Exam

1. The Federal Reserve has recently removed all reserve requirements on Demand Deposits (and has also removed the limits on the number of withdrawals per month from Savings Accounts). This 0% required reserve ratio is expected to be a permanent reduction. The Federal Reserve has said “For many years, reserve requirements played a central role in the implementation of monetary policy by creating a stable demand for reserves. In January 2019, the FOMC announced its intention to implement monetary policy in an ample reserves regime. Reserve requirements do not play a significant role in this operating framework. As announced (Off-site) on March 15, 2020, the Board reduced reserve requirement ratios to zero percent, effective March 26, 2020, in light of the shift to an ample reserves regime. This action eliminates the need for thousands of depository institutions to maintain balances in accounts at Reserve Banks to satisfy reserve requirements, thereby freeing up liquidity in the banking system to support lending to households and businesses.” (https://www.frbservices.org/resources/centralbank/faq/reserve-account-admin-app.html) Ample reserves just means that most institutions kept reserves in excess of the minimum requirements. Bit of Extra credit (right off the bat!) Using general Economic principles, explain why one might expect the amount of reserve banks to remain the same (hint: why were they keeping excess reserves if they didn’t need to?) Also—using general economic principles, explain why one might expect the amount of reserves to decrease (hint: think about the costs of keeping the same amount of reserves when the RRR is at say 4% versus 0%) Main question: how does the new policy of a zero required reserve ratio affect the Fed’s Tools, Strategies and Tactics of Monetary Policy? Are the effects large or small, and can the changes be compensated through other policies? 

2.  Describe some ways in which the Federal Reserve System is independent of the political system. Does congress have some control over the Federal Reserve? How does it exert this influence? Do you think the President (any President) should have more control over the Federal Reserve than they currently do? Explain your reasoning. 

3. How does the theory of bureaucratic behavior explain why the Federal Reserve may be more responsive to the wishes of politicians that it might otherwise seem to need to be? 

4. What tools does the Federal Reserve have to control the level of borrowed reserves? Explain how those tools work. 

5. Suppose that for some reason, the amount of currency held by the public decreased. What defensive open market operations would typically occur? Why? Why might the manager of domestic operations consider it better to use a matched sale-purchase transaction (a reverse repurchase agreement) rather than outright purchasing or selling of bonds? Explain your answers! 6. (20 pts) Why would a goal of stable long-run inflation be better than a goal for a central bank to pursue than a goal of long-run economic growth? How might a goal of long-run economic growth lead a central bank to fall into the time-inconsistency trap? Do the events of the past couple of months change your answer? (The CPI fell by 0.4% in March from February, but increased 1.5% from the previous March, which has been the only CPI data released in which the data was collected after the impact of COVID-19 on the U.S. economy—from https://www.bls.gov/cpi/home.htm)