econ 310 chapter 13

In what ways is the Fed subject to external​ pressure? ​(Check all that apply.​)

The president can exercise control over the membership of the Board of Governors and appoint a new chairman every four years. The Congress can amend the​ Fed's charter and powers or even abolish it entirely.

In what sense is the Federal Reserve System a public-private partnership

While authorized by the​ government, it is owned by private banks.

public interest view

a theory of central bank decision making that holds that officials act in the best interest of the public -goals in public interest examples: price stability, high employment, economic growth

federal open market committee (FOMC)

directs the fed's open market operations -12 member federal reserve committee

countries with less independent central banks had _____ rates of inflation

higher

two views of what motivates the fed in using its authority

public interest view; principal-agent view

federal reserve system

the central bank of the US

board of governors

the governing board of the Federal Reserve System, consisting of seven members appointed by the president of the United States -administers monetary policy to influence the nation's MS and interest rates through open market operations, reserve requirements, and discount lending -responsible for some financial regulation, like margin requirements

political business cycle

the theory that policymakers will urge the fed to lower interest rates to stimulate the economy prior to an election

arguments against fed independence

-importance of monetary policy for economy - in a democracy, elected officials should make public policy

the 12 federal reserve banks carry out the following duties related to the fed's role in the payments system, control of MS, and financial regulation:

-manage check clearing in the payment system -manage currency in circulation by issuing new federal reserve notes and withdrawing damaged notes from circulation -conduct discount lending by making and administering discount loans to banks within the district -perform supervisory and regulatory functions such as examining state member banks and evaluating merger applications -provide services to businesses and general public by collecting and making available data on district business activities and by publishing articles on monetary and banking topics written by professional economists employed by the banks -serve on the federal open market committee, the federal reserve system's chief monetary policy body

arguments for fed independence

-monetary policy, which affects inflation, int rates, exchange rates, and economic growth, is too important and technical to be determined by politicians. politicians may be short sighted and short term desire of politician to be reelected may clash with country's long term goal of low inflation -complete control of the fed by electe officials increases the likelihood of political business cycle fluctuations in teh money supply and interest rates

main provisions of dodd-frank act

-new regulatory responsibilities for teh fed -restrictions on the fed's role as a lender of last resort -new responsibilities for one member of the board of governors -GAO audit of emergency lending -new process for electing reserve bank presidents -requirement for new disclosures of fed borrowers and counterparties -new regulatory bureau within the fed

Is it easier for a central bank to be independent in a​ high-income country or in a​ low-income country?

It is often difficult for a central bank to act independently in a​ low-income country. - Research has shown that the more independent a central bank​ is, the lower the inflation rate will be.​ Thus, one would expect the average inflation rate in​ less-developed countries to be higher than in industrial countries.

Why would a central bank that is independent be expected to perform​ better?

It would be able to conduct monetary policy free from political interference.

What are the changes to the Fed under the​ Dodd-Frank Act? ​(Check all that apply.​)

Making the Fed a member of the new Financial Stability Oversight Council. Designating a Fed vice chairman for regulatory supervision. Ordering the Government Accountability Office to audit the emergency lending programs the Fed carried out during the financial crisis.

In what sense is the Federal Reserve System both accountable to the government and independent of​ it?

The Board of Governors is a federal government​ agency, while the Federal Reserve Banks are legally the equivalent of private corporations.

Which body is more important within the Federal Reserve​ System, the Board of Governors or the Federal Open Market​ Committee?

The Board of Governors since they control reserve​ requirements, the discount​ rate, and hold a majority of the seats on the Federal Open Market Committee.

Compare the length of terms of office for central bank heads and members of central bank governing boards between the U.S. Federal Reserve and foreign central banks.

The Fed has the shortest term length for the head and the longest term length for the board members.

Why was the Federal Reserve System split into 12​ districts?

The Federal Reserve System was split into 12 districts because there was opposition in Congress to establishing a​ single, unified central bank.

Evaluate the following​ statement: "Because the Fed does not have to ask Congress for money to fund its​ operations, the​ principal-agent view of the​ Fed's motivation cannot be​ correct."

This is not necessarily correct. For​ instance, despite the apolitical setup of the​ Fed, each member of the Federal Reserve Board still has an incentive to maximize personal​ well-being, power, and​ influence, and may make decisions that promote those factors.

principal-agent view

a theory of central bank decision making that holds that officials maximize their personal well-being rather than that of the general public -predicts that fed acts to increase its power, influence, and prestige as an organization, subject to constraints placed on it by the principals: the president and congress

congress has given ____ and ____ formal authority over the monetary policy

board of governors; FOMC

wall street reform and consumer protection act (dodd-frank act)

legislation passed in 2010 that was intended to reform regulation of the financial system

discount loans provide ____ to banks

liquidity --> fulfilling in a decentralized way the system's role as a lender of last resort and putting an end to bank panics

many analysts believe that an independent central bank improves the economy's performance by ____ inflation without ____ input or employment fluctuations

lowering; raising

member banks

nominal owners of federal reserve banks -little actual power within the system -own shares of stock in the federal reserve banks, but this ownership confers few of the rights that are typically granted to shareholders of private corporations

federal reserve bank

one of 12 district banks of the federal reserve system that, among other activities, conduct discount lending