FIN3244 Test 2 Study Guide Good Luck Everyone Email me if you need support I will be updating the study guide after every class and I will add any additional work I do My Email asl09c fsu edu Table of Contents Chapter 19 3 Federal Reserve Banks 3 Architecture of District Banks 3 Member Banks 3 Board Members 4 Functions 4 Chairman of The Board Board of Directors 4 Federal Open Market Committee 4 Power Structure 5 Effects of External Pressure Politics and Government 5 Intended Fed Motivation 5 Arguments for Fed Independence 6 Proof of level of importance 6 Chapter 20 6 The Business Cycle 6 Fiscal Policy Secretary of the Treasury 7 Monetary Policy The Fed 7 3 Tools of the Fed 7 Open Market Operations 7 Advantages 8 Discount Policy 8 Types 8 Advantages 8 Disadvantages 9 Reserve Requirements 9 Fed Review 9 Goals 9 Tools 9 Other Notes 9 Congress s Influence 9 Quantitative Easing 9 Chapter 1 Investing 10 What is investing 10 Investments and the Investment Process 10 Types of Investments 10 Suppliers and Demanders of Funds 11 Investing Vehicles 11 Taxes 11 Example 12 Investment Returns Capital Gains and Taxes 12 Capital Gains Example 12 Life Cycle Investing 13 The Business Cycle 14 Short Term Investments 14 Chapter 2 Markets and Transactions 14 Securities Markets 14 Primary Market Provide capital to grow and expand 14 IPO Process 15 Investment Bankers Role 15 Returns on IPOs 16 IPO Extremes 16 Secondary Markets 16 Dealers and Brokers 17 Bottom Line 17 More Information 17 Broker Dealer Markets 17 Over the Counter Markets 18 Benefit 18 Alternative Trading Systems 18 Bull Market 18 Bear Market 18 Extended Hour Trading 19 Global Investing 19 Effects 19 Global Investing 19 Direct Investing 19 International Investing 20 Currency Exchange Risk extra risk 20 Types of Trading 20 Margin Trading 20 Advantages and Disadvantages 21 Margin Trading Process 21 Example 22 Problems 22 Example Problem 1 22 Short Selling 23 Chapter 19 Federal Reserve Banks 12 Federal Reserve districts Each has a district bank to conduct discount lending 1 Fed Bank None only one state Fears of moral hazard of the people running bank Architecture of District Banks 12 Presidents one in each district Board of District banks 9 members o 3 Banks o 3 industry commerce or agriculture o Public interest Board Members Elect president of district banks Must be approved by board of governors District Board Bembers specifically represent district Contain a mixture of economic interests Theoretically the private commercial banks that belong to the Federal Reserve System in each district own the district bank Reality joint private government venture Member Banks All national banks required to be members of the Fed State banks can decide originally many didn t join Why Fed has reserve requirements require banks to keep funds on deposit with the Fed Do not get to use all of their money No interest is paid on these funds In effect this is a tax on these banks Later law changed this Required all banks to keep reserves on deposit Gave equal access to the discount loans payment system Goal Keeping Banks Solvent Board Members 7 Board of Governors members appointed by the U S President The U S Senate must confirm them Members serve 14 year nonrenewable terms Functions Administers monetary policy o Open market operations o Sets reserve requirements within Congressional limits How much money is on reserve with the banks o Operates the discount window makes discount loans When banks are in trouble they can borrow from Fed Duties relating to financial regulation Setting margin requirements for securities purchases o Margin Buying on Margin How much you put up pay when you purchase stock usually 50 Leveraging Very Risky Chairman of The Board Board of Directors Possibly Second Most Important Person in Government Appointed by U S President Confirmed by the U S Senate Serves a 4 year term o At expiration can be reappointed for an additional 4 years or serve out remaining 10 years as a member Very influential in setting monetary policy and shaping economic policy Popularized by Alan Greenspan currently Ben Bernanke Federal Open Market Committee 12 Members 7 Board of Governors 5 District bank presidents rotate o Always 1 from New York Trading Desk Keeps short terms fund rate in range o Buy to bring rates up o Sell to bring rates down Directs Fed s open market operations Federal Funds Rate Target loan interest rate range set by the board of governors that banks can borrow short term funds for Power Structure The Federal Reserve s formal structure defuses power between the Board of Governors the 12 Federal Reserve Banks the FOMC The informal power of the Fed lies with the Chairman of the Board of Governors Member banks have little actual influence Figure 1 Org Of Fed System Effects of External Pressure Politics and Government The Fed was designed to operate independently of external pressures political Reality the Fed operates in a political arena and is subject to political pressure The President makes appointments to the Board of Governors The Fed was created by Congress It can reduce the Fed s power or even eliminate it Intended Fed Motivation Public interest view the Fed acts in the interest of the general public Principal agent view the Fed acts to increase its power influence and prestige Implies there may be a political business cycle Evidence of a political business cycle is weak o There is no very little correlation between business cycle and politics Arguments for Fed Independence Political issue of Fed s independence arises when the public negatively views Fed policy Pro independence Monetary policy too important Politicians focus on short term oriented Monetary policy too technical for politicians Con independence Monetary policy too important Only elected officials should make public policy Proof of level of importance All other creations of congress must get money from congress it makes money and doesn t take money from congress 1st Phase Expansion growing economy o employment income output interest rates At some point economy activity gets overheated too big too much risk 2nd Phase Decline economy slows eventually turns downward 3rd Phase Recession 2 consecutive quarters of decreasing GDP economy Money coming in independently funded o Provides money to congress Chapter 20 The Business Cycle Regular fluctuations in economic activity stops growing o employment income output prices interest rates At some point the economy bottoms begins to
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