Chapter 20, Problem 1CT

Summary Introduction

To think critically about: The economic figures that indicate the performance of the federal bank and the role Mr. B, previous head of federal bank in the recent banking crises.

Introduction:

Federal Reserve Bank is the central bank of the country; Federal bank is responsible for making monetary policies.

Financial crisis is a state where the value of the financial assets decline to a large extent. The banks fail and the markets crash in this situation.

Explanation of Solution

Given information:

Federal Reserve Bank is the central bank of the country; Federal bank is responsible for making monetary policies therefore central banks play a vital role in the financial crises of a country.

Economic figures that indicate the performance of the central bank are as follows:

• Currency exchange rates, the rise in the value of a currency of a country
• Economic growth of the country.
• Net interest margin, which shows the efficiency of investments of the funds.
• Gold stock kept with the bank.
• Remittances to the country’s treasury
• Size of the bank’s balance sheet.
• Net income of the bank.
• Inflation rate of a country is direct affected from the policies of the federal bank.
• Price stability.
• Unemployment rate, various policies adopted by the federal bank has got an impact on the unemployment rate therefore; unemployment rate in a country shows the effectiveness of the federal bank.

Role played by the Federal bank in the recent banking crises is mentioned as follows:

• Federal bank kept low borrowing rates for promotion of housing loans.
• When the values of the mortgaged properties declined central bank should have issued warnings.
• The above facts are considered as the role played by the federal in the 2008-2009 financial crises.

Conclusion

Thus, inflation rate and economic growth of the country shows the effectiveness of operations of the central bank and the lowering of interest rates and failure to issue warnings are considered as the accusations against the central bank for the financial crises.