Money And Monetary Policy Final UPDATED Exam Questions and CORRECT Answers
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Money And Monetary Policy
Institution
Money And Monetary Policy
Money And Monetary Policy Final
UPDATED Exam Questions and
CORRECT Answers
What was the main function of the Federal Reserve Bank originally intended to be? -
CORRECT ANSWER- The Federal Reserve Bank was originally meant to function as a
lender of last resort. It was supposed to control the...
Money And Monetary Policy Final
UPDATED Exam Questions and
CORRECT Answers
What was the main function of the Federal Reserve Bank originally intended to be? -
CORRECT ANSWER- ✔✔The Federal Reserve Bank was originally meant to function as a
lender of last resort. It was supposed to control the amount of currency outstanding and the
volume of loans—known as discount loans—to member banks under the lender-of-last-resort
function.
What was peculiar about the division of the Federal Reserve Bank into different districts? -
CORRECT ANSWER- ✔✔The division of the Federal Reserve Bank into different districts
looked peculiar on a geographical map since no state became a single Federal Reserve
district. Some states were split by district boundaries, and economically dissimilar states were
grouped in the same district. Most Federal Reserve districts contained a mixture of urban and
rural areas, as well as manufacturing, agriculture, and service business interests. This was an
intentional arrangement to prevent any one interest group or any one state from obtaining
preferential treatment from the district Federal Reserve Bank.
How do the Federal Reserve Banks engage in monetary policy both directly and indirectly? -
CORRECT ANSWER- ✔✔The Federal Reserve Banks engage in monetary policy both
directly (by making discount loans) and indirectly (through membership on Federal Reserve
committees). Theoretically the Federal Reserve Banks establish the discount rate that banks
pay on discount loans and determine the amounts that individual (member and nonmember)
banks are allowed to borrow. It is the Board of Governors in Washington, DC, that has been
setting the discount rates in all the 12 districts in recent years
What changes did the Dodd-Frank Act make to the Fed? - CORRECT ANSWER- ✔✔The
Dodd-Frank Act is legislation passed during 2010 that was intended to reform the regulation
of the financial system. The provisions of the bill relevant to the Fed make only relatively
minor changes to the system's operation. The changes include:
1. Barring class A directors of the Federal Reserve banks from participating in the election of
bank presidents
2. Making the Fed a member of the new Financial Stability Oversight Council
3. Designating a Fed vice chairman for regulatory supervision,
4. Ordering the Government Accountability Office to audit the emergency lending programs
the Fed carried out during the financial crisis
,5. Requiring the Fed to be more transparent about the parties to whom it lends and with
whom it buys and sells securities
6. Establishing the Consumer Financial Protection Bureau, which took over some of the Fed's
responsibilities for administering consumer protection statutes that apply to all financial firms
a. Why did Congress set up a system that had this tension between the Federal Reserve Banks
and the Federal Reserve Board?
b. Has the tension been resolved in the modern Fed? If so, how? - CORRECT ANSWER-
✔✔a. Congress created the tension between the Federal Reserve Banks and the Federal
Reserve Board as part of an organizational plan intended to prevent one faction within the
Federal Reserve System from having too much power.
b. The Board of Governors how has undisputed control over the Federal Reserve System. In
that sense, the tension has been resolved. However, the 12 Federal Reserve Banks have
interests that sometimes diverge from the interests of the Board of Governors. So in that
sense, the tension remains.
In what ways is the Fed subject to external pressure? - CORRECT ANSWER- ✔✔The
president can exercise control over the membership of the Board of Governors and appoint a
new chairman every four years, and the Congress can amend the Fed's charter and powers or
even abolish it entirely.
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? - CORRECT ANSWER- ✔✔The public interest view is a theory of central
bank decision making that holds that officials act in the best interest of the public. The
principal-agent view is a theory of central bank decision making that holds that officials
maximize their personal well-being rather than that of the general public. The political
business cycle is the theory that policymakers running for reelection will urge the Fed to
lower interest rates to stimulate the economy prior to an election. If the Fed is more
concerned with preserving its power, influence, and prestige, as the principal-agent view
holds, then it would be more likely to take actions resulting in a political business cycle as it
attempts to avoid conflict with groups that could limit its power and influence.
What is the composition of the Fed's Board of Governors? - CORRECT ANSWER- ✔✔The
Board of Governors of the Fed consists of seven members appointed by the President of the
United States and confirmed by the U.S. Senate
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. - CORRECT
, ANSWER- ✔✔Among the Federal Reserve, the European Central Bank (ECB), the Bank of
England, and the Bank of Japan, the length of terms of office are longest for the central bank
board members of the Federal Reserve and shortest for the head of the Federal Reserve (the
chairman). The Fed has the shortest length of term for its head, at 4 years, and the longest
length of terms for its board members, at 14 years.
What is the Federal Open Market Committee? What is its main function? - CORRECT
ANSWER- ✔✔The Federal Open Market Committee is a 12-member committee consisting
of the chairman of the Board of Governors, the other Fed governors, and the presidents of 12
Federal 3 Reserve Banks. The chairman of the Board of Governors serves as the chairman of
the FOMC. Its main function is to supervise the Fed's open market operations.
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 crisis? - CORRECT ANSWER- ✔✔The European Central Bank (ECB) has an
executive board of six members, with one of the members serving as president. The board
members are appointed by the heads of state and government, based on the recommendation
of the council of Ministers of Economics and Finance after consulting the European
Parliament and the Governing Council of the ECB. The governance of the ECB also includes
the governors of each of the member national central banks. The decentralized organization
of the ECB with the governors of the national central banks holding a majority of the votes,
instead of the executive board, may make it harder to achieve a consensus during a crisis.
During the financial crisis of 2007-2009, the ECB encountered difficulty conducting a
common monetary policy for countries experiencing significantly different economic
conditions. During the subsequent sovereign debt crisis, the ECB faced the dilemma of
whether to buy the sovereign debt of struggling governments so that the governments would
still be able to raise funds by selling bonds. The ECB bond purchases would also serve to
protect the solvency of European banks with large holdings of government bonds. But the
ECB bond purchases risk raising expectations of higher future inflation and more moral
hazard in government budgetary policies.
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 high-income countries as opposed to low-income countries? - CORRECT
ANSWER- ✔✔Low-income (less-developed) countries often have more trouble selling
governmental debt to investors than do high-income countries. As a result, it is often difficult
for a central bank to act independently in a less-developed country. When the government of
a less-developed country runs a deficit, the country's central bank is often under great
pressure to buy some, or even all, of the bonds the government must issue to fund the deficit.
Research has shown that the more independent a central bank is, the lower the inflation rate
will be. On these grounds, we would expect the average inflation rate in low-income
countries to be higher than in high-income countries
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