Economics 470/570
Winter 2014
Practice Problem Set 2
1. Briefly describe the major functions of Federal Reserve district banks.
2. How do member banks differ from other banks? How did the difference change in 1980?
3. Who is on the FOMC? What does the FOMC do?
4. Describe the structure of Federal Reserve districts and Federal Reserve banks.
5. Describe the structure and function of the Board of Governors of the Federal Reserve System.
6. How has the power structure of the Federal Reserve System shifted over time?
7. How independent is the Fed? What factors contribute to independence? What factors work against independence? Discuss arguments for and against the independence of the Fed.
8. Use t-accounts to show that the Fed can control the monetary base better than it can control either currency or reserves. What does this result tell us?
9. Suppose that a bank has $100,000 in excess reserves that it loans out. Assuming that the required reserve ratio is 20%, use t-accounts to illustrate the multiple deposit creation process. Use this to obtain the simple deposit multiplier.
10. Explain why the multiplier falls when people hold currency or when banks hold excess reserves.
11. Suppose that the required reserve ratio is 20%, the currency to deposit ratio is .25, the excess reserve to deposit ratio is .05, and the monetary base is 1,000. (a) Find the money supply. (b) Let open market operations increase the monetary base by 200. Use the money multiplier to find the new value of the money supply.
12. Explain how and why the money multiplier changes when (a) the required reserve ratio increases, (b) the currency to demand deposit ratio increases, and (c) the excess reserve to demand deposit ratio increases. Who determines each of these quantities?
