CHAPTER 9

why was the federal reserve system set up with 12 regional federal reserve banks rather than one central banks, 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

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 os 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 federal reserve system resembles the US constitution in that it was designed with many checks and balances." discuss

like the US constitution, the federal reserve system, originally established by the federal reserve act, has many checks and balances and is a peculiarly American institution. the ability of the 12 regional banks to affect discount policy was viewed as a check on the centralized power of the board of governors, just as states' 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.

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

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

the board of governors sets reserve requirements and the discount rate; FOMC directs open market operations. in practice, however, the FOMC helps make decisions about reserve requirements and the discount rate

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.

the fed is more independent because its substantial revenue from securities and discount loans allows is to control its own budget.

in what ways can the regional federal reserve banks influence the conduct of the 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