ECON 2411 CH. 9 Central Banks and The Federal Reserve System

Increasing the independence of a central bank would probably:

All of the above are correct. (Allow the central bank to more easily monetary policies that directly oppose the government's fiscal policies, hinder the coordination of monetary and fiscal policy, and reduce pressure to pursue inflationary policies.)

The theory of bureaucratic behavior suggests that the Federal Reserve will:

All of the above are correct. (Devise clever strategies in an effort to avoid blame for poor economic performance, try again regulatory power over more banks, try to avoid a conflict with the president and Congress over increases in interest rates.)

"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? Which of the following functions is not performed by the twelve Federal Reserve banks?

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.) Setting the reserve requirements.

Which of the following statements about central bank structure and independence is true?*

In recent years, there has been a remarkable trend toward increasing independence.*

Which of the following is not an important reason for the regional Federal Reserve bank presidents to attend the FOMC meetings, even if they are nonvoting members?

It provides a greater opportunity for nonvoting members t become voting members in the future.

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.

Advocates of Fed independence fear that subjecting the Fed to direct presidential or congressional control would:

Only A and B are correct. (Impart an inflationary bias to monetary policy, and force monetary authorities to sacrifice the long-run objective of price stability.)

The Fed promotes secrecy by not releasing the minutes of the FOMC meetings to Congress or the public immediately. Based on this statement, indicate whether the following are arguments for (pros) or arguments against (cons) this policy: This policy allows the Fed more independence in making monetary policy decisions: ___ This policy encourages the Fed to be less accountable for its actions: ___ This policy reduces transparency because people cannot figure out what the goal of the Fed is: ___ This policy should reduce inflationary pressure and political business cycles: ___

Pro, Con, Con, Pro.

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.

Which of the following statements regarding Federal Reserve independence is incorrect?

The 14-year non-renewable terms for governors effectively insulate the Board of Governors from political pressure.

Which of the following entities in the Federal Reserve System controls the discount rate?* Which of the following entities in the Federal Reserve System sets reserve requirements?* Which of the following entities in the Federal Reserve System 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.*

How does the Federal Reserve have a high degree of instrument independence? If the Federal has a specific mandate from Congress to achieve "maximum employment and low, 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.

Which of the following does not explain why it is unlikely that the policy recommendation put forth by the chairman of the Board of Governors would ever be voted down by the rest of the FOMC?

The chairman always has the final vote when making monetary policy decisions.

Why is the Twelfth Federal Reserve district so geographically large, while the Second Federal Reserve district is so small by comparison?

The districts represent the population and economic interests in 1913 when the Federal Reserve Act was created.

Which of the following is not part of the checks and balances of the Federal Reserve System?

The requirement that all depository institutions keep deposits at the Fed.

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 was the Federal Reserve System set up with twelve regional Federal Reserve banks rather than one central banks, as in other countries?*

The writers of the Federal Reserve Act wanted to ensure the Fed's power was not centralized in a single location.*

'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) The Fed's personnel are not directly affected by the outcome of the next election; therefore, it has some level of independence: ___ The Fed can still be influenced by political pressure: ___ The Fed's lack of accountability may make the Fed more irresponsible: ___ The members of the board generally cannot be reappointed to their position; they do not need to do favors in order to keep their job in the future. ___

True, False, False, True.

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

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.

Should the Federal Reserve redraw its district boundaries, similar to how congressional districts are periodically realigned?

Uncertain. This would require Congress to rewrite the Federal Reserve Act, which could create opportunities for political interest to interfere with the monetary policy process.

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.

The financial panic of 1907 resulted in such widespread bank failures and substantial losses to depositors that the American public finally became convinced that...*

a central bank was needed to prevent future panics.*

The many regional Federal Reserve banks resulted from a compromise between parties favoring:

a private central bank and those favoring a government institution.

The political business cycle refers to the phenomenon that just before elections, politicians enact ____ policies. After the elections, the bad effects of these policies (for example, ____) have to be counteracted with ____ policies.*

expansionary, a higher inflation rate; contractionary*

The ability of a central bank to set monetary policy instruments is _____, while the ability of a central bank to set goals of monetary policy is ____.*

instrument independence; goal independence*

The theory of bureaucratic behavior when applied to the Fed helps to explain why the Fed...*

is so secretive about the conduct of future monetary policy.*

The European System of Central Banks (ESCB) is similar to the Federal Reserve System in that:

it is structured such that the central banks for each country have a similar role to that of the Federal banks.

Critics of Fed independence argue that:

it is undemocratic to have monetary policy controlled by an elite group responsible to no one.

Which legislation enacted in 1998 granted the Bank of Japan new powers and greater autonomy, its critics contend that:

its independence is limited by the Ministry of Finance's veto power over part of the Bank's budget.

While legislation enacted in 1998 granted the Bank of Japan new powers and greater autonomy, its critics contend that:

its independence is limited by the Ministry of Finance's veto power over part of the Bank's budget.

The theory of bureaucratic behavior suggests that the objective of a bureaucracy is to maximize:

its own welfare.

In England, the Chancellor of the Exchequer (the equivalent of the US Secretary of Treasury) sets the goal of monetary policy, a target for inflation. Thus, when compared to the Fed, the Bank of England has:

less goal independence

The European Central Bank (ECB) has complete control over the monetary policy in eleven euro countries and has a charter that cannot be changed by legislation. In comparison to the Federal Reserve System the ECB is:

more independent.

Members of Congress are able to influence monetary policy, albeit indirectly, through their ability to..*

propose legislation that would force the Fed to submit budget requests to Congress, as must other government agencies.*

The president of the U.S. can exert influence over the Federal Reserve in all of the following ways except:

reducing the Fed's net earnings.

The Federal Open Market Committee consists of the...*

seven members of the Board of governors and five presidents of the regional Fed banks.*

Eliminating the Fed's independence might lead to a more pronounced political business cycle because a politically exposed Fed would be more concerned with:

short-run objectives and thus be more likely to engage in expansionary policies designed to lower unemployment and interest rates before an election.

A dilemma challenging the existing structure of the European Central Bank (ECB) has been brought on by:

the possibility if expanding the membership in the Euro system.

The public interest view of central bank behavior suggests that the objective of a bureaucracy is to maximize:

the public's welfare.

When the charter of the Second Bank of the United States expired in 1836:

there was no lender of last resort to provide reserves to the banking system.

The primary reason for the creation of the Federal Reserve System was:

to reduce or eliminate future bank panics.