NaimExplain

The fed promotes secrecy by not releasing FOMC minutes to the congress or the public immediately. Discuss the pro's and con's. Answer: The argument for not releasing the FOM Cdirectives immediately is that it keeps congress off the fed's back, thus enabling the Fed to pursue an independent monetary policy that is less subject to inflation and political business cycles. The argument for releasing the directive immediately is that it would make the fed more accountable.

The independence of the Fed leaves it completely unaccountable for its actions. Is this statement true false or unceratin.? Answer: False the Fed is still subject to political pressure because congress can pass legislation limiting the Feds power. If the fed is performing badly, congress can therefore make the fed accountable by passing legislation that the fed does not like.

Why might eliminating the Fed's independence lead to a more pronounced political business cycle? Answer: Eliminating the Fed's independence might make it more shortsighted and subject to political influence. Thus, when political gains could be achieved by expansionary policy before an election, the Fed might be more likely to engage in this activity, As a result more pronounced political business cycles might result.

The fed is the most independent of all US government agencies. What is the main difference between it and other government agencies that explains its greater independence. Answer: The fed is more independent because its substantial revenue from securities and discount loans allows it to control its own budget.

Which entities in the federal Reserve system control the discount rate? Reserve requirements? Open market operations? Answer: The board of governors sets reserve requirements and the discount rate, the FOMC directs open market operations. In practice however the FOMC helps make decisions about reserve requirements and the discount rate.

In what ways can the regional federal reserve banks influence the conduct of monetary policy? Answer: The federal reserve banks influence the conduct of monetary policy through their administration of the discount facilities at each bank and by having five of their presidents sit on the FOMC, the main policy making arm of the fed.

The federal reserve system resembles the U.S. constitution in that it was designed with many checks and balances? Answer: Like the US constitution, the federal reserve system, originally established by the federal reserve act, has many checks and balances and is a peculiarly american institution. The ability of the 12 regional banks to affect discount policy was viewed as a check on the centralized power of the board of Governors, just as states rights are a check on the centralized power of the federal government. The provision that there be three types of directors, (A, B, and C) representing different groups was again intended to prevent any group from dominating the fed. The Fed's independence of the federal government and the setting up of the federal reserve banks as incorporated institutions were further intended to restrict government power over the banking industry.

What political realities might explain why the federal reserve act of 1913 placed two federal banks in Missouri? Answer: The placement of two banks in the Midwest farm belt might have been engineered to placate farmers an important voting block in the early twentieth century.

Why was the federal reserve system set up with 12 regional federal reserve banks rather than one central bank, as in other countries? Answer: Because of traditional American hostility to a central bank and centralized authority, the system of 12 regional banks was set up to diffuse power along regional lines.

The benefits of using FED discount operations to prevent bank panics are straightforward. What are the costs? Answer: The costs are that banks that deserve to go out of business because of poor management may survive because of fed discounting to prevent panics. This might lead to an inefficient banking system with many poorly run banks.

Discounting is no longer needed because the presence of the FDIC eliminates the possibility of bank panics. Is this statement true, false, or uncertain? Answer: False, the FDIC would not be effective in elimating bank panics without Fed discounting to troubled banks in order to keep bank failures from spreading.

Which goals of the fed frequently conflict? Answer: The goal of price stability often conflicts with the goal of high econmic growth and employment and interest rate stability. When the economy is expanding along with employment, inflation may rise. In order to pursue the goal of price stability the fed may have to pursue contractionary anti-inflationary policy that conflicts with the goal of high employment and economic growth. Similarly when the central bank wants to pursue tight monetary policy and raise interest rates in order to contain inflation, this pursuit of the goal of price stability may conflict with the goal of interest rate stability.

Unemployment is a bad thing, and the government should make every effort to eliminate it. Do you agree or disagree? Answer: Disagree. Some unemployment is beneficial to the economy because the availability of the vacant jobs makes it more likely that a worker will find the right job and that the employer will find the right worker for the job.

Describe the two ways whereby capital market securities pass from the issuer to the public. Answer: Capital market securities may be sold in a public offering or in a private placement. In a public offering, investment bankers register the security with the SEC and market it through a network of brokerage houses. In a private placement, the firm or an investment banker sells the securities to a very limited number of investors, who each buy a large quantity.

What is the document called that lists the terms of a bond? Answer: The list of terms of a bond is known as the indenture.

What is a sinking fund? Do investors like bonds that contain this feature? Answer: A sinking fund contains funds set aside by the issuer of a bond to pay for the redemption of the bond when it matures. Because a sinking fund increases the likelihood that a firm will have the funds to pay off the bonds as required, investors like the feature. As a result, interest rates are lower on securities with sinking funds.

A call provision on a bond allows the issuer to redeem the bond at will. Investors do not like call provisions and so require higher interest on callable bonds. Why do issuers continue to issue callable bonds anyway? Answer: Firms like having the flexibility to adjust their capital structure by paying off debt they no longer need. They also need to pay off debt to remove restrictive covenants. Call provisions permit both these actions at the issuer's discretion.

In addition to treasury securities, some agencies of the government issue bonds. List three such agencies, and state what the funds raised by the bond issues are used for. Answer: Agencies that issue securities include Ginnie Mae (formerly the Government National Mortgage Association), the federal housing administration, the veterans administration, the federal national mortgage association, and the Student Loan Marketing Association. The first four fund mortgage loans and the last funds college student loans.

As interest rates in the market change over time, the market price of bonds rises and falls. The change in the value of bonds due to changes in interest rates is a risk incurred by bond investors. What is this risk called? Answer: The risk that a bonds price will change due to changes in the market interest rates is called interest rate risk.

The U.S. treasury issues bills, notes, and bonds. How do these three securities differ? Answer: Treasury bills mature in less than 1 year, treasury notes mature in 1 to 10 years, and treasury bonds mature in about 10 to 30 years.