Chapter 9 Questions

"The Federal Reserve System resembles the U.S Constitution in that it was designed with many checks and balances." Discuss

1) 12 regional banks is a check on the centralized power of the Board of Governors 2) Three types of Directors is a check to assure no one group is dominant 3) Feds independence of Federal government is a check to restrict government power over the banking industry

Why might eliminating the Fed's independence lead to a more pronounced political business cycle?

1) Make it more shortsighted and subject to political influence 2) Ex. when political gains could be achieved by expansionary policy before an election, the Fed may be more inclined to take these actions This would lead to a more pronounced political business cycle.

The Fed promotes secrecy by not releasing FOMC minutes to Congress or the public immediately. Discuss the pros and cons of the policy.

1) This keeps Congress off the Fed's back, enabling the Fed to pursue an independent monetary policy that is less subject to inflation and political business cycles. 2) Releasing the directive immediately would make the Fed more accountable

Why was the Federal Reserve System set up with 12 regional Federal Reserve banks rather than one central bank, as in other countries?

Because of traditional American hostility to a central bank and centralized authority, the system of 12 regional banks was set up to diffuse power along regional lines.

Which entities in the Federal Reserve System control the discount rate? Reserve requirements? Open market operations?

Discount Rate--> Board of Governors Reserve Requirement--> Board of Governors Open market operations--> FOMC (also helps BG)

"The independence of the Fed leaves it completely unaccountable for its actions." Is this true, false, uncertain? Explain

False. The Fed is still subject to political pressure because Congress can pass legislation limiting the Fed's power.

The Fed is the most independent of all U.S government agencies. What is the main difference between it and other government agencies that explains its greater independence?

The Fed is more independent because its substantial revenue from securities and discount loans allows it to control its own budget.

In what ways can the regional Federal Reserve Banks influence the conduct of monetary policy?

The Federal Reserve Banks influence the conduct of the monetary policy through their administration of the discount facilities at each bank and by having five of their presidents sit of the FOMC, the main policymaking arm of the Fed.

What political realities might explain why the Federal Reserve Act of 1913 placed two Federal Reserve banks in Missouri?

The placement of two banks in the Midwest farm belt might have been engineered to placate farmers, an important voting block in the early twentieth century.