Chapter 13: Central Banks and the Federal Reserve System

Question 1

What does the Central banks affect?

Answer 1

interest rates, the amount of credit available, and the money supply

Question 2

how many districts are there for the Federal Reserve

Answer 2

12

Question 3

what are the three largest Federal Reserve Banks?

Answer 3

San Franciso, New York, Chicago

Question 4

Is the Federal Reserve private or public?

Answer 4

both, it is owned by private commercial banks and by the government

Question 5

member banks

Answer 5

commercial/national banks that are members of the Federal Reserve System

Question 6

How many directors does each Federal Reserve bank have and who appoints them?

Answer 6

each district has 9
- 6 appointed by member banks
- 3 appointed by Board of Governors

Question 7

classification of directors and what they mean

Answer 7

3 A directors - elected by member banks, professional bankers
3 B directors - elected by member banks, prominent leaders from industry
3 C directors - elected by Board of Governors to represent public interest

Question 8

Which banks are required and not required to be members of the Federal Reserve System?

Answer 8

• all national banks are required to be members of the Federal Reserve System
• Commerical banks charted by the states are not required to be members

Question 9

Board of Governors

Answer 9

the head of the Federal Reserve System that is made up of seven members
- usually professional economists
- required to come from different districts

Question 10

Who appoints the governors?

Answer 10

Each is appointed by the president of the US and confirmed by the Senate

Question 11

How long do the governors serve?

Answer 11

one full nonrenewable 14-year term plus part of another term
- one governor’s term expires every other January

Question 12

the chair of the Board of Governors

Answer 12

chosen from among the seven governors

Question 13

how long does the chair of the Board of Governors serve?

Answer 13

4 years (renewable)

Question 14

Federal Open Market Committee (FOMC)

Answer 14

meets eight times a year (about every six weeks) and makes decisions regarding the conduct of open market operations, setting the policy of interest rate, the federal funds rate, and the setting of the interest rate paid on reserves
- also called the Fed

Question 15

Who makes up the FOMC?

Answer 15

• 7 members of the Board of Governors
• president of the Federal Reserve Bank of New York
• the presidents of four other Federal Reserve Banks

Question 16

Who is the chair of the FOMC?

Answer 16

the chair of the Board of Governors

Question 17

tighening of monetary policy

Answer 17

a rise in the federal funds rate and the interest rate paid on reserves

Question 18

easing of monetary policy

Answer 18

a lowering of the federal funds rate and the interest paid on reserves

Question 19

what are the two types of independence of central banks?

Answer 19

instrument independence and goal independence

Question 20

instrument independence

Answer 20

the ability of the central banks to set monetary policy instruments

Question 21

goal independence

Answer 21

the ability of the central bank to set the goals of monetary policy

Question 22

Who threatens the Federal Reserve’s independence?

Answer 22

Congress

Question 23

The case of leaving the Federal Reserve independent

Answer 23

subjecting it to more political pressure would impart an inflationary bias to monetary policy
- leads to political business cycle
- An independent Fed is better able to resist this pressure from the Treasury
- the control of monetary policy is too important to be left of politicians
- An independent Fed can pursue policies that are politically unpopular yet ultimately in the public interest

Question 24

political business cycle

Answer 24

just before an election, expansionary policies are pursued to lower unemployment and interest rates
After the election, high inflation and high interest rates

Question 25

The case against the Federal Reserve’s independence

Answer 25

• undemocratic to have monetary policy, controlled by an elite group responsible to no one
• lack of accountability
• Only by placing monetary policy under the control of the politicians
  who also control fiscal policy can these two policies be prevented from working at cross-purposes
• an independent Fed has not always used its freedom successfully

Question 26

theory of bureaucratic behavior

Answer 26

the objective of a bureacracy is to maximize personal welfare which is realted to its power and prestige

Question 27

Dove

Answer 27

• Want low ST interest rates
• focus on economy/flow/main street (factories, business)

Question 28

Hawk

Answer 28

• Want high ST interest rates
• focus on capital/stock/Wall Street (finance)

Question 29

What are the beliefs of Doves?

Answer 29

• believes slack exists in labor market and capital stock so keep rates lower for longer
• Discretion is needed b/c “This time is different”
• risk losing inflation-fighting credibility
• supports pro-growth agenda
• pro Fed independence
• steeper yield curve

Question 30

What are the beliefs of Hawks?

Answer 30

• believes Fed is behind the inflation curve so act preemptively to prevent economy overheating (if increase in AD > increase in AS then Change P/P > 2% target )
• Fed should follow “Rule-based policy”
• reinforce inflation-fighting credibility
• counter pro-growth agenda
• Congress reviews monetary policy decisions
• flatter yield curve

Question 31

four players in the money supply process

Answer 31

1. Central Bank
2. Banks
3. Depositors
   4 Borrowers from banks

Question 32

Reserves

Answer 32

• vault cash + deposits at Fed Res
• Required Reserves + excess reserves

Question 33

monetary liabilities

Answer 33

currency and reserves in Fed. Res

Question 34

monetary base

Answer 34

Currency + Reserves

Question 35

How are the Regional Federal Reserve Banks involved in the conduct of monetary policy?

Answer 35

• establish discount rate, decide who can obtain the loan, and administer them
• clearing checks
• 5 of the bank presidents are in FOMC
• issue new currency and withdrawal damaged currency
• evaluate mergers
• act as liaisons between the business community and the Fed
• examine bank holding companies and state-chartered member banks
• collect data on local business conditions
• use staff to research topics related to the conduct of monetary policy

Question 36

How are the Board of Governors involved in the conduct of monetary policy?

Answer 36

• in FOMC
• set reserve requirements
• set interest rates on reserves
• controls fixed amount by which the discount rate exceeds the fed funds rate target
• the chair of the Board advises the president of the US, speaks to Congress and the media
• sets margin requirements
• sets salary pf president and officers of each Federal Reserve Bank
• approves bank mergers and applications for new activities
• hires staff to provide economic analysis

Question 37

How are the FOMC involved in the conduct of monetary policy?

Answer 37

• set feds fund rate
• oversees open market operations