Chapter 16 – The Structure of Central Banks: The Federal Reserve and the European Central Bank
102. The Federal Reserve is the U.S. government’s bank. Identify the functions the Fed
performs in this role.
103. Why is it technically incorrect to say that the board of directors of the regional Fed banks
set the discount rate that each bank charges?
Chapter 16 – The Structure of Central Banks: The Federal Reserve and the European Central Bank
104. Why can’t two Governors of the Fed come from the same district and does this limitation
make sense today?
105. Who makes up the voting members of the Federal Reserve’s Open Market Committee?
106. In what ways do the regional Federal Reserve Banks influence monetary policy?
Chapter 16 – The Structure of Central Banks: The Federal Reserve and the European Central Bank
107. If it is the real rate of interest that savers and borrowers respond to, how does the Fed
impact a real rate by targeting a nominal rate of interest?
108. Why can it be argued that, while interest rate decisions are made by the FOMC, a
committee, the real power of the committee lies with the Chairman of the Federal Reserve
System?
Chapter 16 – The Structure of Central Banks: The Federal Reserve and the European Central Bank
109. What are the three criteria that are used to judge a central bank’s independence and how
does the Fed stack up to each of these criteria?
The three criteria selected by the author include budgetary independence, irreversible
110. Given the democratic political structure of the United States, make an argument against
the independence granted the Federal Reserve.
Chapter 16 – The Structure of Central Banks: The Federal Reserve and the European Central Bank
111. In the mid 1930s, the Federal Reserve became more independent from political pressure.
What significant changes occurred then to increase the Fed’s independence?
112. Chapter 15 laid out the criteria for an effective central bank. Two of these criteria
focused on accountability and transparency. How accountability is achieved for the Federal
Reserve and is it clear?
Chapter 16 – The Structure of Central Banks: The Federal Reserve and the European Central Bank
113. Identify an advantage and a disadvantage of requiring the Fed to state an explicit
numerical target for inflation.
114. Respond to the following statement with a brief explanation: “The Federal Reserve can
improve the operating performance of the stock market but it cannot prevent a stock market
crash.”
Chapter 16 – The Structure of Central Banks: The Federal Reserve and the European Central Bank
115. Considering the three branches that make up the Federal Reserve System, identify the
corresponding branches that make up the Euro system. Be sure to state which part of the Euro
system corresponds to which part of the Federal Reserve System.
116. There are several important differences between the Fed and the European Central Bank
(ECB). What are they?
Chapter 16 – The Structure of Central Banks: The Federal Reserve and the European Central Bank
117. What is the difference between the European System of Central Banks and the Euro
system?
118. Explain why the decision to join the Euro system presents serious domestic monetary
policy issues.
Chapter 16 – The Structure of Central Banks: The Federal Reserve and the European Central Bank
119. What argument can you offer to justify the policy prohibiting formal voting during the
Euro systems Governing Council meetings?
120. In terms of transparency and communications, what are the significant differences
regarding the information that is made available immediately after the meetings of the FOMC
and the Euro system’s Governing Council?
Chapter 16 – The Structure of Central Banks: The Federal Reserve and the European Central Bank
121. In terms of the decisions coming from the Euro system’s Governing Council, explain
why, at times, relatively small countries may be at a distinct disadvantage in terms of
monetary policy targets but perhaps have undue influence in terms of the actual policies.
122. If the current number of participating countries in the Euro system is thirteen and the
number of large countries is three (Germany, France and Italy), are policies likely to favor
small or large countries? Explain.
Chapter 16 – The Structure of Central Banks: The Federal Reserve and the European Central Bank
123. How does the no bail-out rule governing the European Central Bank create the potential
for moral hazard?
Essay Questions
124. The text mentioned that the twelve regional Federal Reserve Banks are
disproportionately distributed throughout the country for a variety of reasons. Why do you
suppose the Federal Reserve has not corrected this problem over the years?
125. Explain how a regulation requiring banks to keep a given percentage of deposits in a
non-interest bearing account at the Fed is really a tax on banks.
126. Discuss whether a large private organization could function in the role of a lender of last
resort, and if it could, what potential problem(s) might arise.
Chapter 16 – The Structure of Central Banks: The Federal Reserve and the European Central Bank
127. The system of government in the U.S. has historically been one of checks and balances.
Provide examples of these checks and balances as they pertain to the Board of Governors of
the Federal Reserve and their relationship to the executive and legislative branches of
government.
Chapter 16 – The Structure of Central Banks: The Federal Reserve and the European Central Bank
128. From a political view, explain why it may be advantageous for elected officials to have
an independent Fed.