the value of its domestic currency at an artificially low level for a sustained period than at an artificially high level.
When asked about the value of the dollar, the Chair of the Federal Reserve Board answers, "The foreign exchange policy of the United States is the responsibility of the Secretary of the Treasury; I
Explain why a consensus has developed that countries should either allow their exchange rates to float freely or adopt a hard peg as an exchange-rate regime?
Explain the costs and benefits of dollarization. Could a dollarized regime collapse?
Show the impact on the Federal Reserve’s balance sheet of a foreign-exchange market intervention where the Fed sells $1,000 worth of foreign exchange reserves. Explain what impact, if any, the
If the Federal Reserve decides to sterilize the foreign-exchange market intervention described in Problem, show the impact on the Fed’s balance sheet. What would the overall impact be on the
Use a supply and demand diagram for dollars to show the impact of an increase in U.S. interest rates relative to interest rates in the euro area in the wake of a foreign-exchange market intervention
Do you think the U.S. dollar is more likely to strengthen or weaken over the next few months? Explain your reasoning.
China’s stock of foreign-exchange reserves has risen more than 20 times since 2000, and approached $3.5 trillion in the spring of 2013. Do you think that pace of reserve accumulation is likely to
Consider a small open economy with a wide array of trading partners all operating in different currencies. The economy’s business cycles are not well synchronized with any of the world’s largest
During the time of the currency board, Argentinean banks offered accounts in both dollars and pesos, but loans were made largely in pesos. Describe the impact on banks of the collapse of the currency
Investors became nervous just before the 2002 Brazilian presidential election. As a result, the risk premium on Brazilian government debt increased dramatically and Brazil’s currency depreciated
Explain why a well-capitalized domestic banking system might be important for the successful maintenance of a fixed exchange-rate regime.
Why might sterilized foreign-exchange market intervention have a greater impact on the exchange rate in times of financial stress than in times of normal market conditions?
You observe that two countries with a fixed exchange rate have current inflation rates that differ from each other. You check the recent historical data and find that inflation differentials have
Assuming the country is open to international capital flows, which of the following combinations of monetary and exchange-rate policies are viable? Explain your reasoning.(a) A domestic interest rate
A small eastern European economy asks your opinion about whether they should pursue the path to joining the European Economic and Monetary Union (EMU) or simply “euroize” (i.e. dollarize by using
Panama, Ecuador, and El Salvador began using the U.S. dollar as their domestic currency in 1904, 2000, and 2001, respectively. How do you expect their inflation rates to compare with U.S. inflation?
Did the September, 2000, currency intervention by the United States and other countries influence the dollar-euro exchange rates? Plot for the September-October 2000 period the daily dollar-euro
Some claim that adoption of a gold standard would contribute to price stability. Was price stability a feature of the U.S. gold standard that prevailed prior to World War I (see Applying the Concept
China is the world’s largest exporter and has a fixed nominal exchange to the U.S. dollar. However, China’s real exchange rate, which determines the country’s competitiveness, can change even
In September 1992, a speculative attack compelled the United Kingdom to devalue the British pound versus the German currency (Deutsche Mark). How did monetary policy in both countries influence this
Explain why giving an independent central bank control over the quantity of money in the economy should reduce the occurrences of periods of extremely high inflation, especially in developing
If velocity were predictable but not constant, would a monetary policy that fixed the growth rate of money work?
Describe the impact of financial innovations on the demand for money and velocity.
Suppose that expected inflation rises by 3 percent at the same time that the yields on money and on non-money assets both rise by 3 percent. What will happen to the demand for money? What if expected
Provide arguments both for and against the Federal Reserve’s adoption of a target growth rate for M2. What assumptions would be necessary to compute such a target rate?
Draw a graph of money demand and money supply with the nominal interest rate on the vertical axis and money balances on the horizontal axis. Assume the central bank is following a money growth rule
Using the same graph as that described in Problem, show how the central bank could use its control over the quantity of money to target a particular interest rate in the face of changes in velocity.
Why might targeting the money supply lead to lower output growth than targeting the rate of interest?.
Which of the following factors would increase the transactions demand for money? Explain your choices.(a) Lower nominal interest rates.(b) Rumors that a computer virus had invaded the ATM network.(c)

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