ECO 3355 Chapter 13 Problems

How is the president of the United States able to exert influence over the Federal Reserve?

1. Can influence congress to pass legislation to reduce the independence of the fed 2. President can appoint members of the BOG so he may appoint people of particular economic ideologies 3. Can appoint a new chair to the BOG every four years

"The independence of the Fed leaves it completely unaccountable for its actions.' Why is this statement not true?

All of the above are correct. (The Fed has to report to Congress on a semiannual basis to explain its actions, the legislation that structure the Fed is written by Congress and is subject to change, and the president can appoint a new chairman of the Board of Governors every four years.)

Why is the New York Federal Reserve always a voting member on the FOMC?

All of the above are correct. (The New York Federal Reserve is actively involved in the bond and foreign exchange markets, It is the only Federal Reserve bank that is a member of the Bank for Intentional Settlements (BIS), and the New York Federal Reserve district contains many of the largest commercial banks in the U.S.)

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

All of the above are correct. (Through their administration of the discount facilities at each bank, By having five of their presidents sit on the FOMC, and by having members serve on the Federal Advisory Council.)

Why was the Federal Reserve System set up with twelve 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

Despite the important role that the Board of Governors has in setting monetary policy, seats to serve on the Board of Governors can sometimes be empty for several years. How could this happen?

Despite the important role that the Board of Governors has in setting monetary policy, seats to serve on the Board of Governors can sometimes be empty for several years. How could this happen? Since members of the Board of Governors are appointed by the president and confirmed by the Senate, these seats may remain vacant due to the arduous and lengthy political approval process that candidates must endure.

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 pronounced political business cycles might result

Why is it unlikely that the policy recommendation put forth by the chair of the Board of Governors would ever be voted down by the rest of the FOMC?

Even though each person of the FOMC gets one vote, the policy deliberations will undoubtedly reflect the preferences of the chairman.

The theory of bureaucratic behavior indicates that the Fed never operate in the public interest. Is this statement true, false, or uncertain?

False. Maximizing one's welfare does not rule out altruism. Operating in the public interest is clearly one objective of the Fed. The theory of bureaucratic behavior only points out that other objectives, such as maximizing power, also influence Fed decision making.

Should the Federal Reserve redraw its district boundaries, similar to the manner in which congressional districts are periodically realigned? Why or why not?

In theory it sounds sensible to redraw the districts to reflect the larger economic interests and population movements to western and southern states since the original Federal Reserve Act of 1913. However, in practice this would require Congress to rewrite the Federal Reserve Act and redraw the boundaries, which could create more opportunities for political interests to interfere with the monetary policy process and could take a long time to resolve.

The presidents of each of the district Federal Reserve banks (including the New York Federal Reserve bank) are currently not required to undergo a formal political appointment and approval process. Do you think this is appropriate?

Maybe. A formal approval process is lengthy, which might leave some Federal Reserve districts without leadership, possibly creating more problems than it solves.

Do the fourteen-year nonrenewable terms for governors effectively insulate the Board of Governors from political pressure?

No. In order to gain additional power to regulate the financial system, the governors need the support of Congress and the president to pass favorable legislation.

Which of the following entities in the Federal Reserve System controls the discount rate? Sets reserve requirements? Directs open market operations?

The Board of Governors The Board of Governors The FOMC

Which is more independent, the Federal Reserve or the European Central Bank? Why?

The European Central Bank - Its charter cannot be changed through legislation, making t more independent than the Federal Reserve.

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's source of revenue is free from the appropriations process.*

In what ways does the Federal Reserve have a high degree of instrument independence? If it has a specific mandate from Congress to achieve "maximum employment and look, stable prices," then how does the Fed have goal independence?

The Federal Reserve can choose any method it wants in order to achieve a given set of policy objectives. The Fed is free to interpret exactly what these objectives mean.

The Fed promotes secrecy by not releasing the minutes of the FOMC meetings to Congress or the public immediately. Discuss the arguments for and against 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

What is the primary tool that Congress uses to exercise some control over the Fed?

The threat that Congress will acquire greater control over the Fed;s finances and budget.

Why is it important for the regional Federal Reserve System presidents to attend the FOMC meetings, even if they are nonvoting members?

This is important since, even if they are currently non-voting members, it gives them an opportunity to provide information on the health of the economy in their region, which could be quite different from other regions, giving important context to any policy decision.

'The independence of the Fed has meant that it takes the long view and not the short view.' Assume this statement is correct and answer the following questions: (True or False)

True

"The Federal Reserve System resembles the U.S. Constitution in that is was designed with many checks and balances. Is this statement true, false, or uncertain?

True. Because of public hostility and the centralization of power, the Federal Reserve System was created with many checks and balances to diffuse power.

Should the Federal Reserve be subject to periodic auditing of its policies, procedures, and finances? Why or why not?

Uncertain. Auditing could make the Federal Reserve more accountable but less independent.

Why did the Bank of England up until 1997 have a low degree of independence?

Until 1997, the power to set interest rates was determined exclusively by Her Majesty's Treasury.

Why is the Twelfth Federal Reserve district (San Francisco) so geographically large, while the Second Federal Reserve district (New York) is so small by comparison?

When the Federal Reserve districts were created in 1913, the districts were drawn up to reflect roughly equal populations and economic interests that prevailed at the time. Since the West coast was so sparsely populated relative to the East coast, this implied a much larger area in the 12th district, as compared to New York's 2nd district.

In the 1960s and 1970s, the Federal Reserve System lost member banks at a rapid rate. How can the theory of bureaucratic behavior explain the Fed's campaign for legislation to require all commercial banks to become members? Was the Fed successful in this campaign?

Yes. The theory describes how bureaucracies will take action to preserve their autonomy and increase their overall power. This explains this campaign to have control over all banks in the USA.