Introduction to Finance

 1. 
(LO 4.1)
Identify some of the institutional participants in the 
mortgage markets.
 2. 
(LO 4.1)
What actions did the Fed take to help avoid a fi nancial 
system collapse in 2008–09?
 3. 
(LO 4.2)
Describe the weaknesses of the national banking 
system that was in place prior to passage of the Federal Reserve 
Act of 1913.
 4. 
(LO 4.2)
What functions and activities do central banks usually 
perform?
 5. 
(LO 4.3)
Describe the organizational structure of the Federal 
Reserve System in terms of its fi ve major components.
 6. 
(LO 4.3) 
Explain how the banking interests of large, medium, 
and small businesses are represented on the board of directors of each 
Reserve Bank. 

---

100
C H A PT E R 4 Federal Reserve System
Exercises
1. 
You are a resident of Seattle, Washington, and maintain a check-
ing account with a bank in that city. You have just written a check 
on that bank to pay your tuition. Describe the process by which the 
banking system enables your college to collect the funds from your 
bank.
2. 
As the executive of a bank or thrift institution you are faced with 
an intense seasonal demand for loans. Assuming that your loanable 
funds are inadequate to take care of the demand, how might your 
Reserve Bank help you with this problem?
3. 
The Federal Reserve Board of Governors has decided to ease mon-
etary conditions to counter early signs of an economic downturn. 
Because price infl ation has been a burden in recent years, the Board is 
eager to avoid any action that the public might interpret as a return to 
infl ationary conditions. How might the Board use its various powers 
to accomplish the objective of monetary ease without drawing unfa-
vorable publicity to its actions?
4. 
An economic contraction (recession) is now well under way, and 
the Fed plans to use all facilities at its command to halt the decline. 
Describe the measures that it may take.
5. 
You have recently retired and are intent on extensive travel to many 
of the exotic lands you have only read about. You will be receiving 
not only a pension check and Social Security check but also dividends 
and interest from several corporations. You are concerned about the 
deposit of these checks during your several months of absence, and 
you have asked your banker if there is an arrangement available to 
solve this problem. What alternative might the banker suggest?
6. 
The prime rate, and other interest rates, off ered by banks often 
change in the same direction as a change in the Fed’s target for the 
federal funds rate. As an employee of a Federal Reserve District Bank 
you have been told that your district bank will be increasing its dis-
count rate early next week. Expectations are that an increase in the 
discount rate will lead to an increase in the federal funds rate, which 
will lead to an increase in the prime rate and other bank lending rates. 
You have been thinking about buying a new automobile for the past 
couple of months. Given this information of a planned discount rate 
increase, you are considering buying your new automobile before the 
end of the week. What are the ethical issues, if any, involved in this 
scenario? What would you do? 
Problems