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money banking financial markets

Questions and Answers of Money Banking Financial Markets

How does an open market sale of Treasury securities by the Fed affect the price of Treasury securities, the interest rate on Treasury securities, the monetary base, and the money supply?
A column in the Wall Street Journal in the summer of 2016 discussed gold as an investment. The columnist noted: “The future can always be different from the past. But if gold shoots far up from
Allan Meltzer of Carnegie Mellon University wrote the following about how the Federal Reserve Board’s staff analyzed the likely effects of the large excess reserves banks were holding in the
Consider the following data (where all values are in billions of dollars):Calculate the values for each period for the currency-to-deposit ratio, the ratio of total reserves to deposits, the monetary
Consider the following data:Currency ............................$850 billionCheckable deposits ............700 billionBank reserves .....................700 billiona. Calculate the values for the
A Fed publication refers to the multiple expansion of deposits as “the heart of banking theory.”a. Why is the process of the multiple expansion of deposits important to understanding how the
Consider the following data:Currency ................................$ 100 billionBank reserves ...........................200 billionCheckable deposits ..................800 billionTime deposits
In medieval times, many goldsmiths would offer to store gold in return for a fee. They provided anyone depositing gold with a receipt, which represented a legal claim on the goldsmith to exchange the
An article in the Economist noted that the money supply in China “has grown considerably faster than” the monetary base. The article also noted that the Bank of China had reduced the required
In the following bank balance sheet, amounts are in millions of dollars. The required reserve ratio is 3% on the first $30 million of checkable deposits and 12% on any checkable deposits over $30
An article in the Wall Street Journal in mid-2016 notes the persistence of slow economic growth and very low interest rates seven years after the end of the financial crisis. One consequence was
What will be the value of the money multiplier if banks hold no excess reserves, the currency-todeposit ratio is 1, and the required reserve ratio for checkable deposits is 100%?
Explain whether you agree with the following observation:“If the required reserve ratio were zero, the process of multiple deposit expansion would go on forever.”
Use T-accounts to show the initial effects of each of the following actions on the balance sheets of the Fed and the banking system:a. The Fed increases discount loans by $2 billion.b. The Fed
A Federal Reserve publication notes that when economists analyze the money supply process, they typically assume that the money multiplier is “independent of the policy actions of the central
Go to the web site of the Federal Reserve Bank of St. Louis (FRED) (fred.stlouisfed.org) and download the data series for the St. Louis Adjusted Monetary Base (BASE) from July 1959 until the most
Evaluate the following statement: “Because the Fed does not have to ask Congress for money to fund its operations, the principal–agent view of the Fed’s motivation cannot be correct.”
A column in the Wall Street Journal notes that “every heavily indebted country weighs the cost of repaying debt against the loss of confidence and creditworthiness that default entails.” Whose
Arthur Rolnick of the Federal Reserve Bank of Minneapolis has argued that in their account of the failure of the Bank of United States: Friedman and Schwartz provide the rationale for the policy that
Suppose that a bank with no excess reserves receives a deposit into a checking account of $10,000 in currency. If the required reserve ratio is 0.10, what is the maximum amount the bank can lend out?
Suppose that Wells Fargo lends $100,000 to Jill’s Jerseys. Using T-accounts, show how this transaction is recorded on the bank’s balance sheet. If Jill’s spends the money to buy materials from
An article in the Economist refers to the monetary base in China as “central bank-issued currency.” Do you agree with this definition? Briefly explain.
Briefly explain what happened to the currencyto-deposit ratio (C/D) and the excess reserves-todeposit ratio (ER/D) during the financial crisis of 2007–2009. What effect did these changes have on
Go to the web site of the Federal Reserve Bank of St. Louis (FRED) (fred.stlouisfed.org) and find the most recent value and the value from the same month one year earlier for Excess Reserves of
If the required reserve ratio is 15%, what is the value of the simple deposit multiplier?
Use a T-account for Wells Fargo and a T-account for the Fed to show the result of the Fed buying $1 million in Treasury bills from Wells Fargo.
Briefly explain whether under normal circumstances the money multiplier will increase or decrease following an increase in each of the following, holding other factors constant:a. The
Go to the web site of the Federal Reserve Bank of St. Louis (FRED) (fred.stlouisfed.org) and find the most recent values for the Currency Component of M1 (CURRNS), Total Checkable Deposits (TCDSL),
Why does the Fed’s purchase of Treasury bills lead to “multiple deposit expansion”?
What are the two most important assets and the two most important liabilities on the Fed’s balance sheet? Because currency is valuable, why is it a liability to the Fed rather than an asset?
What are the key differences between the simple deposit multiplier and the money multiplier?
Go to the web site of the Federal Reserve Bank of St. Louis (FRED) (fred.stlouisfed.org) and find the most recent values for the for the M1 Money Stock (M1SL) and the St. Louis Adjusted Monetary Base
Suppose that PNC Bank sells $1 million in Treasury bills to the Fed and then makes a $1 million loan to David’s Donut Emporium and Boat Repair.Use a T-account to show the results of these
How does the monetary base differ from the money supply?
A Federal Reserve document states: “Due to concerns about potential conflicts of interest … Class A directors may not participate in most aspects of the appointment process of Reserve Bank
Defending the presence of bankers on the boards of directors of the Federal Reserve Banks, Jeffrey Lacker, president of the Federal Reserve Bank of Richmond argued: “This hybrid governance model
Suppose that the U.S. Constitution were amended to include the following: “Congress shall establish a central bank that will be responsible for conducting the monetary policy of the United
What is the purpose of the Government in the Sunshine Act? In your opinion, was Fed Chairman Bernanke justified in evading the requirements of this act during the financial crisis of 2007–2009?
When Kentucky Senator Rand Paul was running for the 2016 Republican presidential nomination, an article in the New York Times noted: “Mr. Paul opposes the Federal Reserve’s control of the money
Suppose that Bank of America pays a 2% annual interest rate on checking account balances while having to meet a reserve requirement of 10%. Assume that the Fed pays Bank of America an interest rate
Fed Chair Janet Yellen was quoted in an article in the Wall Street Journal as asserting: “Academic studies establish beyond a shadow of a doubt that independent central banks perform better.”
A representative of the Treasury Department is present at every meeting of the Bank of England’s Monetary Policy Committee. The representative can participate in the discussion but is not allowed
In his memoirs, former Fed Chairman Ben Bernanke discussed the reaction of the Federal Reserve Bank presidents to a congressional proposal that the Reserve Banks no longer be responsible for
Adam Posen, then a member of the Bank of England’s Monetary Policy Committee, was characterized as arguing in a speech that:Central banks’ purchases of government debt … far from undermining
Look again at the Making the Connection “St. Louis and Kansas City? What Explains the Locations of the District Banks?” on page 433 in Section 13.1. Are Michael McAvoy’s and David Wheelock’s
Suppose Congress were to amend the Federal Reserve Act and set up a new commission to reexamine the Federal Reserve district boundaries. What considerations should the commission use in drawing the
David Wheelock of the Federal Reserve Bank of St. Louis describes the following episode at the beginning of the Great Depression:Following the stock market crash [of October 1929], the Federal
According to economist Allan Meltzer of Carnegie Mellon University, who has written about the history of the Federal Reserve:Tension between the [Federal Reserve] Board and the reserve banks began
In 2015, the Bank of Japan announced that it would begin buying exchange-traded funds (ETFs), provided that the stocks included in the funds had been issued by firms that were “proactively making
Thomas Hoenig, former president of the Federal Reserve Bank of Kansas City, remarked about the Federal Reserve System: “It was designed as a public–private partnership, accountable to, and yet
On its web site, the European Central Bank (ECB) states: The European Central Bank and the national central banks together constitute the Eurosystem, the central banking system of the euro area. The
At a hearing before a committee of the House of Representatives, former Fed Chairman Ben Bernanke was asked about legislation that would direct the GAO to audit the Fed’s monetary policy actions.
Is it easier for a central bank to be independent in a high-income country or in a low-income country? What implications does your answer have for what the average inflation rate is likely to be in
In the first volume of his history of the Federal Reserve System, Allan Meltzer titled one of his chapters “Under Treasury Control, 1942–1951.” Why would Meltzer have considered the Fed to have
Which body is more important within the Federal Reserve System: the Board of Governors or the Federal Open Market Committee? Briefly explain.
How is the European Central Bank organized? What special problems does it confront? What difficulties did it encounter during the financial crisis of 2007–2009 and the subsequent sovereign debt
Briefly discuss the main arguments for and against the Fed’s independence.
Why was the Federal Reserve System split into 12 districts?
Go to sdw. ecb.europa.eu and select “Government Debt (as a % of GDP).” What is the current eurozone debt/GDP ratio? What is the deficit/GDP ratio? What challenges do the deficit and debt data
What are the major differences between the public interest view of the Fed’s motivation and the principal–agent view? How are these views connected to the theory of the political business cycle?
Why did the United States have no central bank between 1836 and 1913? Why did Congress decide to establish the Federal Reserve System in 1913?
Go to the web site of the Federal Reserve Bank of St. Louis (FRED) (fred. stlouisfed.org) and download and graph the growth rate for real GDP in Greece (GRCGDPRQPSMEI) from the first quarter of 2000
What is the main problem with having a central bank that is not independent of the rest of the government?
Compare the length of terms of office for central bank heads and members of central bank governing boards between the U.S. Federal Reserve and foreign central banks.
In what ways is the Fed subject to external pressure?
Shortly after the Federal Reserve arranged for JPMorgan Chase to purchase Bear Stearns in March 2008, the Wall Street Journal recounted the events that led to the extraordinarily low price that
Carmen Reinhart and Kenneth Rogoff have argued that the 2007–2009 financial crisis explains not just the severity of the accompanying recession but also the slowness of the subsequent economic
In 2016, financial regulators ordered significant changes in the “living wills” prepared by five large banks. According to an article in the Wall Street Journal, the wills as submitted didn’t
An article in a Federal Reserve publication notes that during the financial crisis, the Federal Reserve lent $29 billion to help in JPMorgan Chase’s purchase of Bear Stearns. The article asks:
In describing the performance of the Federal Reserve during the Great Depression, former Federal Reserve Chairman Ben Bernanke has written: “The Fed proved far too passive during the Depression. It
In their book This Time Is Different, Carmen Reinhart and Kenneth Rogoff conclude: “An examination of the aftermath of severe postwar financial crises shows that they have had a deep and lasting
Financial journalist James Stewart notes that in contrast to its actions with respect to Lehman Brothers: “the Fed did lend into continuing runs at both Bear Stearns and A.I.G., although officials
In discussing the 2007–2009 financial crisis, Federal Reserve Vice Chairman Stanley Fischer observed: “The fact that losses in what was a relatively small part of the mortgage market quickly
In his history of the Federal Reserve, Allan Meltzer of Carnegie Mellon University describes the views of Federal Reserve officials in the fall of 1930:Most of the policymakers regarded the
Economist Laurence Kotlikoff of Boston University has proposed that the banking system be reformed so that all banks become “limited purpose banks.” As he explains:[Banks] would simply function
In a paper looking back at the financial crisis, former Fed Chairman Alan Greenspan wrote: Some bubbles burst without severe economic consequences, the dotcom boom and the rapid run-up of stock
Looking back at the financial crisis several years later, former Fed Chairman Alan Greenspan argued:At least partly responsible [for the severity of the financial collapse] may have been the failure
A columnist writing in the Wall Street Journal observed: “Franklin D. Roosevelt’s March 1933 inaugural line ‘that the only thing we have to fear is fear itself’ was inspiring, but wrong.
A classic account of bank panics was published in 1879 by Walter Bagehot, editor of the Economist, in his book Lombard Street: “In wild periods of alarm, one failure makes many, and the best way to
Former Federal Reserve Chairman Ben Bernanke has observed: “Even a bank that is solvent under normal conditions can rarely survive a sustained run.”a. What does Bernanke mean by “solvent under
An article in the Wall Street Journal notes: “Higher capital requirements effectively limit how much SIFIs can borrow, and can crimp profitability.”a. What is a SIFI? Why does the Dodd-Frank Act
In a blog post, former Federal Reserve Chairman Ben Bernanke described the four “basic elements” of a financial crisis: “broad-based loss of confidence in banks, runs by providers of short-term
In his memoirs, Herbert Hoover described the reaction of his Treasury secretary to the Great Depression:First was the “leave it alone liquidationists” headed by Secretary of the Treasury Mellon,
In describing the bank panic that occurred in the fall of 1930, Milton Friedman and Anna Schwartz wrote:A contagion of fear spread among depositors, starting from the agricultural areas, which had
The financial writer Sebastian Mallaby made the following observation about hedge funds: Leverage also made hedge funds vulnerable to shocks: If their trades moved against them, they would burn
An article in the New York Times published just after the Fed helped save Bear Stearns from bankruptcy noted:If Bear Stearns failed, for example, it would result in a wholesale dumping of mortgage
In academic research published before he entered government, Fed Chairman Ben Bernanke wrote:[In] a system without deposit insurance, depositor runs and withdrawals deprive banks of funds for
How do currency crises occur? Why have some European countries been suffering from a sovereign debt crisis?
A column in the Wall Street Journal by the governor of the central bank of Sweden discussing the Basel accord makes the following observation: “One clear lesson from the [financial] crisis is that
An article in the New York Times quotes former Fed Chairman Alan Greenspan as arguing:The global house price bubble was a consequence of lower interest rates, but it was long-term interest rates that
In June 1930, a delegation of businessmen appeared at the White House to urge President Herbert Hoover to propose an economic stimulus package. Hoover told them: “Gentlemen, you have come sixty
What are the two methods that governments typically use to avoid bank panics?
Why might deposit insurance encourage banks to take on too much risk? Is deposit insurance, therefore, a bad idea? Briefly explain.
Briefly discuss the policy actions the Federal Reserve and the Treasury took during the financial crisis of 2007–2009.
Briefly summarize the four explanations of why the Federal Reserve failed to intervene to stabilize the banking system in the early 1930s.
Does a bank have to be insolvent to experience a run?
Go to the web site of the Federal Reserve Bank of St. Louis (FRED) (fred.stlouisfed.org) and download and graph the data series for the interest rate on Baa-rated corporate bonds (DBAA) from January
What innovations did banks develop to get around ceilings on deposit interest rates?
How can an investment bank experience a “run”? Briefly describe the effect the runs on Bear Stearns and Lehman Brothers had on the U.S. economy.
How did the debt-deflation process contribute to the severity of the Great Depression?

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