Chap 26

More documents

Recommendations

Info

$MATH 219 - Differential Equations Quiz 3 Name Solutions Date ...$

230 CHAPTER 10 directors of the regional banks are hardly key players in the Federal Reserve System. Essentially, the most important task they perform is nominating a president for the regional bank. The regional banks’ presidents are important. The directors, however, do not get much freedom in this choice because their nominee must be approved by the Board of Governors, which does not hesitate to veto anyone considered unacceptable. Regional bank presidents gain their power from sitting on the FOMC. But there they are a minority because the voting members of the FOMC consist of five regional bank presidents and seven members of the Board of Governors. Because the board members are appointed by the president and approved by the Senate, the government thus wields the ultimate power in the Federal Reserve. The regional bank presidents must be approved by the publicly appointed board members and the board members constitute a majority on the FOMC. 5. Controlling the Quantity of Money It is useful to look at the Fed’s balance sheet (available on its excellent Web site). It shows very quickly that loans to banks usually are a trivial portion of the Fed’s assets. Of the Fed’s theoretical three tools, only open market operations really matter and there is no harm in being blunt about this. Students can easily see why required reserve ratio changes would work, but also can see quickly how discontinuous and disruptive they would be. Tell students that (a) many industrialized countries no longer bother with required reserve ratios at all, and (b) changes in required reserve ratios are normally only used as monetary policy tools in developing countries without capital markets in which open market operations would be possible. The discount rate looks like it ought to matter more, and certainly changes in it are announced, but explain that it is in practice a signal: banks only borrow from the Fed as a last resort. Why? Because banks believe that if they borrow from the Fed, that will be interpreted as meaning that they cannot borrow from any other source, so they are in very bad trouble. So what actually matters is the Federal Funds Rate, which the Fed can influence very strongly by changing the supply of reserves by Open Market Operations. The Big Picture Where we have been Because Chapter 10 is the first chapter on money, it introduces a lot of new material. The discussion of monetary policy goals relates back to Chapter 5 which introduced the main topics of macroeconomics. Where we are going Chapter 10 is the first of three chapters that examine money and the economy. Chapter 11 examines how money influences interest rates, real GDP, and the price level. Chapter 12 looks at the monetary phenomenon of inflation and how it impacts unemployment and interest rates.
MONEY, BANKS, AND THE FEDERAL RESERVE 231 Overhead Transparencies Transparency Text figure Transparency title 59 Figure 10.1 Two Measures of Money 60 Figure 10.2 The Multiple Creation of Bank Deposits 61 Figure 10.4 The Structure of the Fed 62 Figure 10.7 The Multiplier Effect of an Open Market Purchases Electronic Supplements MyEconLab MyEconLab provides pre- and post-tests for each chapter so that students can assess their own progress. Results on these tests feed an individualized study plan that helps students focus their attention in the areas where they most need help. Instructors can create and assign tests, quizzes, or graded homework assignments that incorporate graphing questions. Questions are automatically graded and results are tracked using an online grade book. PowerPoint Lecture Notes PowerPoint Electronic Lecture Notes with speaking notes are available and offer a full summary of the chapter. PowerPoint Electronic Lecture Notes for students are available in MyEconLab. Instructor CD-ROM with Computerized Test Banks This CD-ROM contains Computerized Test Bank Files, Test Bank, and Instructor’s Manual files in Microsoft Word, and PowerPoint files. All test banks are available in Test Generator Software. Additional Discussion Questions 11. Why is the use of money in the exchange of goods and services less costly than using barter? 12. “Everyone knows that true money is issued by the government; that is, the only real form of money is the nation’s currency.” Comment on this assertion. 13. Why do we need different types of depository institutions? Would the nation be better off if, say, S&Ls became more like banks? Defend your answer. 14. Currently deposits in banks pay approximately 3 percent. Yet people borrowing these deposits from banks pay approximately 9 percent. Why don’t people making deposits in banks get together with people borrowing from banks and “split the difference” between these rates? For instance, a loan could be made at 6 percent so that the lenders (the former depositors) receive 6 percent rather than 3 percent and the borrowers pay 6 percent rather than 9 percent. 15. What are required reserves, actual reserves, and excess reserves? How much in excess reserves do you think a bank wants to keep on hand? (Bear in mind that excess reserves earn no interest income.) 16. How does a currency drain affect the money multiplier?
Page 1 and 2: Chapter Key Ideas Outline C h a p t
Page 3 and 4: MONEY, BANKS, AND THE FEDERAL RESER
Page 13: MONEY, BANKS, AND THE FEDERAL RESER
Page 23: MONEY, BANKS, AND THE FEDERAL RESER

Chap 26

You also want an ePaper? Increase the reach of your titles

Delete template?

Save as template?