46) The theory of bureaucratic behavior suggests that the Federal Reserve will
A) try to avoid a conflict with the president and Congress over increases in interest rates.
B) try to gain regulatory power over more banks.
C) devise clever strategies in an effort to avoid blame for poor economic performance.
D) do all of the above.
47) According to the theory of bureaucratic behavior, the objective of bureaucracy is
A) to maximize its own welfare, meaning that it seeks additional power and prestige.
B) to maximize consumers’ surplus, meaning that it seeks additional regulatory powers.
C) to protect the industry it regulates, meaning that it seeks additional regulatory powers.
D) none of the above.
48) According to the theory of bureaucratic behavior,
A) the objective of a bureaucracy is to maximize its own welfare, meaning that it seeks
additional power and prestige.
B) the bureaucracy will fight vigorously to preserve its autonomy; thus, it will attempt to avoid
conflict with the president and Congress.
C) the bureaucracy will support legislation that gives it additional regulatory power.
D) all of the above describe bureaucratic behavior.
49) The theory of bureaucratic behavior when applied to the Fed helps to explain why the Fed
A) resists so vigorously congressional attempts to limit the central bank’s autonomy.
B) is secretive about the conduct of future monetary policy.
C) sought less control over banks in the 1980s.
D) all of the above.
E) only A and B of the above.
50) The theory of bureaucratic behavior when applied to the Fed helps to explain why the Fed
A) is supportive of congressional attempts to limit the central bank’s autonomy.
B) is secretive about the conduct of future monetary policy.
C) sought less control over banks in the 1980s.
D) is willing to take on powerful groups that may threaten its autonomy.
51) The strongest argument for an independent Federal Reserve rests on the view that subjecting
the Fed to more political pressures would impart
A) an inflationary bias to monetary policy.
B) a deflationary bias to monetary policy.
C) a disinflationary bias to monetary policy.
D) a countercyclical bias to monetary policy.
52) Politicians in a democratic society may be shortsighted because of their desire to win
reelection; thus, the political process can
A) impart an inflationary bias to monetary policy.
B) impart a deflationary bias to monetary policy.
C) generate a political business cycle in which, just before an election, expansionary policies are
pursued to lower unemployment and interest rates.
D) cause both A and C of the above to occur.
53) The case for Federal Reserve independence includes the idea that
A) political pressure would impart an inflationary bias to monetary policy.
B) a politically insulated Fed would be more concerned with long-run objectives and thus be a
defender of a sound dollar and a stable price level.
C) a Federal Reserve under the control of Congress or the president might make the so-called
political business cycle more pronounced.
D) all of the above.
54) The case for Federal Reserve independence includes the idea that
A) a politically insulated Fed would be more concerned with long-run objectives and thus be a
defender of a sound dollar and a stable price level.
B) a Federal Reserve under the control of Congress or the president might make the so-called
political business cycle more pronounced.
C) the principal-agent problem is perhaps worse for the Fed than for congressmen since the
former does not answer to the voters on election day.
D) only A and B of the above.
55) The case for Federal Reserve independence does not include the idea that
A) political pressure would impart an inflationary bias to monetary policy.
B) a politically insulated Fed would be more concerned with long-run objectives and thus be a
defender of a sound dollar and a stable price level.
C) policy is always performed better by an elite group such as the Fed.
D) a Federal Reserve under the control of Congress or the president might make the so-called
political business cycle more pronounced.
56) The case for Federal Reserve independence does not include the idea that
A) political pressure would impart an inflationary bias to monetary policy.
B) the principal-agent problem is perhaps worse for the Fed than for congressmen since the
former does not answer to the voters on election day.
C) a politically insulated Fed would be more concerned with long-run objectives and thus be a
defender of a sound dollar and a stable price level.
D) a Federal Reserve under the control of Congress or the president might make the so-called
political business cycle more pronounced.
57) Advocates of Fed independence fear that subjecting the Fed to direct presidential or
congressional control would
A) impart an inflationary bias to monetary policy.
B) force monetary authorities to sacrifice the long-run objective of price stability.
C) make the so-called political business cycle even more pronounced.
D) do all of the above.
E) do only A and B of the above.
58) Advocates of Fed independence fear that subjecting the Fed to direct presidential or
congressional control would
A) impart an inflationary bias to monetary policy.
B) force monetary authorities to sacrifice the long-run objective of price stability.
C) make the so-called political business cycle less pronounced.
D) do all of the above.
E) do only A and B of the above.
59) Supporters of the current system of Fed independence believe that a less autonomous Fed
would
A) adopt a long-run bias toward policymaking.
B) pursue overly expansionary monetary policies.
C) be more likely to create a political business cycle.
D) do only B and C of the above.
60) Critics of the current system of Fed independence contend that
A) the current system is undemocratic.
B) voters have too much say about monetary policy.
C) the president has too much control over monetary policy on a day-to-day basis.
D) all of the above are true.
61) Critics of Fed independence argue
A) that it is undemocratic to have monetary policy controlled by an elite group responsible to no
one.
B) that an independent Fed conducts monetary policy with a consistent inflationary bias.
C) that the Fed, since it does not face a binding budget constraint, spends too much of its
earnings.
D) only A and B of the above.
62) Critics of Fed independence argue
A) that it is undemocratic to have monetary policy controlled by an elite group responsible to no
one.
B) that independence seemingly does little to guarantee good monetary policy.
C) that its independence may encourage the Fed to pursue a course of narrow self-interest rather
than the public interest.
D) all of the above.
63) Instrument independence means the central bank is free from
A) political pressure regarding how it uses the tools of monetary policy.
B) political pressure regarding the goals it pursues.
C) both A and B of the above.
D) neither A nor B of the above.
64) Suppose legislation requiring the Fed to keep the inflation rate between 1.5% and 2.5% per
year is passed by Congress. This law restricts the Fed’s
A) instrument independence.
B) goal independence.
C) both A and B of the above.
D) neither A nor B of the above.
65) Cross-country evidence suggests that an increase in central bank independence results in a
________ inflation rate and ________ unemployment.
A) lower; higher
B) lower; no worse
C) higher; lower
D) higher; higher
66) The Board of Governors of the Federal Reserve System
A) appoint three directors to each Federal Reserve Bank.
B) elect six members to member commercial banks.
C) both of the above.
D) none of the above.
67) The Federal Advisory Council has ________ member(s) from each district.
A) one
B) two
C) three
D) can have any number of
68) The three largest Federal Reserve banks in terms of assets are those of New York, Chicago,
and
A) Atlanta.
B) Los Angeles.
C) Baltimore.
D) San Francisco.
69) The directors of a district bank are classified into three categories: A, B, and C. The three B
directors are
A) professional bankers.
B) prominent leaders from industry, labor, agriculture, or the consumer sector.
C) elected by the board of governors to represent the public interest.
D) all of the above.
70) The 12 Federal Reserve banks are involved in monetary policy in which of the following
ways?
A) Their directors establish the discount rate.
B) They decide which banks can obtain discount loans from the Federal Reserve Bank.
C) Their directors select one commercial banker from each bank’s district to serve on the Federal
Advisory Council.
D) all of the above.
71) The ________ of the Board of Governors is the spokesperson for the Fed.
A) chairman
B) president
C) either of the above can be the spokesperson
D) neither of the above
72) Currently, there are ________ countries that are members of the European Monetary Union.
A) 10
B) 17
C) 15
9.2 True/False
1) The unusual structure of the Federal Reserve System is best explained by Americans’ fear of
centralized power.
2) Rapid money supply growth and uncontrollable inflation were among the factors which
motivated the creation of the Federal Reserve System.
3) The Washington, D.C. Fed bank, with over 30 percent of the system’s assets, is the most
important Federal Reserve Bank.
4) The FOMC is an element of the Federal Reserve System.
5) All nationally chartered banks are required to be members of the Fed.
6) Each member of the seven-member Board is appointed by the president and confirmed by the
Senate to serve 14-year terms.
7) The Board of Governors sets reserve requirements.
8) Monetary policy is set by the Board of Governors.
9) Federal Reserve monetary policy decisions must be approved by the Secretary of the Treasury
before they may be implemented.
10) The FOMC issues directives to the trading desk at the New York Fed.
11) Critics of the current system of Fed independence contend that the president has too much
control over monetary policy on a day-to-day basis.
12) Countries with more independent central banks have lower inflation rates, but these have
come at the expense of greater output fluctuations.
13) Announcing the FOMC’s policy decision immediately after the FOMC meeting is an
example of how Fed policymaking has become more transparent.
14) The Fed has goal independence but not instrument independence.
15) The Federal Reserve banks act as liaisons between the business community and the Federal
Reserve System.
16) The FOMC does not actually carry out securities purchases or sales.
17) In the ECB, the Governing Council has the right to vote, and this right is taken very
seriously, with all important matters decided by a majority vote.
1) Former Congressman Jack Kemp reportedly once said that he wanted to become the most
powerful man in Washington, D.C.—the chairman of the Board of Governors of the Federal
Reserve System. What does Representative Kemp’s comment imply about the power of the
chairman of the Federal Reserve? Do you think he may have been exaggerating? Explain.
2) Former Board of Governors chairman Paul Volcker reportedly once said that the Federal
Reserve is free to pursue any policy it desires, as long as it convinces Congress that such a policy
is reasonable. What does Volcker’s comment suggest about the independence of the Fed?
Explain.
3) What are the factors that promote the independence of the Federal Reserve?
4) What factors limit the independence of the Federal Reserve?
5) What are the arguments for and against an independent Fed?
6) What is the theory of bureaucratic behavior? What types of behavior does it predict the Fed
might undertake?
7) In recent years, has Fed policymaking become more or less transparent? Why?
8) Describe the structure and responsibility for policy tools in The Federal Reserve System.
9) Discuss similarities and differences between Ben Bernanke and Alan Greenspan in their
respective roles as chairman of the Federal Reserve Board.
10) How did the current Federal Reserve System evolve? What aspects of the American
experience with a central bank were important in shaping the current structure of the Fed?
11) Describe similarities and differences between the ECB and the US Fed.
12) Are central banks in other nations moving toward more or less independence? Why?