ECON-002 Lecture Notes - Lecture 18: Federal Funds Rate, Janet Yellen, Bank Reserves

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greygiraffe398

5 Jun 2017

School

Georgetown University

Department

Economics

Course

ECON-002

Professor

Rogers Carol

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Document Summary

March 28th, 2017 (part 2 after midterm 2) Money supply in the short run: conventional monetary policy, unconventional monetary policy. Janet yellen (fomc chair) video (very conventional): www. federalreserve. gov/videos. htm. When we were thinking about the long run, it was not important to distinguish among interest rates; there was the interest rate. In the short run, we have to make distinctions. Ex: effective federal funds rate, 10-year treasury constant maturity rate, 3-month. Treasury bill: secondary market rate, 30-year fixed rate mortgage average in the us, The interest rate that the fed is interested in is the federal funds rate. At the end of each day, banks with extra reserves lend to banks with insufficient reserves. This activity is called the federal funds market. The federal funds rate is the interest are that banks charge for this lending. It"s a really short term interest rate because it is for an over-night loan.

Related Questions

In July of this year (2015), Janet Yellen said the following in her testimony before the House Committee on Financial Services:

If the economy evolves as we expect, economic conditions likely would make it appropriate at some point this year to raise the federal funds rate target, thereby beginning to normalize the stance of monetary policy.

In raising the federal funds rate, the Fed would likely start to sell some of the Treasury securities that it holds.

a. How would this change in policy affect the size of the Feds balance sheet? In your answer, discuss how each side of the balance sheet (assets and liabilities) would change. Would one or both sides increase or decrease?

b. Suppose the Fed sells $1 billion worth of Treasury securities to banks. How would this action change the size of the monetary base? If banks are required to hold 10% of their deposits as reserves, what would be the final change in the money supply (assume we're talking about M1) as implied by the money multiplier?

c. Is the change in the money supply that you calculated in part (b) likely to occur in reality? Why or why not? Would you expect the actions of the Fed to have any meaningful influence on the size of the money supply at this point in time? Hint: For the last part of this question, you might think about the factors that influence a bank's decision to lend as well as the current supply of excess reserves in the banking system (see https://research.stlouisfed.org/fred2/series/EXCSRESNS).

salmondinosaur263

In July of this year (2015), Janet Yellen said the following in her testimony before the House Committee on Financial Services:

In raising the federal funds rate, the Fed would likely start to sell some of the Treasury securities that it holds.

a. How would this policy change affect the size of the Fed's balance sheet? In your answer, discuss how each side of the balance sheet (assets and liabilities) would change. Would one or both sides increase or decrease?

c. Is the change in the money supply that you calculated in part (b) likely to occur in reality? Why or why not? Would you expect the actions of the Fed to have any meaningful influence on the size of the money supply at this point? Hint: For the last part of this question, you might think about the factors that influence a bank's decision to lend as well as the current supply of excess reserves in the banking system (see https://research.stlouisfed.org/fred2/series/EXCSRESNS).

byzantiumminnow992

Each Federal Reserve Bank is

Answer

		a corporation.
		a government owned enterprise.
		a government subsidized entity.
		a government-sponsored enterprise.

A transaction in which the Fed agrees to buy a security one day and sell it back the next day is

Answer

		an overnight securitization operation.
		a repurchase agreement.
		a legal tender.
		a rebate sale.

The Federal Reserve document that states the goals of the FOMC and the target for the federal funds rate is known as the

Answer

		Directive.
		Beige book.
		Bluebook.
		Green book.

How long is the normal term in office for a Governor of the Federal Reserve Board?

Answer

		Five years
		Seven years
		Fourteen years
		Life

The federal funds rate is the interest rate on

Answer

		loans to banks from the Fed.
		loans by banks to the Fed.
		short-term loans between banks.
		Treasury bills.

Expenditures of each Federal Reserve Bank are approved by

Answer

		the U.S. Senate.
		the President of the United States.
		the U.S. Treasury Department.
		the Federal Reserve Board of Governors.

Federal Reserve Banks pay for their central banking operations through

Answer

		government tax revenue.
		interest on the securities they own.
		fees charged to banks that use their services.
		dividends paid by local banks.

When the Fed engages in open-market operations, the transactions are conducted by

Answer

		the Open Market Desk at the Federal Reserve Bank of New York.
		the Open Market Desk at the Federal Reserve Board in Washington, D.C.
		the National Bureau of Economic Research.
		the Federal Open Market Committee.

In 2006, Chairman Greenspan left the Fed because

Answer

		President Bush wanted him to resign.
		he reached mandatory retirement age.
		his term as Governor expired.
		his term as Chairman expired.

The Federal Reserve publication that discusses forecasts for the economy is known as the

Answer

		Redbook.
		Beigebook.
		Bluebook.
		Greenbook.

The FOMC directive

Answer

		describes forecasts for the economy.
		states the target for the federal funds rate.
		discusses the regional economies around the country.
		shows the Fed's balance sheet.

The chairman of the Federal Reserve Board who reduced the inflation rate from over 10 percent to about 3 percent in the early 1980s was

Answer

		Arthur Burns.
		G. William Miller.
		Paul Volcker.
		Alan Greenspan.

Which Fed chairman ensured the independence of the Federal Reserve in the 1950s?

Answer

		William McChesney Martin
		Arthur Burns
		Paul Volcker
		G. William Miller

There are ____ Federal Reserve Banks.

Answer

		seven
		ten
		twelve
		fifteen

Purchases and sales of government securities in the secondary market are known as

Answer

		discount borrowing and lending.
		federal funds purchases and sales.
		discounting.
		open-market operations.

The monetary base can be divided into

Answer

		currency plus transactions deposits.
		vault cash plus reserves held at the Fed.
		required clearing balances plus currency.
		reserves plus currency.

The Fed does not generally change reserve requirements to affect the money supply because

Answer

		the impact is too large.
		the Fed needs the approval of Congress to do so.
		it's not legal for the Fed to do so.
		the Fed needs the approval of the President of the United States to do so.

The Fed has decided to tighten monetary policy, so it decreases the money supply through

Answer

		defensive open-market operations.
		dynamic open-market operations.
		reduced discount loans for profit.
		reduced discount loans for business needs.

A haircut is

Answer

		the extra collateral the Fed requires above the value of a discount loan.
		the extra principal a commercial bank requires the Fed to pay when making a discount loan.
		the difference between what an investor pays for a bond and what the investor sells the bond for.
		expected personal grooming for a member of the Board of Governors.

Currency held by the nonbank public plus banks' vault cash plus banks' deposits at the Fed equals

Answer

		the Fed's capital stock.
		discount loans.
		the monetary base.
		required clearing balances.

The extra collateral the Fed requires above the value of a discount loan is known as

Answer

		the term premium.
		a haircut.
		a covenant.
		secondary credit.

Currency held by the nonbank public plus banks' reserves equals

Answer

		the Fed's capital stock.
		discount loans.
		the monetary base.
		required clearing balances.

The money supply divided by the monetary base equals

Answer

		the reserve ratio.
		velocity.
		high-powered money.
		the money multiplier.

The main liability on the Federal Reserve's balance sheet is

Answer

		discount loans.
		securities.
		monetary base.
		capital.

A bank in good condition may take out a loan without the Fed questioning the purpose or nature of the loan. Such a loan is known as

Answer

		a no documentation discount loan.
		a haircut.
		a covenant.
		a primary credit discount loan.

If the Open-Market Desk at the Fed buys securities when the federal funds rate is below the primary credit discount rate, the most likely effect is that the

Answer

		federal funds rate decreases.
		primary credit discount rate decreases.
		primary credit discount rate increases.
		federal funds rate increases.

In November and December, people use more currency than usual, so the Fed increases the money supply through

Answer

		defensive open-market operations.
		dynamic open-market operations.
		discount loans for profit.
		discount loans for business needs.

Reserves held by banks at the Fed that earn implicit interest payments in the form of earnings credits for Fed services are known as

Answer

		required clearing balances.
		reserve requirements.
		excess reserves.
		non-transaction deposits.

Required clearing balances

Answer

		pay interest in the form of earnings credits.
		count as reserves and can be used to meet reserve requirements.
		pay interest equal to the federal funds rate minus one percent.
		are required to be held against transactions deposits.

ECON-002 Lecture Notes - Lecture 18: Federal Funds Rate, Janet Yellen, Bank Reserves

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