True or False? (1) Consider the following price changes over the last year: (a)

Question

True or False?

(1) Consider the following price changes over the last year: (a) The US dollar went down by 2.8% (against an index that includes most currencies); (b) Commodity prices increased by 14.3% in US$ (the index includes most commodity prices); (c) The yield curve steepened from 0.97% to 3.14% (10 year – 2 year US Treasury bonds). Suppose that the Federal Reserve’s Federal Open Market Committee (FOMC) applies the Market Price Approach to monetary policy. Given the information above, the FOMC should reduce the money supply. Is that last statement true or false?

(2) In February 2012, the balance sheet of the US Federal Reserve (FED) showed $108.2 billion in central bank liquidity swaps with the European Central Bank (ECB). One year later, the amount was $4.2 billion. This means that European banks operating in the US paid back $104 billion directly to the FED. Is that last statement true or false?

(3) When a central bank sells bonds to commercial banks, it reduces the quantity of money in the banking system.

(4) When the U.S. government avoided the bankruptcy of investment bank Bear Stearns (by arranging its acquisition by JPMorgan), it worried more about the consequences of ‘moral hazard’ than about a ‘systemic risk’ crisis. Is that last statement true or false?

(5) Bank EU has $35 billion in assets. The bank has many thousands of retail and corporate clients, and if offers both commercial and investment bank services across four continents. According to the US Federal Reserve, it is a Systemically Important Financial Institution (SIFI) and it should be subject to an annual stress-test. Is that last statement true or false?

(6) The most important argument put forward by those who defend central bank independence is that an independent central bank is better at keeping inflation expectations under control.

Explanation / Answer

1. True, All statments are the indicative of that the excessive liquidity is in the market and fed needs to cut the money supply.

2. Ture, central bank liquidity swaps with the European Central Bank (ECB) will be shown as asset in Fed's balance sheet, hence replayment will reduce the asset the its size.

3. True, on selling bonds Fed raises money from commercial bank hence reducing the money supply in the market.

4. False, The spreading financial crisis has led the Fed to pump liquidity into the economy and expand its lending beyond the commercial banking sector. In March, it assisted with J.P. Morgan Chase’s buyout of Bear Stearns, a cash-strapped investment bank and brokerage.

5. False,  any bank with over $50 billion in assets is considered a systemically important financial institution (SIFI) and faces heightened prudential regulation.

6. True,

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.