Which of the following activities of the central bank do not constitute monetary
ID: 1106322 • Letter: W
Question
Which of the following activities of the central bank do not constitute monetary policy?
A.
Monitoring key stock prices.
B.
Indirectly controlling the money supply.
C.
Monitoring financial institutions.
D.
Controlling certain key interest rates.
The Fed's dual mandate includes maintaining
.
The Fed engages in different types of activities to achieve its dual mandate. In the following examples, identify the type of activity being carried out by the Fed.
Example
Activity
The Fed transfers $1 million from Santander Bank's reserves (on deposit at the Fed) to Deutsche Bank's reserves when Alice, a customer of Deutsche Bank, goes to clear a check written to her by April, a customer of Santander Bank.
Management of macroeconomic fluctuations
Management of interbank transfers
Regulation
The Fed increases the quantity of bank reserves to stimulate the economy by increasing inflation and lowering unemployment.
Regulation
Management of macroeconomic fluctuations
Management of interbank transfers
The Fed fails Morgan Stanley in its stress test and orders the bank to improve its balance sheet by adding more capital.
Example
Activity
The Fed transfers $1 million from Santander Bank's reserves (on deposit at the Fed) to Deutsche Bank's reserves when Alice, a customer of Deutsche Bank, goes to clear a check written to her by April, a customer of Santander Bank.
Management of macroeconomic fluctuations
Management of interbank transfers
Regulation
The Fed increases the quantity of bank reserves to stimulate the economy by increasing inflation and lowering unemployment.
Regulation
Management of macroeconomic fluctuations
Management of interbank transfers
The Fed fails Morgan Stanley in its stress test and orders the bank to improve its balance sheet by adding more capital.
Explanation / Answer
Answer: C. Monitoring financial institutions.
This is not the activity of Central Bank's monetary policy. Because Central Bank act as a banker's bank to control the money supply in the economy and it decide the interest rate also. Many times it was noticed that stock of money constitutes an important monetary policy variable to the government. But monitoring financial institution is not the responsibility of Central Bank.
As the Fed fails Morgan Stanley in its stress test and orders the bank to improve its balance sheet by adding more capital so Fed's dual mandate activities are
Regulation
Management of macroeconomic fluctuations
Management of interbank transfers
Because to improve its balance sheet by adding more capital is a regualtion of Bank and it is managing by Fed and he acts as an interbank transferer also.
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