Practice Questions #3

Disclaimer: These practice questions are not comprehensive, nor are they intended to be. They are a strict subset of questions on the subject matter for which you are responsible.

Identifications:

Federal Reserve System
Federal Open Market Committee
Reserve Requirements
Open Market Operations
Discount Rate
Public Interest View
Theory of Bureaucratic Behavior
Political Business Cycle
Green Book of the Federal Reserve
Blue Book of the Federal Reserve
Beige Book of the Federal Reserve
Discount Loan
Base Drift
Required Reserves
Excess Reserves
Monetary Base
High Powered Money
Float
Simple Money Multiplier
Currency Drains
Multiple Deposit Creation
Fractional Reserve Banking System
Required Reserve Ratio
Open Market Purchase
Open Market Sale
Nonborrowed Monetary Base
Excess Reserves Ratio
Currency Ratio
Expected Deposit Outflows
SDRs
Dynamic Open Market Operations
Defensive Open Market Operations
Primary Dealers
Repurchase Agreement
Matched Sale-purchase Transactions
TRAPS
Adjustment Credit Loans
Extended Credit
Seasonal Credit
Moral Suasion
Lender of Last Resort
Announcement Effect

True/False/Uncertain:

1. Bureaucracies that work to serve the public interest are acting in accordance with the theory of bureaucratic behavior.
2. Countries with more independent central banks typically have better macroeconomic performance than do countries with less independent central banks.
3. When the Fed makes an open market purchase from a bank this leads to an increase in the bank's reserves.
4. When the Fed makes an open market sale to a bank this leads to an increase in the amount of currency in circulation.
5. When the Fed makes an open market purchase from the nonblank public this may lead to an increase in reserves and/or an increase in currency.
6. The Fed can control the level of reserves in the banking system better than it can control the monetary base.
7. An increase in the monetary base, holding everything else constant, will lead to an increase in the money supply.
8. The Fed can offset fluctuations in the monetary base due to fluctuations in float and Treasury deposits.
9. People can change the monetary base when they purchase Treasury securities.
10. A bank likes holding excess reserves since it helps them to cover deposit outflows.
11. Holding excess reserves decreases the expansion process from the money multiplier.
12. An increase in the nonborrowed monetary base will result in a decrease in the money multiplier.
13. An increase in the discount rate will decrease discount loans and therefore the monetary base will decrease; this in turn will lead to a decrease in the money supply.
14. When interest rates increase this leads to an increase in the excess reserve ratio for banks and an increase in the level of discount loans.
15. In the long run the primary determinant of movements in the money supply is the borrowed monetary base, or in other words, the discount loans that the Fed makes.
16. In the short run, the money multiplier is very constant and highly predictable.
17. The Fed can control the level of discount loans.
18. The FOMC is the group that actually makes the decisions and executes the transactions involved in open market operations.
19. The Fed can influence the Federal Funds interest rate through its open market operations.
20. The discount rate and the Federal Funds rate differ by a constant amount.
21. There is no limit to the level of discount loans available to banks since the Fed is the lender of last resort for the banking system.
22. The easiest monetary policy tool to implement from an administrative perspective is a change in the required reserve ratio.
23. The Fed, if it is successful in implementing defensive open market operations, will have no need to pursue dynamic open market operations.
24. The existence of discount loans creates a moral hazard problem for the taxpayers with respect to bank behavior.
25. Extended credit discount loans are short-term loans offered to banks that face a severe reserve shortfall.

Short Essays:

1. How independent is the Federal Reserve? Based on the experiences of the Fed in the U.S., as well as other central banks, do you believe that the Fed should be independent? Provide both pros and cons in your argument.
2. What are the components of the monetary base? What are the components of the money multipliers? Critically assess the control of the Fed over the money supply, with respect to the monetary base and money multipliers. Be sure to discuss the degree to which the Fed can control each component of these two variables.
3. Compare the use of open market operations, changes is the discount rate, and changes in reserve requirements to control the money supply on the following criteria: flexibility, reversibility, effectiveness, and speed of implementation.
4. The Fed used net free reserves as an operating target during the Depression. Why might this have been inadvisable?