Question & Answer

Explain the motivation behind the Fed’s policy of purchasing massive amounts of mortgage-backed securities during the 2008 credit crisis. What could this policy accomplish that the Fed’s traditional monetary policy might not accomplish? (LO2, LO3) 

What should be the Fed’s role? Should it focus only on monetary policy? Or should it engage in the trading of various types of securities in an attempt to stabilize the financial system when securities markets are suffering from investor fears and the potential for high credit (default) risk? (LO2, LO3)

Explain why participating in the eurozone causes a country to give up its independent monetary policy and control over its domestic interest rates. (LO4)

As a result of the Financial Reform Act of 2010, the Consumer Financial Protection Bureau was established and housed within the Federal Reserve. Explain the role of this bureau. (LO3)

Explain how the Fed’s facility programs improved liquidity in some debt markets. (LO3) 

How might the FOMC statement (issued following the committee’s meeting) stabilize financial markets more than if no statement were provided? (LO2)

Explain how the Fed’s monetary policy may indirectly affect the prices of equity securities. (LO2)

Explain how the Fed influences the monthly mortgage payments on homes. How might the Fed indirectly influence the total demand for homes by consumers? (LO2)

Explain how the Fed’s monetary policy affects the unemployment level. (LO2)

Do you think that the Fed should have bailed out large financial institutions during the credit crisis? (LO3)

Should the Fed or Congress decide the fate of large financial institutions that are near bankruptcy? (LO2, LO3)

The Fed focuses its control on the federal funds rate, yet indirectly influences many other types of interest rates. Explain. (LO2)

Supply Explain how the ample reserves framework that the Fed currently uses has a different impact on the money supply than the open market operations that the Fed used prior to the credit crisis. (LO2)

Explain how the Fed uses the ample reserves framework to reduce the money supply. (LO2)

Presentations What is the purpose of the economic presentations made during a FOMC meeting? (LO2)

Describe the characteristics that a measure of money should have if it is to be manipulated by the Fed. (LO2)

How is money supply growth affected by an increase in the reserve requirement ratio? (LO2)

Book What is the Beige book, and why is it important to the FOMC? (LO2)

What is the policy directive, and who carries it out? (LO2)

Explain how the Fed increases the money supply through the ample reserves framework. (LO2)

What are the main goals of the Federal Open Market Committee? How does it attempt to achieve these goals? (LO1)

Briefly describe the origin of the Federal Reserve System. Describe the functions of the Fed district banks. (LO1)

The key components of a market interest rate are the risk-free rate and the credit risk premium. During a credit crisis, these two components may change substantially, but in different ways. Write a short essay that describes how the risk-free rate and the risk premium may change during a credit crisis. Explain why the financial markets can become paralyzed during a crisis. Is it because of changes in the risk-free rate or changes in the risk premium?

Explain how credit rating agencies have changed their rating processes following criticism of their ratings during the credit crisis. (LO1)

Assume that the yield curve for Treasury bonds has a slight upward slope, starting at 6 percent for a 10- year maturity and slowly rising to 8 percent for a 30-year maturity. Create a yield curve that you believe would exist for A-rated bonds, and a corresponding yield curve for B-rated bonds. (LO1, LO3)