1- Briefly describe the origin of the Federal Reserve System. Describe the functions of the Fed district banks?
2- Explain how the Fed increases the money supply through open market operations?
3- What is the policy directive, and who carries it out?
4- How is money supply growth affected by an increase in the reserve requirement ratio?
5- Explain how the Fed’s monetary policy affects the unemployment level?
6- Explain how the Fed influences the monthly mortgage payments on homes. How might the Fed indirectly influence the total demand for homes by consumers?
7- Explain how the Fed’s monetary policy may indirectly affect the prices of equity securities?
8- When does the Fed use a stimulative monetary policy, and when does it use a restrictive monetary policy? What is a criticism of a stimulative monetary policy? What is the risk of using a monetary policy that is too restrictive?
9- Explain why an increase in the money supply can affect interest rates in different ways. Include the potential impact of the money supply on the supply of and the demand for loanable funds when answering this question?
10- When the Fed increases the money supply to lower the federal funds rate, will the cost of capital to U.S. companies be reduced? Explain how the segmented markets theory regarding the term structure of interest rates (as explained in Chapter 3) could influence the degree to which the Fed’s monetary policy affects long-term interest rates?
11- A bank has asked you to assess various strategies it is considering and explain how they could affect its regulatory review. Regulatory reviews include an assessment of capital, asset quality, management, earnings, liquidity, and sensitivity to financial market conditions. Many types of strategies can result in more favorable regulatory reviews based on some criteria but less favorable reviews based on other criteria. The bank is planning to issue more stock, retain more of its earnings, increase its holdings of Treasury securities, and reduce its business loans. It has historically been rated favorably by regulators, but the bank believes that these strategies will result in an even more favorable regulatory assessment.
a. Which regulatory criteria will be affected by the bank’s strategies? How?
b. Do you believe that the strategies planned by the bank will satisfy its shareholders? Is it possible for the bank to use strategies that would satisfy both regulators and shareholders? Explain.
c. Do you believe that the strategies planned by the bank will satisfy the bank’s managers? Explain.