Kenneth R. Szulczyk
businesses know the Greek government will force its central bank to buy its bonds, causing the
inflation rate to increase while the drachma depreciates against the euro. Public has started bank
runs on Greek banks, withdrawing their euros and creating more financial hardship for Greece.
Then Greece’s financial problems trickled into Cypress in 2013.
Cypress is an offshore banking center that attracted sizeable deposits from British and
Russians. However, Cypress banks suffered huge losses from their Greek bonds. The EU
refused to bail Cypress out and convinced the Cypress government to tax all bank accounts over
$100,000. Tax would cause depositors to withdraw their money and flee the country, called
capital flight. We discuss capital flight in Chapter 15.
Key Terms
Federal Reserve System
discount rate
Board of Governors
The Federal Open Market Committee
(FOMC)
directive
Eurozone
European Central Bank
Governing Council
Executive Board
European Council
public interest view
principal-agent viewChapter Questions
- How many district banks does the Federal Reserve have?
- Why did Congress and the President create the Federal Reserve System with several
independent bank branches? - Please describe the structure of the Federal Reserve System? For example, who owns the
Fed stock? Who makes the decisions regarding monetary policy? - Identify the functions of the Board of Governors, and who appoints members to this board?
- Which factors help the Fed be independent of the U.S. federal government?
- Identify the functions of the Federal Open Market Committee, and who appoints members to
this board? - Explain why the chairperson of the Board of Governors is such a powerful person.
- Identify the economic consequences if an EU member of the Eurozone withdraws from the
euro and reintroduces its currency. - Distinguish between the Executive Board and the Governing Council of the European
Central Bank.