QUESTIONS AND PROBLEMS

QUESTIONS

1. How is a central bank different from a typical commercial bank?
2. List the three traditional tools that a central bank has for controlling the money supply.
3. List and describe the new monetary policy tools that have been added since the 2008 as methods for increasing or decreasing the federal funds rate.
4. Why do presidents typically reappoint Chairs of the Federal Reserve Board even when they were originally appointed by a president of a different political party?
5. In what ways might monetary policy be superior to fiscal policy? In what ways might it be inferior?
6. What is a bank run?
7. In a program of deposit insurance as it is operated in the United States, what is being insured and who pays the insurance premiums?
8. What is meant by the lender of last resort?
9. Name and briefly describe the responsibilities of each of the following agencies: FDIC, NCUA, and OCC.
10. The term “moral hazard” describes increases in risky behavior resulting from efforts to make that behavior safer. How does the concept of moral hazard apply to deposit insurance and other bank regulations?
11. Explain how to use an open market operation to expand the money supply.
12. Explain how the interest rate on reserve balances can be used to expand the money supply. Also explain how it is used to contract the money supply.  Which action is being used by the Federal Reserve in this year?  (Google IORB FRED)
13. How do the expansionary and contractionary monetary policy affect the quantity of money and the interest rate?
14. How do expansionary, loose, contractionary, and tight monetary policy affect aggregate demand?
15. Explain how to use quantitative easing to stimulate aggregate demand.
16. A well-known economic model called the Phillips Curve describes the short run tradeoff typically observed between inflation and unemployment. Based on the discussion of expansionary and contractionary monetary policy, explain the inherent challenge of trying to address both potential problems with one policy solution.
17. Which kind of monetary policy would you expect in response to recession: expansionary or contractionary? Why?
18. Which kind of monetary policy would you expect in response to high inflation: expansionary or contractionary? Why?
19. How might each of the following factors complicate the implementation of monetary policy: long and variable lags, excess reserves, and movements in velocity?
20. Define the velocity of the money supply.
21. What is the basic quantity equation of money?
22. How does a monetary policy of inflation targeting work?
23. Suppose the Fed conducts an open market purchase by buying $10 million in Treasury bonds from Acme Bank. Sketch out the balance sheet for Acme Bank before and after the purchase showing the changes that will occur as Acme converts the bond sale proceeds to new loans. The initial Acme bank balance sheet contains the following information: Assets – reserves 20, bonds 40, and loans 60; Liabilities – deposits 100 and equity 20.  Would this change speed up or slow down the economy?
24. All other things being equal, by how much will nominal GDP expand if the central bank increases the money supply by $100 billion, and the velocity of money is 3?   Suppose now that economists expect the velocity of money to increase by 50% as a result of the monetary stimulus. What will be the total increase in nominal GDP with the increased velocity?
25. Calculate the velocity of money in each situation:
    1. If GDP is 1,500 and the money supply is 500, what is velocity?
    2. If GDP remains 1,500, but the money supply changes to 750, what is the new velocity changed?
    3. If GDP remains 1,500, but the money supply falls to 250, what is velocity?
    4. Is there a positive or inverse relationship between the money supply and the velocity?