1. The Fed- Briefly describe the origin of the Federal Reserve System. Describe
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Question
1. The Fed- Briefly describe the origin of the Federal Reserve System. Describe the functions of the Fed district banks.<?xml:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />
2. FOMC- What are the main goals of the Federal Open Market Committee (FOMC)? How does it attempt to achieve these goals?
3. Open Market Operations- Explain how the Fed increases the money supply through open market operations.
6. Reserve Requirement- How is money supply growth affected by an increase in the reserve
requirement ratio?
7. Control of Money Supply- Describe the characteristics that a measure of money should have if it is to be manipulated by the Fed.
9. Open Market Operations- Explain how the Fed can use open market operations to reduce the money supply.
11. Discount Window Lending during Credit Crisis- Explain how and why the Fed extended its
discount window lending to nonbank financial institutions during the credit crisis.
13. Bailouts by the Fed- Do you think that the Fed should have bailed out large financial institutions during the credit crisis?
18. Fed Facility Programs during the Credit Crisis- Explain how the Fed
Explanation / Answer
1. The Fed. Briefly describe the origin of the Federal Reserve System. Describe the functions of the Fed district banks.
ANSWER: Two attempts to establish a central bank in the 1800s had failed. In the late 1800s and early 1900s, several bank panics occurred, which encouraged another attempt. In 1913, the Federal Reserve Act was passed and specified 12 districts across the United States, as well as a city in each district where a Federal Reserve district bank was to be established.
The Fed district banks facilitate operations within the banking system by clearing checks, replacing old currency, and providing loans to depository institutions in need of funds.
2. FOMC. What are the main goals of the Federal Open Market Committee? How does it attempt to achieve these goals?
ANSWER: The main goals of the FOMC are to promote high employment, economic growth, and price stability.
6. Reserve Requirements. How is money supply growth affected by an increase in the reserve requirement ratio?
ANSWER: An increase in the reserve requirement ratio reduces the proportion of deposited funds that a financial institution can lend out. Consequently, it reduces the rate by which money can multiply.
7. Control of Money Supply. Describe the characteristics that would be desirable for a measure of money to be manipulated by the Fed. Explain why it is difficult to simultaneously control the money supply and the federal funds rate.
ANSWER: A desirable measure of money is one that can be precisely controlled by the Fed and has a predictable impact on economic variables.
It may be impossible to maintain money supply and the federal funds rate within specific boundaries simultaneously. In order to maintain the federal funds rate within boundaries, the Fed may need to manipulate the money supply, which could force it outside of its boundaries.
9. Open Market Operations. Explain how the Fed increases the money supply through open market operations.
ANSWER: The Fed can increase money supply by purchasing securities in the secondary market.
11. Discount Window. How is the money supply adjusted through the discount window? What policy change occurred in 2003 that caused the discount rate to be an ineffective monetary policy tool?
ANSWER: As a result of a 2003 policy, the discount rate was forced to be set at a level about the federal funds rate. Therefore, any changes in the discount rate were the result of a change in the federal funds rate, and did not signal any information about the Fed
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