Money and Banking Exam 3 Study Guide
Money and Banking Exam 3 Study Guide ECON 04305 - 1
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This 2 page Study Guide was uploaded by Nicole Rossi on Saturday April 30, 2016. The Study Guide belongs to ECON 04305 - 1 at Rowan University taught by Robert Ferrari in Spring 2016. Since its upload, it has received 81 views. For similar materials see Money and Banking in Economcs at Rowan University.
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Date Created: 04/30/16
Money and Banking Study Guide for Exam 3 I: Factors influencing the shape of the yield curve: What are the risks? Liquidity of the investment Maturity- the further out, the higher the rate How does the tax law affect tax consideration? Inflation rate Sinking fund (insurance policy) II: History and Organization of Federal Reserve: Organization: There is a board of governors in Washington D.C, and then branches of Federal Reserve Banks in major cities like Boston, NY, Philadelphia, and Richmond. There are 12 of these, and each is a private corporation. Each of these banks is organized the same way. They have board of directors, presidents, etc. Membership in Federal Reserve is optional, if you are state chartered that is. If you join, you are obligated to invest 6% in your bank. Each bank only gets 1 vote, no matter how much stock you have. The Board of Directors: has 9 members, 3 class A members, who are bankers who are elected by bankers; 3 class B members, who can’t be bankers, but are elected by bankers; and 3 class C members, who can’t be bankers, but are appointed by the Board of Governors in D.C. The chair person must come from class C members. The Board of Governors: made up of 7 members, who are appointed by the U.S president with the approval of the Senate. They are appointed for 14 years, with non-renewable terms. They are from 7 different reserve districts. III: Functions of a Central Bank: Bankers Bank Fiscal Agent of U.S Treasury Bank Regulator Lender of Last Resort Regulator of Money Supply IV: Quantitative and Qualitative powers of Federal Reserve: Quantitative: macroeconomic, general, talk about Federal Reserve giving X amount of money and the market determines how it will be allocated o Powers: establish reserve requirements (base, percentage), administration of the discount window (rate, collateral), open market operation Qualitative: microeconomic, specific, aimed at specific market places o Powers: regulation ‘Q’, marginal requirements (G,T,U): regulate the amount of borrowing you can do on listed securities, lending to institutions, moral suasion V: Monetary vs. Fiscal Policy: Monetary: Federal Reserve has two options: monetary aggregate (M1, M2) or interest rate; Monetary policy is subject to lags Fiscal: US treasury has two options: tax or spend VI: Keynesian Monetarist View of Each: VII: Multiplier: 1/Reserve Requirement VIII: Taylor Rule/Guidance: Taylor Rule: Taylor was an economist at Stanford. He argues the argument, should monetary policy be automatic? Money supply should increase the same as the long term growth, and the GDP. The Federal Funds Rate= equilibrium F.F rate+W1(Y-Yt): GDP+W2(Pi-Pi(t)): Inflation Guidance: the chair has a press conference saying what they plan to do in the future. Guidance is part of moral suasion. IX: Liquidity Preference Theory: Refers to the demand for money, considered as liquidity. The concept was first developed by John Maynard Keynes, to explain determination of the interest rate by the supply and demand for money. X: Effectiveness of Monetary and Fiscal Policy: Fiscal: While fiscal policy has been used successfully during and after the Great Depression, the Keynesian theories were called into question in the 1980s after a long run of popularity. Monetarists, such as Milton Friedman, and supply-siders claimed that the ongoing government actions had not helped the country avoid the endless cycles of below average gross domestic product (GDP) expansion, recessions and gyrating interest rates. Monetary: A) since banks have a choice to lend out the excess reserves they have on hand from lower interest rates, they may just choose not to lend and B) Keynesians also believe that consumer demand for goods and services may not be related to the cost of capital to obtain theses goods. At different times in the economic cycle, this may or may not be true, but monetary policy has proven to have some influence and impact on the economy and equity and fixed income markets.
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