Mishkin • Instructor’s Manual for The Economics of Money, Banking, and Financial Markets, Twelfth Edition 152
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?
When the Federal Reserve districts were created in 1913, the districts were drawn up to reflect
3. Should the Federal Reserve redraw its district boundaries, similar to the manner in which
congressional districts are periodically realigned? Why or why not?
In theory it sounds sensible to redraw the districts to reflect the larger economic interests and
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.
True. Like the U.S. Constitution, the Federal Reserve System, originally established by the
Federal Reserve Act, has many checks and balances and is a peculiarly American institution.
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
Reserve and monetary policy. Its district contains many of the largest commercial banks in the
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?
Some may argue that the presidents of the regional Federal Reserve banks should be
nominated and go through the same formal process as those on the Board of Governors, to
10. Do you think that the fourteen-year, nonrenewable terms for governors effectively insulate
the Board of Governors from political pressure?
The 14-year terms do not completely insulate the governors from political influence. The
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?
Since members on the Board of Governors must be appointed by the president and confirmed
by the Senate, the political process involved with empty seats being filled can sometimes be
12. How is the president of the United States able to exert influence over the Federal Reserve?
The president can influence the Fed in several ways. For one, the president can influence
Congress, which has in the past threatened legislation to reduce independence of the Fed in
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?
Even though each person on the FOMC gets one vote, the policy deliberations will
undoubtedly reflect the preferences of the chairman. For one, the Chair is the face of
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?
It has a high degree of instrument independence in the sense that it can choose any method it
wants in order to achieve a given set of policy objectives. This has taken the form of adjusting
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?
The theory of bureaucratic behavior indicates that the Fed will want to acquire as much
power as possible by requiring all banks to become members. Although the Fed did not
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
statement true, false, or uncertain? Explain your answer.
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.
The argument for not releasing the FOMC minutes immediately is that it keeps Congress off
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?
Prior to 1997, the Bank of England had very little independence, since interest rate policy
ANSWERS TO DATA ANALYSIS PROBLEMS
1. Go to the St. Louis Federal Reserve FRED database and find data on the unemployment rate
in the following states: Kentucky (KYUR), North Dakota (NDUR), Alaska (AKUR), New York
(NYUR), Alabama (ALUR), Texas (TXUR), and the national unemployment rate (UNRATE)
a. For the most recent month of data available, determine which of those states had the
highest, and which had the lowest, unemployment rate; how do these compare to the
national average?
For May 2017, the unemployment rates for the states are listed from highest to lowest:
b. Given your answer to part (a), what does this say about the need for all twelve Federal
Reserve district presidents to participate in the FOMC meetings?
Given the wide variability in unemployment rates in this group of states, it makes sense
that all regional presidents participate in the FOMC discussions, so that the voting
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?
As of July 12, 2017, the last time the federal funds rate target was adjusted was at its