Here are some practice questions:

1)The British central bank is known as
A)the Bank of London.
B)the British Federal Reserve.
C)the Bank of England.
D)the Bank of the Empire.

2)Which of the following factors contributed to the problems that banks began to face during the 1960s and 1970s?
A)very low interest rates
B)prolonged periods of recession
C)banking regulations enacted during the 1930s
D)very low inflation rates

3)Government regulation of banks in the United States
A)changes slowly over time as knowledge of the best way to organize the system increases.
B)has remained essentially unchanged since the early twentieth century.
C)changes abruptly in response to periodic financial crises.
D)generally increases during election campaigns as politicians exploit the public's hostility toward banks.

4)Congress created the Federal Reserve System
A)to process the receipt of taxes received by the Internal Revenue Service.
B)to provide a source of mortgage loans to the residential housing market.
C)to serve as a lender of last resort.
D)to regulate the value of the U.S. dollar against foreign currencies.

5)The creation of a lender of last resort in the United States
A)occurred in response to the S&L crisis of the 1980s.
B)was mandated in the U.S. Constitution.
C)has been recommended by the Treasury in its report of late 1992.
D)occurred in response to banking panics.

6)Which of the following did NOT occur as a result of the weakness of the Fed's actions during the banking crisis of the early 1930s?
A)A federal system of deposit insurance was introduced.
B)Congress amended the Fed's charter to limit the convertibility of dollars into gold.
C)Congress amended the Fed's charter to broaden the permissible collateral for discount loans.
D)Congress amended the Fed's charter to require it to make discount loans to any banks requesting them.

7)In late 1998, the Fed averted a possible financial panic by
A)using its influence to encourage banks to make loans to broker-dealers in the securities industry.
B)lowering interest rates.
C)using its influence to bring together the creditors of Long-Term Capital Management.
D)raising interest rates.

8)Congress has attempted to reduce competition among banks in order to
A)increase the tax revenues generated from bank profits.
B)lower interest rates charged on bank loans.
C)make the process of check clearing easier.
D)reduce the chance of moral hazard in banks? behavior.

9)Anticompetitive restrictions on banks generally result in
A)the persistence of traditional ways of doing things.
B)a stifling of innovation.
C)a passive attitude on the part of bank managers as they realize attempts to compete vigorously have been closed off.
D)an increase in innovation and competition.

10)The Japanese central bank is known as
A)the Federal Japanese Bank.
B)the Grand Nippon Central Bank.
C)the National Japanese Bank.
D)the Bank of Japan.

11)Which of the following is an asset of the Fed?
A)reserves of banks
B)checkable deposits in commercial banks
C)discount loans to banks
D)currency in circulation

12)Which of the following is a liability of the Fed?
A)reserves
B)U.S. government securities
C)checkable deposits in commercial banks
D)discount loans to banks

13)Banks prefer to hold their liquid balances as
A)mortgage loans. B) required reserves.
C)marketable securities. D) excess reserves.

14)The Fed's portfolio of securities consists principally of
A)U.S. Treasury obligations.
B)corporate bonds.
C)municipal bonds.
D)obligations of foreign governments.

15)What is the most direct method the Fed uses to change the monetary base?
A)changing the level of discount loans
B)changing the federal funds rate
C)open market operations
D)changing the required reserve ratio

16)When banks borrow on the federal funds market,
A)they pay a rate set by the Federal Reserve, rather than one set by market forces.
B)they typically pay a lower interest rate than the discount rate.
C)they borrow funds interest free.
D)they typically pay a higher interest rate than the discount rate.

17)If banks do not hold excess reserves, the multiple deposit expansion process ends when
A)total new reserves equal total checkable deposits created.
B)total reserves equal excess reserves.
C)total loans created equal total checkable deposits created.
D)all excess reserves have been eliminated.

From Paul Krugman's NYT blog today:

First, we need a model. My starting point is to think of the Fed as setting “the” interest rate (more on that later), and facing two tradeoffs. On one side, the lower the interest rate the higher is employment. On the other side, the lower the interest rate the lower the dollar. In normal times the Fed tries to set the interest rate so as to achieve more or less full employment, and lets the dollar fall where it may.

Now along comes a change in investor expectations that makes the dollar weaker at any given interest rate. This also, with some lag, makes the economy stronger at any given interest rate, because a weaker dollar means stronger exports and less imports.

So what would we expect the effect of changing expectations that weaken the dollar to be? We’d expect it to lead to a weaker dollar (duh) and also higher interest rates — but the latter effect would happen only because the Fed is trying to offset the expansionary effect of that weaker dollar. It shouldn’t depress the economy at all.

OK, so how do we make this story more pessimistic?

Full post here.

These questions pertain to the previous two lectures (November 13 and 20).

Why are a bank's liabilities said to be its sources of funds? Why are a bank's assets said to be its uses of funds?

Why would government regulators and taxpayers like banks to have high net worth?

Describe the types of risk that banks face.

How do banks try to reduce credit risk?

What are floating rate loans? How do they help to reduce the interest rate risk for banks?

What are the major types of off-balance sheet activities in which banks engage? Why have banks been involved in more of these activities recently and less in traditional banking?

Suppose that banks collectively have not managed their exposure to interest rate risk well and that market interest rates increase and become more volatile. What do you predict will happen to the value of the equity capital in the banking industry? To the number of bank failures?

Suppose that Ann, who has an account at First Bank, writes a check for $1000 to Bill, who has an account at Melon Bank. When the check clears, how have the balance sheets of First and Melon been affected?

If you were a banker who believed that interest rates were going to rise, what would you try to do with your bank's portfolio?

What are credit scores and how are they computed?

See this article about the City of Leeds' efforts to obtain a $22.5 million line of credit (from the Jefferson County Commission) to attract a commercial and residential project. The county, which is overextended in such funding for such projects, is likely to reject the request. What would be the advantages and disadvantages if Leeds' accessed funds through the private sector? Is there significant default, credit, and interest rate risk? Which funding source would taxpayers prefer? And, how does the lack of interest on the part of the Jefferson County Commission reflect the opportunity cost of the proposed $1 billion dome project planned for downtown Birmingham?

Explain the US banking system before from 1787 to 1861. Why was the Hamiltonian banking system considered controversial? What type of regulatory structure were free banks subject to? What types of banks received state charters? What is dual banking?

Why was the Secret Service created? What effect on banking in the U.S. did the National Bank Act of 1863 have? What effect on banking did the Federal Reserve Act of 1913 have?

Why was Glass Steagall passed? Did it make the banking system in the US more competitive? What effect did it have on the demand curve for banking services?

What motivated Congress to pass deposit insurance legislation in the 1930s? How much was the original insurance coverage? Was the system intended to operate like an insurance program, with premiums paid by banks?

What was the McFadden Act? What factors contributed to the weakening of this Act? What role was played by holding companies?

Why were banks forbidden from paying interest up until 1970? What problems did this cause the banking industry before the 1970s? How did the government try to rectify these problems?

What is a credit crunch? What is disintermediation?

Why did Congress pass DIDMCA in 1980? What did it do?

What is universal banking? What are some advantages and disadvantages to universal banking? Can the banking system in the US today be characterized by universal banking?

Define: Return on Assets, Return on Equity, and Net Interest Margin? Look at this data on ROA, ROE, and NIM. Why is the significantly ROE larger?

(Here are some examples. Here is a list of average annual return on assets since 1934. Here is a list of bank failures, by year, from 1934 to 2003.)

What are the objectives of bank regulation? How are they contradictory?

How many banks fail each year, on average? Why? Should we conclude that the remaining banks run efficiently?

Here is the FDIC's page on Wal-Mart's application to start a bank from earlier this year. It was eventually rejected. Here and here are articles about the effort.

What is the "too big to fail doctrine"? Here and here are article about this doctrine applied to the case of Continental Illinois (as discussed in class and in our text).

Why were banks easy to blame for the Great Depression?

True, false, and explain: The dominant view today among economists is that the banks caused the Depression.

What are central banks and where do they come from?

What are the macroeconomic goals of the U.S. Federal Reserve? Explain in detail the purpose of Humphrey-Hawkins.

Why is price stability considered such an important goal relative to others? How successful has the Fed been in pursuing this goal?

What are the major assets and liabilities of the Federal Reserve System? Describe each briefly.

Explain how the Fed sets the reserve ratio. Are the reserve ratio and the money supply positively or inversely related? Define: excess reserves and fully loaned institution.

What is the money multiplier and how is it related to the money supply and the monetary base?

Define open market operations. How does the Fed know how much money it needs to increase (decrease) the monetary base through open market operations?

If the Fed wants to increase the money supply, should it make an open market purchase or sale? Should it make more discount loans or fewer? If the Fed wants to decrease the money supply, what should it do?

If a bank has $10,000 in excess reserves, what is the most new lending that it should do? Why shouldn't it do more than that amount?

A student remarks, "If any one bank can safely loan only an amount equal to its excess reserves, I don't understand how the banking system as a whole can loan out an amount equal to several times the initial excess reserves in the system." Resolve this seeming paradox.

What are dynamic and defensive transactions in open market operations?

Explain discount policy. What are its advantages (from the point of view of the Fed?)

Explain and give examples of adjustment, seasonal, and extended credits. Explain its use creating announcement effects.

Explain how the Fed uses margin requirements to achieve its goals. (Here is my article comparing asset bubbles in the 1920s and the 1990s.) What is moral suasion?