ECON 3311: MONEY & BANKING
HOMEWORK #6
Define the following terms:
central bank monetary policy
Federal Reserve IORB rate
Board of Governors federal funds rate
Federal Open Market Committee quantitative easing
Central bank – an institution charged with controlling the nation’s money supply
Federal Reserve – a government institution that was established in 1923 by congressional act
Board of Governors – located in Washington D.C and represents the centralized decision-making of the Fed, consist of 7 governors.
Federal Open Market Committee– is a gathering of all seen governors and all 12 presidents of the District Banks
Monetary policy – policy implemented by the central bank that influences the flow of money and credit in the economy
IORB rate – the interest rate that the Fed pays banks for their deposited reserves
Federal funds rate – banks that lend reserves charge an interest rate to other banks who borrow reserves.
Quantitative easing – Federal reserve put large amounts of reserves into the banking system
Answer the following:
1. Go to http://research.stlouisfed.org/publications/ and go to Page One Economics. Filter the year to 2020 and scroll down to the publication “Independence, Accountability, and the Federal Reserve System”. Read the 5-page article and answer the following:
a. The first section describes policy events that we will discuss later in the semester. Go to the second section and how and why the Federal Reserve maintains a degree of independence from the political branches of government.
b. From the third section, state which part of the Federal Reserve is representative of national interests and which part is representative of regional interests.
c. From the fourth section, describe the difference between how Fed governors are put into their positions versus how District Bank presidents are put into their position. Which is most closely tied to the political process?
d. From the final section, state the ways in which the Fed is accountable to Congress.
2. Write out a simple balance sheet for a bank. State the three ways in which a bank’s assets can generate revenue, and rank those assets according to their riskiness.
3. Go to https://fred.stlouisfed.org/ and click on the “Category” link below the search box. Find the heading “Money, Banking, & Finance” and click on “Monetary Data”, then “Reserves”, and then “Reserves of Depository Institutions: Total”. Answer the following:
a. In which year did bank reserves first show an accelerated increase? What was special about that year?
b. We described the behavior of quantitative easing (QE) in class. Looking closely at the graph, can you identify the periods of QE? (HINT: Look for periods of obvious increase in bank reserves.)
c. What is it called when the Fed maintains plentiful reserves the banking system?
4. a. How can the Federal Reserve control the federal funds rate through its administration of the IORB rate?
b. Go to https://fred.stlouisfed.org/ and click on the “Categories” link under the search box. Click on “Money, Banking, & Finance” and then “Interest Rates”. Click on “FRB Rates” and then on the series “Federal Funds Effective Rate”.
Change the graph range to 5Y and describe the pattern of the federal funds rate over this period.
c. Go back to the “Interest Rates” page and click on “Prime Bank Loan Rate” and then on the series “Bank Prime Loan Rate”.
This is the interest rate that banks use as a base rate for their loans. In other words, an increase in the prime rate will typically result in an increase in all bank lending rates, including business loans, variable rate credit cards, auto loans, etc. It can be considered a short-term rate.
Change the graph range to 5Y and describe the pattern of the prime rate over this period. How does it compare to the series from part a?
d. Go back to the “Interest Rates” page and click on “Treasury Constant Maturity”. Scroll down and look at the series “Market Yield on U.S. Treasury Securities at 30-Year Constant Maturity, Quoted on an Investment Basis”.
This is the interest rate offered on 30-year Treasury bonds that the government uses to borrow. It is one of the major long-term interest rates in the US economy.
Change the graph range to 5Y and describe the pattern of the 30-year Treasury rate over this period. How does it compare to the series from part a?
e. Using your answers to parts b – d, do interest rate changes by the Fed (as indicated by your answer to part a) seem to influence short-term and long-term market interest rates in the same way? Explain.