Money and Banking Chapter 13
(pic 1) Each Federal Reserve district has____ main Federal Reserve bank/banks.
One
The Federal Reserve Bank of New York holds ___ of the assets of the Federal Reserve System.
One-Quarter
Which of the following entities in the Federal Reserve System controls the discount rate?
The Board of Governors
Which of the following entities in the Federal Reserve System sets reserve requirements?
The Board of Governors
Which of the following entities in the Federal Reserve System directs open market operations ?
The FOMC
'The independence of the Fed leaves it completely unaccountable for its actions.' Why is this statement not true?
The Fed has to report to Congress on a semiannual basis to explain its actions & The president can appoint a new chairman of the Board of Governors every four years & The legislation that structures the Fed is written by Congress and is subject to change
If the Federal Reserve has a specific mandate from Congress to achieve "maximum employment and low, stable prices," then how does the Fed have goal independence?
The Fed is free to interpret exactly what these objectives mean.
How does the Federal Reserve have a high degree of instrument independence?
The Federal Reserve can choose any method it wants in order to achieve a given set of policy objectives.
The first central bank in the United States was
The First Bank of the United States
The interest rate on overnight loans from one bank to another is the
federal funds rate
The many regional Federal Reserve banks resulted from a compromise between parties favoring
A private central bank and those favoring a government institution.
The Federal Reserve System was established in 1913. Why?
Because the public became convinced a central bank was needed to avoid bank panics
Who is responsible "determines margin requirements"
Board of Governors
Reserve requirements are set by the __________ and advised upon by the __________.
Board of Governors; FOMC
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?
By attending meetings, nonvoting members can participate in deliberations and discussions of the FOMC.
In what ways can the regional Federal Reserve Banks influence the conduct of monetary policy?
By having members serve on the Federal Advisory Council & By having five of their presidents sit on the FOMC & Through their administration of the discount facilities at each bank.
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
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.
The European Central Bank (ECB) has complete control over monetary policy in eleven euro countries and has a charter that cannot be changed by legislation. In comparison to the Federal Reserve System
More independent.
The largest Federal Reserve bank in terms of assets is that of _____
New York
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.
___are the most important policy tool the Fed has for controlling the money supply.
Open market operations
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.
The following are the three reseach documents that play an important role in the monetary policy process and at Federal Open Market Committee
The three research documents that play a vital role in the monetary process as well as at Federal Open Market Committee meetings are the "green book," "blue book," and "beige book."
Why was the Federal Reserve System set up with twelve regional Federal Reserve banks rather than one central bank, 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.
(pic 1) Referring to the figure about the Federal Reserve System above, we find that
There are 12 federal reserve bank cities.
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
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
The Fed is the most independent of all US 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
The primary reason for the creation of the Federal Reserve System was:
To reduce or eliminate future bank panics.
The Fed's personnel are not directly affected by the outcome of the next election; therefore, it has some level of independence: (T or F)
True
The Fed's personnel are not directly affected by the outcome of the next The members of the board generally cannot be reappointed to their position; they do not need to do favours in order to keep their job in the future. (T or F)
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 interests 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 Board of Governors of the Federal Reserve System:
establishes, within limits, reserve requirements & effectively sets the discount rate & sets margin requirements.
The ability of the central bank to set the goals of monetary policy is known as
goal independence
The Bank of Japan
has a single goal: price stability.
Advocates of Fed independence fear that subjecting the Fed to direct presidential or congressional control would:
impart an inflationary bias to monetary policy. & force monetary authorities to sacrifice the long-run objective of price stability.
In recent years, the tendency for central banks has been to:
increase independence
___indicates that the bureaucracy is only concerned about maximizing its own welfare.
indicates that the bureaucracy is only concerned about maximizing its own welfare.
The ability of the central bank to set reserve requirements is an example of
instrument independence.
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 principal-agent problem
is greater for politicians than for an independent central bank.
The theory of bureaucratic behaviour when applied to the Fed helps to explain why the Fed:
is so secretive about the conduct of future monetary policy
The theory of bureaucratic behavior may help explain why the Fed
is sometimes slow to increase interest rates.
____is the idea that bureaucracies are concerned with the welfare of the population-at-large.
is the idea that bureaucracies are concerned with the welfare of the population-at-large.
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 Reserve banks.
The New York Federal Reserve Bank is so important to the Federal Reserve System because of the following except that
it serves as the location for Federal Reserve board meetings.
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.
The Bank of Canada is
less instrument independent than the Federal Reserve on paper and less goal independent than the Federal Reserve.
Critics of Fed independence argue that:
t is undemocratic to have monetary policy controlled by an elite group responsible to no one
Monetary policy is determined by
the Federal Open Market Committee
A dilemma challenging the existing structure of the European Central Bank (ECB) has been brought on by:
the possibility of expanding the membership in the Eurosystem
The Federal Open Market Committee is comprised of
the seven members of the Board of Governors plus five of the twelve Federal Reserve Bank presidents
The public interest view of central bank behavior suggests that the objective of a bureaucracy is to maximize:
the public's welfare.
The theory of bureaucratic behavior suggests that the Federal Reserve will
try to gain regulatory power over more banks. & devise clever strategies in an effort to avoid blame for poor economic performance. & try to avoid a conflict with the president and Congress over increases in interest rates.
The president of the United States can exert influence over the Federal Reserve in all of the following ways except:
A. reducing the Fed's net earnings. Your answer is correct. B. influencing congressional decisions that might reduce the independence of the Fed. C. appointing a new chairman to the Board of Governors. D. appointing new members to the Board of Governor (A)
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 encourages the Fed to be less accountable for its actions: (Pro or Con)
Con
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 reduces transparency because people cannot figure out what the goal of the Fed is: (Pro or Con)
Con
The Fed's personnel are not directly affected by the outcome of the next The Fed can still be influenced by political pressure: (T or F)
False
The Fed's personnel are not directly affected by the outcome of the next The Fed's lack of accountability may make the Fed more irresponsible: (T or F)
False
Who meets eight times a year
Federal Open Market Committee
Who is responsible for clearing checks
Federal Reserve banks
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: (Pro or Con)
Pro
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 should reduce inflationary pressures and political business cycles: (Pro or Con)
Pro
Which of the following functions is not performed by any of the 12 regional Federal Reserve banks?
Setting interest rates payable on time deposits
Which of the following functions is not performed by the twelve Federal Reserve Banks?
Setting the reserve requirement.
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 is more independent, the Federal Reserve or the European Central Bank? Why?
The European Central Banklong dash—Its charter cannot be changed through legislation, making it more independent than the Federal Reserve.
Which of the following statements is true?
The Eurosystem is the most independent central bank in the world & The long-term goal of the European Central Bank (ECB) is price stability, which means that the goal for the Eurosystem is more clearly specified than it is for the Federal Reserve System & The Eurosystem's charter cannot be changed by legislation; it can be changed only by revision of the Maastricht Treaty
The Board of Governors is not involved in which of the following activities?
approval of bank loans
Among the research documents, the only book that is given to the public is the
beige book
(pic 2) The graph on the right shows a relationship between a measure of central bank independence and macroeconomic performance for 17 countries. On the horizontal axis is an index of central bank independence. The 17 central banks are rated from 1 (least independent) to 4 (most independent.). On the vertical axis is the average annual inflation rate measured over the years 1980dash-1988. Based on this graph, one would conclude that central bank independence and inflation are:
negatively related; countries with low ratings have generally produced higher inflation
Increasing the independence of a central bank would probably:
reduce pressures to pursue inflationary policies & hinder the coordination of monetary and fiscal policy & allow the central bank to more easily pursue monetary policies that directly oppose the government's fiscal policies
Although neither _____ nor the _____ is officially set by the Federal Open Market Committee, decisions concerning these policy tools are effectively made by the committee.
reserve requirements; discount rate
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