DISCUSSION QUESTIONS -

1. Identify some of the institutional participants in the mortgage markets.

2. What actions did the Fed take to help avoid a financial system collapse in 2008-2009?

3. Describe the weaknesses of the national banking system that was in place prior to passage of the Federal Reserve Act of 1913.

4. What functions and activities do central banks usually perform?

5. Describe the organizational structure of the Federal Reserve System in terms of its five major components.

6. Explain how the banking interests of large, medium, and small businesses are represented on the board of directors of each Reserve Bank.

7. What is a Reserve Branch Bank? How many such branches exist, and where are roost of them located?

8. How are members of the Board appointed? To what extent are they subject to political pressures?

9. Discuss the structure, the functions, and the importance of the FOMC.

10. Identify the six individuals who served as chairs of the Board since the early 1950s. Indicate each individual's approximate time and length of service as chair.

11. Distinguish among the dynamic, defensive, and accommodative responsibilities of the Fed.

12. Identify and briefly describe the three traditional instruments that may be used by the Fed to set monetary policy.

13. Describe what is meant by quantitative casing by the Fed.

14. Reserve Banks have at times been described as bankers' banks because of their lending powers. What is meant by this statement?

15. Describe the two "targets" that the Fed can use when establishing monetary policy. Which target has the Fed focused on in recent years?

16. Explain the usual procedures fur examining national banks. How does this process differ from the examination of member banks of the Fed holding state charters?

17. What federal agencies are responsible for supervising and. regulating depository institutions that are not commercial banks?

18. Describe the objectives of the Consumer Credit Protection Act of 1968. What is the Truth in Lending section of the act? What is Regulation Z?

19. Explain the process by which the Reserve Banks provide the economy with currency and coin.

20. Describe how a check drawn on a commercial bank but deposited foe collection in another bank in a distant city might he cleared through the facilities of the Fed.

21. What is the special role of the Fed's Interdistrict Settlement Fund in the check clearance process?

22. In what war do the Reserve Banks serve as fiscal agents for the U.S. government?

23. Briefly describe and compare the central banks in the United Kingdom, Japan, and Economic Monetary Union.

EXERCISES -

1. You are a resident of Seattle, Washington, and maintain a checking account with a bank in that city. You have just written a check from that bank to pay your tuition. Describe the process by which the banking system enables your college to collect the funds from your bank.

2. As the executive of a bank or thrift institution, you are faced with an intense seasonal demand for loans. Assuming that your loanable funds are inadequate to take care of the demand, how might your Reserve Bank help you with this problem?

3. The Board has decided to ease monetary conditions to counter early signs of an economic downturn. Because price inflation has been a burden in recent years, the Board is eager to avoid any action that the public might interpret as a return to inflationary conditions.

How might the Board use its various powers to accomplish the objective of monetary ease without drawing unfavorable publicity to its actions?

4. An economic contraction (recession) is occurring, and the Fed plans to use all facilities at its command to halt the decline. Describe the measures that it may take.

5. You have recently retired and are intent on extensive travel to many of the exotic lands you have only read about. You will be receiving a pension Check, a Social Security check, arid dividends and interest from several corporations. You are concerned about the deposit of these checks during your several months of absence, and you have asked your banker if an arrangement is available to solve this problem. What alternative might the banker suggest?

6. The prime rate, and other interest rates, offered by banks often change in the same direction as a change in the Fed's target for the federal funds rate. As an employee of a Federal Reserve District Bank, you have been told that your District Bank will be increasing its discount rate early next work. Expectations are that an increase in the discount rate will lead to an increase in the federal funds rate, which will lead loan increase in the prime rate and other bank lending rates. You have been thinking about buying a new automobile for the past couple of months. Given this information of a planned discount rate increase, you are considering buying your new automobile before the end of the week. What are the ethical issues, if any, involved in this scenario? What would you do?

PROBLEMS -

1. A new bank has vault cash of $1 million and $5 million in deposits held at its Federal Reserve District Bank.

a. If the required reserves ratio is 8 percent, what dollar amount of deposits can the bank have?

b. If the bank holds $65 million in deposits and currently holds bank reserves such that excess reserves arc zero, what required reserves ratio is implied?

2. Assume a bank has $5 million in deposits and $1 million in vault cash. If the hank holds $1 million in excess reserves and the required reserves ratio is 8 percent, what level of deposits are being held?

3. A bank has $110 million in deposits and holds $10 million in vault cash.

a. If the required reserves ratio is 10 percent, what dollar amount of reserves must be held at the Reserve Bank?

b. How would your answer in Part (a) change if the required reserves ratio was increased to 12 percent?

4. A bank has $10 million in vault cash and $110 million in deposits. If total bank reserves were $15 million with $2 million considered to be excess reserves, what required reserves ratio is implied?

5. The Friendly National Bank holds $50 million in reserves at its Federal Reserve District Bank. The required reserves ratio is 12 percent.

a. If the bank has $600 million in deposits, what amount of vault cash would be needed for the bank to be in compliance with the required reserves ratio?

b. If the bank holds $10 million in vault cash, determine the required reserves ratio that would be needed for the bank to avoid a reserves deficit.

c. If the Friendly National Bank experiences a required reserves deficit, what actions can it take to be in compliance with the existing required reserves ratio?

6. Assume that banks must hold a 2 percent reserve percentage against transaction account balances up to and including $40 million. For transaction accounts above $40 million, the required reserve percentage is 8 percent. Assume that Dell National Bank has transaction account balances of $200 million.

a. Calculate the dollar amount of required reserves that Dell National Bank must hold.

b. What percentage of Dell's total transaction account balance must be held in the form of required reserves?

7. Assume that the Fed decides to increase the required reserve percentage on transaction accounts above $40 million from 8 percent to 10 percent. All other information remains the same as given in Problem 6, including the transaction account balances held by Dell National Bank.

a. What would be the dollar amount of required reserves?

b. What percentage of total transaction account balances held by Dell would be held as required reserves?

8. Show how your answers in Problem 6 would change if the Fed lowered the cut-off between the 2 percent rate and the 5 percent rate from $40 million in transaction account balances down to $20 million.

9. Challenge Problem: You have been asked to assess the impact of possible changes in reserve requirement components on the dollar amount of reserves required. Assume the reserve percentages are set at 2 percent on the first $50 million of traction account amounts, 4 percent on the second $50 million, and 10 percent on transaction amounts over $100 million. First National Bank has transaction account balances of $100 million, while Second National Bank's transaction balances are $150 million and Third National Bank's transaction balances are $250 million.

a. Determine the dollar amounts of required reserves for each of the three banks.

b. Calculate the percentage of reserves to total transactions accounts for each of the three banks.

c. The Central Bank wants to slow the economy by raising the reserve requirements for member banks. To do so, the reserve percentages will be increased to 12 percent on transaction balances above $100 million. Simultaneously, the 2 percent rate will apply on the first $25 million. Calculate the reserve requirement amount for each of the three banks after these changes have taken place.

d. Show the dollar amount of changes in reserve requirement amounts for each bank. Calculate the percentage of reserve requirement amounts to transaction account balances for each bank.

e. Which of the two reserve requirement changes discussed in (c) causes the greatest impact on the dollar amount of reserves for all three of the banks?

f. Now assume that you could either (1) lower the transactions account amount for the lowest category from $50 million down to $25 million or (2) increase the reserve percentage front 10 percent to 12 percent on transactions account amounts over $200 million. Which choice would you recommend if you wanted to achieve a moderate slowing of economic activity?