Question

In: Finance

Which of the following is the most flexible of the Fed’s tools for implementing monetary policy?...

Which of the following is the most flexible of the Fed’s tools for implementing monetary policy?

Changes in the fed funds rate

Changes in the required reserve ratio

Changes in the discount rate

Open market operations

Private placements

Which Act allowed the individual states to determine if a bank could branch within or outside its home state?

Competitive Equality Banking Act

Federal Reserve Act

McFadden Act

Glass-Steagall Act

Riegle-Neal Interstate Banking and Branching Efficiency Act

Solutions

Expert Solution

1) The most flexible of the Fed's tools used for implementing monetary policy is Open Market Operations

Open Market Operations = Open market operations aka OMO refers to buying and selling of government securities by the central bank. Here, the fed directly does business with all the primary dealers so that the effective fund rates do not breach the target rate too much. It can be used at any time (several times a week) and hence, it is the most flexible tool and most frequently one used to.

Change is the Fed Fund rate = It is the rate of interest that one bank charges to another bank for lending Federal Reserve Funds overnight. This is generally decided when the members of the fed meet once in 1 or 2 months.

Change in discount rate = It is the rate of interest that Fed charges from the bank for borrowing money from it so that the banks can maintain their reserve requirements. It is generally decided when the members of the fed meet i.e. once in1 or 2 months

Change in Required Reserve Ratio = Banks have to keep a certain amount of deposits as reserves with the fed and after removing the reserves, they can lend the money. This tool is the least of the tool used by the fed and is also decided when the fed meets

Private Placement = Private placement is when the bonds are sold to a limited number of investors. Large institutional investors are the ones who generally participate. Fed does not usually conduct a private placement of bonds. It is generally done by investment bank

2) McFadden Act allowed the individual states to determine if a bank could branch within or outside its home state

Competitive Equality Banking Act prevented a commercial bank from creating non-banking institutions, selling real estate, securities underwriting as well as insurance

Federal Reserve Act is the act that led to the formation of Federal Reserve and which governs the operations of the federal reserve

Glass-Steagall Act separated insurance, commercial banking and investment banking into 3 separate industries

Riegle-Neal Interstate Banking and Branching Efficiency Act allowed banks that met certain criteria such as market capitalization to acquire other banks in any states


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