BUS 322 chapter 9

Structure of the Federal Reserve System

- 12 federal reserve banks - Board of governors (BOG) - Federal Open Market Committee (FOMC) - Federal Advisory Council - Member Banks

FOMC

Federal Open Market Committee makes the decisions that affect the economy as a whole by manipulating the money supply

FED: the books

Green book: national forecasts for the next two years Blue book: projections of monetary aggregates Beige book: districts state of the economy

Which entities in the federal reserve system control the discount rate, reserve requirements, open market operations?

The board of governors set reserve requirements and the discount rate, FOMC directs open market operations. in practice, the FOMC helps makes decisions about reserve requirements and the discount rate

Why was the federal reserve system set up with 12 regional federal reserve banks rather than 1 central bank, as in other countries?

This is 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.

Explain: The federal reserve system resembles the US constitution in that it was designed with many checks and balances

This system was established by the federal reserve act, the ability of the regional banks to affect discount policy was viewed as a check on the centralized power of the board of governor's just as state's rights are a check on the centralized power of the federal government. the provision that there be 3 types of directors (A,B, and C) representing different groups (professional bankers, business people, and the public) was again intended to prevent any group from dominating the fed. the fed's independence of the federal government and the setting up of the federal reserve banks as incorporated institutions were further intended to restrict government power over the banking industry.

Federal Reserve Bank Functions

clear checks issue new check currency Administer and make discount loans to banks in their districts Evaluate bank mergers and expansions Liaison between local community and Federal Reserve Perform bank examinations Collect and examine data on local businesses conduct research related to monetary policy

why might eliminating the fed's independence lead to a more pronounced political business cycle?

eliminating the fed's independence might make it more shortsighted and subject to political influence. thus, when political gains could be achieved by expansionary policy before an election, the fed might be more likely to engage in this activity. as a result, more pronounces political business cycles might result.

"the independence of the fed leaves it completely unaccountable for its actions." True or False?

false. the fed is still subject to political pressure because congress can pass legislation limiting the fed's power. is the fed is performing badly, congress can therefore make the fed accountable by passing legislation that the fed does not like

the fed is the most independent of all US government agencies. whats the main difference between it and other government agencies that explains the fed's greater independence.

its substantial revenue from securities and discount loans allows is to control its own budget.

the fed promotes secrecy by not releasing the minutes of the FOMC meetings to congress or the public immediately. discuss the pros and cons of this policy.

the argument for not releasing the FOMC directives immediately is that is keeps congress off the fed's back, thus enabling the fed to pursue independent monetary policy that is less subject to inflation and political business cycles. the argument for releasing the directive immediately is that is would make the fed more accountable

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

the federal reserve banks influence the conduct of monetary policy through their administration of the discount facilities at each banks and by having 5 of their presidents sit on 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 2 banks in the midwest farm belt might have been engineered to placate farmers, an important voting block in the early 20th century.