UNIVERSITY OF TECHNOLOGY, JAMAICA

COLLEGE OF BUSINESS AND MANAGEMENT

SCHOOL OF BUSINESS ADMINISTRATION
Financial Markets And Institutions (FIN3017)
Tutorial Sheet 3
Chapters 7
1. "Why was the Federal Reserve System set up with twelve regional Federal Reserve banks
rather than one central bank, as in other countries?
2. In what ways can the regional Federal Reserve banks influence the conduct of monetary
policy?
3. Compare the structure and independence of the Federal Reserve System and the European
System of Central Banks
4. .What is the primary tool that Congress uses to exercise some control over the Fed?
5. "The theory of bureaucratic behavior indicates that the Fed never operates in the public
interest." Is this statement true, false, or uncertain? Explain your answer.
6. List and explain the functions of Bank of Jamaica.
7. Discuss the arguments put forward for an independent Bank of Jamaica.
Chapters 8
1. Unemployment is a bad thing, and the government should make every effort to eliminate it."
Do you agree or disagree? Explain your answer.
2. Which goals of the Bank of Jamaica frequently conflict?
3. What procedures can the Fed use to control the three-month Treasury bill rate? Why does
control of this interest rate imply that the Fed will lose control of the money supply?
4. If the BOJ has an interest-rate target, why will an increase in the demand for reserves lead to
a rise in the money supply?
5. Interest rates can be measured more accurately more quickly than the money supply. Hence
an interest rate is preferred over the money supply as an intermediate target." Do you agree
or disagree? Explain your answer.
6. What incentives arise for a central bank to fall into the time-inconsistency trap of pursuing
overly expansionary monetary policy?
7. What are the advantages of monetary targeting as a strategy for the conduct of monetary
policy?
8. "Because inflation targeting focuses on achieving the inflation target, it will lead to excessive
output fluctuations." Is this statement true, false, or uncertain'? Explain your answer.

9. Consider a bank policy to maintain 12% of deposits as reserves. The bank currently has $10
million in deposits and holds $400,000 in excess reserves. What is the required reserve on a
new deposit of $50,000?
For Problems 10 - 11, recall from introductory macroeconomics that the money multiplier =
!/(required reserve ratio) .
10. If the required reserve ratio is 10%, how much of a new $10,000 deposit can a bank lend?
What is the potential impact on the money supply?
11. A bank currently holds $150,000 in excess reserves. If the current reserve requirement is
12.5%, how much could the money supply change? How could this happen?