Question

True or False: and why

1- The FDIC was formed as part of the Bank Deregulation and Control Act of 1980.

2- The Federal Reserve's target rate has been in a general uptrend since 1980.

3- Inflation is the price of money.

4- Time value of money is of little value managing financial institutions.

Answer 1

1- The FDIC was formed as part of the Bank Deregulation and Control Act of 1980 = True

Reason :

The Monetary Control Act (MAC) was a federal law passed in 1980 that changed bank regulations significantly. The bill was proposed in response to record two-digit inflation experienced in the late 1970s, which led to the notion of monetary control by congress. The legislation was signed in by Jimmy Carter on March 31, 1980.

Title 2 of the Monetary Control Act

Title 2 of this act was the Depository Institutions Deregulation Act of 1980. This legislation deregulated banks, while simultaneously giving the Fed more control of non-member banks.

It required non-member banks to abide by Federal Reserve decisions but, perhaps most notably, the bill allowed banks to merge. It also deregulated interest rates paid by depository institutions such as banks, making them a matter of private discretion (previously this was regulated under the Glass-Steagall Act). It allowed credit unions to offer transaction accounts, which included checking accounts and savings accounts. The bill also opened the Fed discount window and extended reserve requirements to all domestic banks.

The Depository Institutions Deregulation Committee (DIDC) is a six-member committee established by Title 2 of the MAC, which had the primary purpose of phasing out interest rate ceilings on deposit accounts by the year 1986. The six members of the Committee were the Secretary of the Treasury, the Chairman of the Board of Governors of the Federal Reserve System, the Chairman of the FDIC, the Chairman of the Federal Home Loan Bank Board (FHLBB) and the Chairman of the National Credit Union Administration Board (NCUAB) as voting members, and the Comptroller of the Currency as a non-voting member.

The Monetary Control Act also contained several provisions relating to bank reserves and deposit requirements. It created the popular Negotiable Order of Withdrawal (NOW) accounts, which are accounts that have no limits on the number of checks that can be written. Additionally, it raised the amount of FDIC insurance protection from $40,000 to $100,000 per account. Note that the FDIC limit has since been raised to $250,000.

2- The Federal Reserve's target rate has been in a general uptrend since 1980 = True

Reason :

Federal funds rate is the target interest rate set by the FOMC at which commercial banks borrow and lend their excess reserves to each other overnight.

The federal funds rate refers to the interest rate that banks charge other banks for lending to them excess cash from their reserve balances on an overnight basis. By law, banks must maintain a reserve equal to a certain percentage of their deposits in an account at a Federal Reserve bank. Any money in their reserve that exceeds the required level is available for lending to other banks that might have a shortfall.

Banks and other depository institutions are required to maintain non-interest-bearing accounts at Federal Reserve banks to ensure that they will have enough money to cover depositors' withdrawals and other obligations. The amount of money a bank must keep in its Fed account is known as a reserve requirement and is based on a percentage of the bank's total deposits.

The target for the federal funds rate has varied widely over the years in response to the prevailing economic conditions. It was set as high as 20% in the early 1980s in response to inflation. With the coming of the Great Recession of 2007 to 2009, the rate was slashed to a record low target of 0% to 0.25% in an attempt to encourage growth.5 6

Besides the federal funds rate, the Federal Reserve also sets a discount rate, which is the interest rate the Fed charges banks that borrow from it directly. This rate tends to be higher than the target fed funds rate, partly to encourage banks to borrow from other banks at the, lower, federal funds rate.

3- Inflation is the price of money = True

Reason :

Inflation, as mentioned, is the rate a price rises, and essentially how much the dollar is worth at a given moment with regards to purchasing. The idea behind inflation being a force for good in the economy is that a manageable enough rate can spur economic growth without devaluing the currency so much that it becomes nearly worthless.

4- Time value of money is of little value managing financial institutions = False

Reason :

The time value of money (TVM) is the concept that money you have now is worth more than the identical sum in the future due to its potential earning capacity. This core principle of finance holds that provided money can earn interest, any amount of money is worth more the sooner it is received. TVM is also sometimes referred to as present discounted value.