Chapter 13
ANSWERS TO QUESTIONS
1. Why was the Federal Reserve System set up with twelve regional Federal Reserve Banks,
rather than one central bank as in other countries?
2. Why is the Twelfth Federal Reserve district (San Francisco) so geographically large, while the
Second Federal Reserve district (New York) is so small by comparison?
3. Should the Federal Reserve redraw its district boundaries, similar to the manner in which
congressional districts are periodically realigned? Why or why not?
4. “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.
5. Which entities in the Federal Reserve System control the discount rate? Reserve requirements?
Open market operations?
6. In what ways can the regional Federal Reserve Banks influence the conduct of monetary
policy?
7. Why is it important for the regional Federal Reserve Bank presidents to attend the FOMC
meetings, even if they are nonvoting members?
8. Why is the New York Federal Reserve always a voting member of the FOMC?
The New York Fed plays an extremely important role in the functioning of the Federal
9. 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? Why or why not?
10. Do you think that the fourteen-year, nonrenewable terms for governors effectively insulate
the Board of Governors from political pressure?
11. Despite the important role played by the Board of Governors in setting monetary policy,
seats to serve on the Board of Governors can sometimes be empty for several years. How
might this happen?
12. How is the president of the United States able to exert influence over the Federal Reserve?
13. Why is it unlikely that the policy recommendation put forth by the chair of the Board of
Governors would ever be voted down by the rest of the FOMC?
14. In what way does the Federal Reserve have a high degree of instrument independence? If it
has a specific mandate from Congress to achieve “maximum employment and low, stable
prices,” then how does the Fed have goal independence?
15. 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?
16. What is the primary tool that Congress uses to exercise some control over the Fed?
17. Should the Federal Reserve be subject to periodic auditing of its policies, procedures, and
finances? Why or why not?
18. In the 1960s and 1970s, the Federal Reserve System lost member banks at a rapid rate. How
can the theory of bureaucratic behavior explain the Fed’s campaign for legislation to require
all commercial banks to become members? Was the Fed successful in this campaign?
19. “The theory of bureaucratic behavior indicates that the Fed never operates in the public
interest.” Is this statement true, false, or uncertain? Explain your answer.
20. Why might eliminating the Fed’s independence lead to a more pronounced political business
cycle?
21. “The independence of the Fed leaves it completely unaccountable for its actions.” Is this
22. “The independence of the Fed means that it takes the long view and not the short view.” Is
this statement true, false, or uncertain? Explain your answer.
23. The Fed promotes secrecy by not releasing the minutes of FOMC meetings to Congress or the
public immediately. Discuss the arguments for and against this policy.
24. Which is more independent, the Federal Reserve or the European Central Bank? Why?
25. Why did the Bank of England up until 1997 have a low degree of independence?
ANSWERS TO DATA ANALYSIS PROBLEMS
1. Go to the St. Louis Federal Reserve FRED database, and find data on the unemployment rate
(D3URN), . . . , (D12URN). For the most recent month of data available, determine which
district had the highest, and which had the lowest, unemployment rate.
2. Go to the St. Louis Federal Reserve FRED database, and find data on the federal funds rate
target (DFEDTAR, DFEDTARU, and DFEDTARL) and the discount, or primary credit rate
(DPCREDIT). When was the last time the federal funds rate target was changed? When was
the last time the primary credit rate was changed? Did the rates increase or decrease?