Chapter 12 STRUCTURE OF CENTRAL BANKS

StudyGuide KeyExercises for chs 12,13,-,15,16,17,18 (Mish8ed)

STUDY GUIDE chapters related to our readings:

Key exercises and questions that are related to our

Readings in Mish8ed, Chapters 12, 13, -, 15, 16, 17, 18

(exercises are taken fromanother folder and all are titled like this: Mish6ed_chXX_StGuide…pdf(where XX refers to chapter number)

Note that the chapter numbers from 6ed and 8ed are NOT always the same.

==========================================

QUESTIONS Likely to be SIMILAR TO EXAMS

I. MULTIPLE CHOICE & TRUE/FALSE QUESTIONS:

-For all chapters, almost all of the multiple choice and true/false questions are relevant and should be known by students (except those that are specifically related to the particular details of the US monetary or banking or financial system AND when these particulars do not exist in other countries, like the EU or Russia)

II. “EXERCISES” QUESTIONS (MORE COMPLEX PROBLEMS OR CALCULATIONS) that will be like those on exams

==============================================

Chapter 12 STRUCTURE OF CENTRAL BANKS

(and US Federal Reserve System, which is the name for the U.S. Central Bank)

Text/Reading File name:

From:

From: Mish6ed_ch14_StGuide_014.pdf

Exercises:

NONE of these exercises are very relevant to our specific readings in the text (you only some pages in chapter) but one question (that is similar to that in Exercise #4) that is RELEVANT and is asked by economists about the way any Central Bank is set up is:

--What are the Advantages and Disadvantages of having a country’s or zone’s Central Bank that is STRONGLY INDEPENDENT (i.e. cannot be made to do what elected political leaders want at any moment, especially when elections are coming soon in time)?

(This is especially relevant currently as we watch the European Central Bank (ECB) try and deal with the Eurodebt problem and the European banking troubles that have been much in the news this semester. The ECB is entirely independent of political control in the short run; some argue that this is a real deficiency right now since it is supposed to also only worry about inflation, when in fact the biggest problem is the potential collapse of the entire European banking and monetary system and the ECB is both independent and is restricted by law from doing anything except worry about price inflation.)

--So be aware of the other chapters where the ‘independence of CB’ question is discussed. This will likely be on exam.

To review (relevant ones corresponding to readings only):

True/False & Multiple Choice

==============================================

Chapter 13 [Multiple Deposit Creation and] the MONEY SUPPLY PROCESS

Text/Reading File name:

-------

From: Mish6ed_ch15_StGuide_015.pdf

Exercises:

#1. Open Market Operations, Reserves, Monetary Base (currency & reserves):

---A. T-Accounts: Fed sale of bonds ($100) to BANK. Show the effects on monetary base and reserves on balance sheets of the

(a) banking system; (b) Fed/central bank.

---B. T-Accounts: Fed sale of bonds ($100) to PUBLIC that pays with a CHECK (drawn on bank) Show the effects on monetary base and reserves on balance sheets of

(a) nonbank public; (b) banking system; (c) Fed/central bank.

---C. T-Accounts: Fed sale of bonds ($100) to public that pays in CURRENCY. Show the effects on monetary base and reserves on balance sheets of

(a) nonbank public; (b) Fed/central bank.

#2. Fed (OMO) sells/buys $100,000 in T-bills (‘Treasuries’ or US government debt securities, here short term) to/from a BANK

---A. T-accounts: Fed SELLS to a BANK: Show T-accounts of effect on

(a) the bank; (b) the Fed (central bank); What’s happened to reserves?

---B. T-accounts: The Bank pays off (fully pays back the loan) a Discount Loan (a loan directly made by the Fed to the Bank): Show T-accounts of effect on

(a) the bank; (b) the Fed (central bank); What’s happened to reserves?

To review (relevant ones corresponding to readings only):

True/False & Multiple Choice

From:

==============================================

Chapter 14 (Mish8ed_ch14…)

(Ignore this chapter; you are not responsible for it)

==============================================

Chapter 15 Tools of Monetary Policy [of Central Banking]

Text/Reading File name: Mish8ed_ch15_MonPolTools015.pdf

-------

From: Mish6ed_ch17_StGuide_017.pdf

Exercises:

#3. OPEN MARKET OPERATIONS (OMO = when U.S. Central Bank, called “Fed” buy or sells bonds from the private sector owners, normally banks, and normally US “Treasuries” that are US government debt securities;

Note: When the Fed BUYS bonds it pays in currency or equivalently with reserve deposits for the seller, thus increasing the “Monetary Base” and money supply; when the Fed SELLS these same kinds of bonds, it has an opposite effect pulling currency or deposits out of the private sector, thus Decreasing the “Monetary Base” and money supply)

--Why are OMO (normal times) the most important monetary policy tool?

--What are two kinds? (buy; sell)

--What are advantages of OMO

#4. DISCOUNT POLICY ( = Fed lends money to banks; Fed sets the price [interest rate for these loans called “the discount rate”)

--A. ignore this part

--B. Why might it be important to have the central bank (here, the Fed) act as a LENDER-OF-LAST-RESORT….even with deposit insurance system alongside?

#5. RESERVE REQUIREMENTS

--A. What are 2 reasons that reserve requirements are now used rarely as a policy tool?

--B. ignore this part

To review (relevant ones corresponding to readings only):

True/False & Multiple Choice

==============================================

Chapter 16 Conduct of Monetary Policy [by Central Bank]: Strategy and Tactics [Domestic Policies]

Text/Reading File name: Mish8ed_ch16_DoWhatCBs016.pdf

-------

From: Mish6ed_ch18_StGuide_018.pdf

Exercises:

#13. The TAYLOR RULE and the targeting of the FEDERAL FUNDS RATE

(NOTE: If a question like this is asked on the exam (calculations/filling in numbers) I will provide you with the Taylor Formula as in my chapter notes like this:

=>TAYLOR RULE TO SET the Federal funds target rate = Sum of the following:

-------(1) Inflation rate

-------(2) Equilibrium fed funds rate

-------(3) (1/2)x(inflation gap)

-------(4) (1/2)x(output gap)

{NOTE: But on questions like Multiple choice or True/False I would NOT provide you with the formula.)

To review: True/False & Multiple Choice

-------------

From: