ECON 307 Short Anwser

Federal Reserve System Liabilities

-Currency in circulation -Reserves

Federal Reserve System Assets

-Government Securities -Discount Loans

MB

= C + R

What are 2 things the federal Reserve Banks do that the Board of Governors don't

Administer and make discount loans to banks in their districts Evaluate proposed merger and applications for banks to expand their activities Clear checks Issue new currency

Banks

Financial Intermediaries

Other Factors that Affect the monetary base

Float Treasury Deposits at the Federal Reserve Interventions in the foreign exchange market

Government Securities

Holdings by the Fed that affect the money supply and earn interest

Depositors

Individuals and Institutions

The Case for Independence

Political Pressure would impart an inflationary bias to monetary policy Too important to leave to politicians Could be used to facilitate treasury financing of large budget deficits

Players in the Money Supply Process

The Central Bank Banks Depositors

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 the Fed's greater independence?

The Fed is more independent because its substantial revenue from securities and discount loans. Independence 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 monetary policy through their administration of the discount facilitates at each bank and by having five of their presidents sit on the FOMC, the main policy making arm of the Fed

The Central Bank

The Federal Reserve System

During the Great Depression years 1930-1933, the currency ratio, c, rose dramatically. What do you think happened to the money supply? Why?

The money multiplier declined. This can be seen in Figure 3 in the chapter, which indicates a dramatically declining money supply. Monetary base grew modestly, if at all.

"The independence of the Fed has meant that it takes the long view and not the short view." Is this statement true, false, or uncertain?

Uncertain. Although independence may help the Fed take the long view; because its personnel are not directly affected by the outcome of the next election, the Fed can still be influenced by the next election, the Fed can still be influenced by political pressure. In addition, the lack of Fed accountability because of its independence may make the Fed more irresponsible. Thus it is not absolutely clear that the Fed is more farsighted as a result of its independence.

The Case Against Independence

Undemocratic Unaccountable Difficult to coordinate fiscal and monetary policy Has not used its independence successfullywq

Reserves

bank deposits at the Fed and Vault Cash

Currency in circulation

in the hands of the public

Discount loans

provide reserves to banks and earn the discount rate