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Structure of Central Banks and the Federal Reserve

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					Chapter 6 Structure of Central Banks and the Federal Reserve System                        5) The financial panic of 1907 resulted in such widespread bank failures and
                                                                                              substantial losses to depositors that the American public finally became convinced
                                                                                              that
6.1 Multiple Choice Questions                                                                 A) the First Bank of the United States had failed to serve as a lender of last resort.
                                                                                              B) the Second Bank of the United States had failed to serve as a lender of last
1) Americans’ fear of centralized power and their distrust of moneyed interests                    resort.
   explains why the U.S. did not have a central bank until the                                C) the Federal Reserve System had failed to serve as a lender of last resort.
   A) 17th century.                                                                           D) a central bank was needed to prevent future panics.
   B) 18th century.                                                                           Answer: D
   C) 19th century.
                                                                                           6) Nationwide financial panics in 1873, 1884, 1893, and 1907 might have been
   D) 20th century.                                                                           avoided had
   Answer: D                                                                                  A) the First Bank of the United States served its intended role of lender of last resort.
2) Bank panics in 1819, 1837, 1857, 1873, 1884, 1893, and 1907 convinced many that            B) the Second Bank of the United States served its intended role of lender of last resort.
   A) the Federal Reserve needed greater control over the banking system.                     C) the Second Bank of the United States not been abolished in 1836 by President
   B) the Federal Reserve needed greater authority to deal with problem banks.                     Andrew Jackson.
   C) a central bank was needed to prevent future financial panics.                           D) the Federal Reserve served its intended role of lender of last resort.
   D) both (A) and (B) of the above.                                                          Answer: C
   Answer: C                                                                               7) The many regional Federal Reserve banks resulted from a compromise between
                                                                                              parties favoring
3) The unusual structure of the Federal Reserve System is perhaps best explained by
                                                                                              A) establishment of a central bank and those opposed to its establishment.
   A) Americans’ fear of centralized power.
                                                                                              B) a private central bank and those favoring a government institution.
   B) the traditional American distrust of moneyed interests.
                                                                                              C) establishment of the Board of Governors in Washington, D.C. and those
   C) Americans’ desire to remove control of the money supply from the U.S.
                                                                                                    preferring its establishment in New York City.
        Treasury.
                                                                                              D) none of the above.
   D) all of the above.
   E) only (A) and (B) of the above.                                                          Answer: B
   Answer: E                                                                               8) Which of the following is an element of the Federal Reserve System?
4) The traditional American distrust of moneyed interests and the fear of centralized         A) The Federal Reserve Banks
   power help to explain                                                                      B) The Board of Governors
   A) the failures of the first two experiments in central banking in the United States.      C) The FDIC
   B) the decentralized structure of the Federal Reserve System.                              D) All of the above
   C) why the Board of Governors of the Federal Reserve System is not located in              E) Only (A) and (B) of the above
        New York.                                                                             Answer: E
   D) all of the above.                                                                    9) Which of the following is an element of the Federal Reserve System?
   E) only (A) and (B) of the above.
                                                                                              A) The Federal Reserve Banks
   Answer: D                                                                                  B) The Board of Governors
                                                                                              C) The FOMC
                                                                                              D) All of the above
                                                                                              Answer: D




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10) Which of the following is not an entity of the Federal Reserve System?             15) Member commercial banks have purchased stock in their district Fed banks; the
    A) Federal Reserve Banks                                                               dividend paid by that stock is limited to
    B) The FDIC                                                                            A) four percent annually.
    C) The Board of Governors                                                              B) five percent annually.
    D) The Federal Advisory Council                                                        C) six percent annually.
    E) Member commercial banks                                                             D) eight percent annually.
    Answer: B                                                                              Answer: C

11) Which of the following functions are not performed by any of the twelve regional   16) All _____ are required to be members of the Fed.
    Federal Reserve Banks?                                                                 A) state chartered banks
    A) Check clearing                                                                      B) nationally chartered banks
    B) Conducting economic research                                                        C) banks with less than $100 million in assets
    C) Setting interest rates payable on time deposits                                     D) banks with less than $500 million in assets
    D) Issuing new currency                                                                Answer: B
    Answer: C
                                                                                       17) Which of the following banks are required to be members of the Federal Reserve
12) Which Federal Reserve Bank president always has a vote in the Federal Open             System?
    Market Committee?                                                                      A) state chartered banks
    A) Philadelphia                                                                        B) insured banks
    B) Boston                                                                              C) banks having over $500 million in assets
    C) San Francisco                                                                       D) none of the above
    D) New York                                                                            Answer: D
    Answer: D
                                                                                       18) Of all commercial banks,
13) Each Fed bank president attends FOMC meetings; although only _____ Fed bank            A) about 15 percent belong to the Federal Reserve System.
    presidents vote on policy, all _____ provide input.                                    B) about 20 percent belong to the Federal Reserve System.
    A) three; ten                                                                          C) about 30 percent belong to the Federal Reserve System.
    B) five; ten                                                                           D) about 50 percent belong to the Federal Reserve System.
    C) three; twelve                                                                       Answer: C
    D) five; twelve
    Answer: D                                                                          19) Banks subject to reserve requirements set by the Federal Reserve System include
                                                                                           A) only state chartered banks.
14) The _____ Fed bank, with about 25 percent of the system’s assets, is the most          B) only nationally chartered banks.
    important of the Federal Reserve Banks.                                                C) only banks with less than $100 million in assets.
    A) Chicago                                                                             D) only banks with less than $500 million in assets.
    B) Los Angeles                                                                         E) all banks whether or not they are members of the Federal Reserve System.
    C) Miami                                                                               Answer: E
    D) New York
    E) Washington, D.C.                                                                20) The Fed’s support of the Depository Institutions Deregulation and Monetary
    Answer: D                                                                              Control Act of 1980 stemmed in part from its
                                                                                           A) concern over declining Fed membership.
                                                                                           B) belief that all banking regulations should be eliminated.
                                                                                           C) belief that interest rate ceilings were too high.
                                                                                           D) belief that depositors had to become more knowledgeable of banking
                                                                                                operations.
                                                                                           Answer: A

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21) Which of the following are duties of the Board of Governors of the Federal Reserve     25) Each member of the seven-member Board of Governors is appointed by the
    System?                                                                                    president and confirmed by the Senate to serve
    A) Setting margin requirements, the fraction of the purchase price of the securities       A) 4-year terms.
         that has to be paid for with cash.                                                    B) 6-year terms.
    B) Setting the maximum interest rates payable on certain types of time deposits            C) 14-year terms.
         under Regulation Q.                                                                   D) as long as the appointing president remains in office.
    C) Regulating credit with the approval of the President under the Credit Control           Answer: C
         Act of 1969.
    D) None of the above has been a duty of the Board since the mid-1980s.                 26) The Board of Governors
    Answer: A                                                                                  A) establishes, within limits, reserve requirements.
                                                                                               B) effectively sets the discount rate.
22) Which of the following are not duties of the Board of Governors of the Federal             C) sets margin requirements.
    Reserve System?                                                                            D) does all of the above.
    A) Setting margin requirements, the fraction of the purchase price of the securities       E) does only (A) and (B) of the above.
        that has to be paid for with cash.
                                                                                               Answer: D
    B) Setting the maximum interest rates payable on certain types of time deposits
        under Regulation Q.                                                                27) Although neither _____ nor the _____ is officially set by the Federal Open Market
    C) Approving the discount rate “established” by the Federal Reserve banks.                 Committee, decisions concerning these policy tools are effectively made by the
    D) Representing the United States in negotiations with foreign governments on              committee.
        economic matters.                                                                      A) margin requirements; discount rate
    Answer: B                                                                                  B) margin requirements; federal funds rate
                                                                                               C) reserve requirements; discount rate
23) The chairman of the Board of Governors of the Federal Reserve System exercises a
                                                                                               D) reserve requirements; federal funds rate
    high degree of control over the Board
                                                                                               Answer: C
    A) through his ability to set the agenda of the Board and the FOMC.
    B) through his role as spokesman for the Fed with the President and before             28) Although the Federal Open Market Committee does not have formal authority to set
         Congress.                                                                             _____ and the _____, it does possess the authority in practice.
    C) because he can veto decisions made by a majority of the other board members.            A) margin requirements; discount rate
    D) because of all of the above.                                                            B) margin requirements; federal funds rate
    E) because of only (A) and (B) of the above.                                               C) reserve requirements; discount rate
    Answer: E                                                                                  D) reserve requirements; federal funds rate
                                                                                               Answer: C
24) Members of the Board of Governors are
    A) chosen by the Federal Reserve Bank presidents.                                      29) Which of the following are true statements?
    B) appointed by the newly elected President of the United States, as are cabinet           A) The FOMC usually meets every six weeks to set monetary policy.
        positions.                                                                             B) The FOMC issues directives to the trading desk at the New York Fed.
    C) appointed by the President of the United States and confirmed by the Senate as          C) Designers of the Federal Reserve Act did not envision the use of open market
        members resign.                                                                            operations as a monetary policy tool.
    D) never allowed to serve more than seven-year terms.                                      D) All of the above are true statements.
    Answer: C                                                                                  E) Only (A) and (B) of the above are true statements.
                                                                                               Answer: D




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30) The Federal Open Market Committee consists of                                      35) The designers of the Federal Reserve Act meant to create a central bank
    A) the five senior members of the seven-member Board of Governors.                     characterized by its
    B) the seven members of the Board of Governors and seven presidents of the             A) system of checks and balances and decentralization of power.
         regional Fed banks.                                                               B) strong concentration of power in the hands of a few men.
    C) the seven members of the Board of Governors and five presidents of the              C) inability to function as a lender-of-last-resort.
         regional Fed banks.                                                               D) responsiveness to the electorate.
    D) the twelve regional Fed bank presidents and the chairman of the Board of            Answer: A
         Governors.
    Answer: C                                                                          36) Which of the following are true statements?
                                                                                           A) The Banking Act of 1933 set in motion a series of changes that gave the Board
31) The Federal Reserve entity that determines monetary policy strategy is the                 of Governors more control over Fed operations.
    A) Board of Governors.                                                                 B) The FOMC issues directives to the trading desk at the New York Fed.
    B) chairman of the Board of Governors.                                                 C) Designers of the Federal Reserve Act did not envision the use of discount
    C) Federal Open Market Committee.                                                          lending as a monetary policy tool.
    D) Shadow Open Market Committee.                                                       D) All of the above are true statements.
    Answer: C                                                                              E) Only (A) and (B) of the above are true statements.
                                                                                           Answer: E
32) Which of the following are true statements?
    A) The FOMC usually meets every six weeks to set monetary policy.                  37) Which of the following are true statements?
    B) The FOMC issues directives to the trading desk at the New York Fed.                 A) The Banking Act of 1933 set in motion a series of changes that gave the Board
    C) Designers of the Federal Reserve Act did not envision the use of discount               of Governors more control over Fed operations.
        lending as a monetary policy tool.                                                 B) The FOMC issues directives to the trading desk at the New York Fed.
    D) All of the above are true statements.                                               C) Designers of the Federal Reserve Act did not envision the use of open market
    E) Only (A) and (B) of the above are true statements.                                      operations as a monetary policy tool.
    Answer: E                                                                              D) All of the above are true statements.
                                                                                           E) Only (A) and (B) of the above are true statements.
33) Designers of the Federal Reserve Act of 1913 had not intended for the Fed to use       Answer: D
    A) open market operations as a monetary policy tool.
    B) reserve requirements as a monetary policy tool.                                 38) The power within the Federal Reserve was effectively transferred to the Board of
    C) the discount rate as a monetary policy tool.                                        Governors by
    D) either (A) or (B) of the above.                                                     A) the banking legislation of the Great Depression.
    E) either (A) or (C) of the above.                                                     B) Supreme Court decisions in the 1950s.
    Answer: D                                                                              C) the Depository Institutions Deregulation and Monetary Control Act of 1980.
                                                                                           D) the Accord of 1951.
34) The designers of the Federal Reserve Act of 1913 intended the Fed to have one          Answer: A
    primary monetary tool:
    A) open market operations.                                                         39) Factors that provide the Federal Reserve with a high degree of independence
    B) discounting.                                                                        include
    C) setting reserve requirements.                                                       A) 14-year terms for members of the Board of Governors.
    D) setting margin requirements.                                                        B) a four-year term for the chairman of the Board of Governors that is not
    Answer: B                                                                                   coincident with the President’s term of office.
                                                                                           C) constitutional independence from Congress and the President.
                                                                                           D) all of the above.
                                                                                           E) only (A) and (B) of the above.
                                                                                           Answer: E



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40) Federal Reserve independence is thought to                                           45) Which of the following have acted to limit the Federal Reserve’s independence?
    A) introduce a short-term bias to monetary policymaking.                                 A) The Full Employment and Balanced Growth Act of 1978
    B) lead to better fiscal and monetary policy coordination.                               B) House Concurrent Resolution 133
    C) introduce longer-run considerations to monetary policymaking.                         C) Both of the above
    D) do both (A) and (B) of the above.                                                     D) Neither of the above
    Answer: C                                                                                Answer: C
41) Members of Congress are able to influence monetary policy, albeit indirectly,        46) The Fed may feel pressure to support the president’s policies since the president can
    through their ability to                                                                 A) dismiss members of the Board of Governors appointed by previous presidents.
    A) withhold appropriations from the Board of Governors.                                  B) appoint a new chairman of the Board of Governors immediately after
    B) withhold appropriations from the Federal Open Market Committee.                            taking office.
    C) propose legislation that would force the Fed to submit budget requests to             C) veto legislation that might limit the Fed’s discretionary authority and power.
         Congress, as must other government agencies.                                        D) do all of the above.
    D) do all of the above.                                                                  E) do both (A) and (C) of the above.
    Answer: C                                                                                Answer: C
42) Although it enjoys a high degree of autonomy, the Fed is still subject to the        47) The Fed may feel pressure to support the president’s policies since the president
    influence of Congress because                                                            A) can appoint a majority of the Board of Governors after a few years, as few
    A) Congress can pass legislation that would restrict the Fed’s independence.                  appointees serve their full 14-year terms.
    B) Congress can withhold the Fed’s appropriations.                                       B) can veto legislation that might limit the Fed’s discretionary power and
    C) Congress can remove members of the Board of Governors on a whim.                           authority.
    D) of all of the above.                                                                  C) can dismiss Board members that have been appointed by previous presidents.
    Answer: A                                                                                D) can do all of the above.
                                                                                             E) can do only (A) and (B) of the above.
43) According to the author of your textbook, the Fed is
                                                                                             Answer: E
    A) remarkably free of the political pressures that influence other government
        agencies.                                                                        48) The oldest central bank, founded in 1694, is the
    B) more responsive to the political pressures that influence other government            A) Bank of England.
        agencies.                                                                            B) Deutsche Bundesbank.
    C) probably somewhat constrained in its policy making by the congressional               C) Bank of Japan.
        threat to reduce Fed independence.                                                   D) Federal Reserve System.
    D) both (A) and (C) of the above.                                                        Answer: A
    Answer: D
                                                                                         49) The newest central bank, which began operations in January, 1999, is the
44) According to the author of your textbook,                                                A) European Central Bank.
    A) the Fed appears to be remarkably free of the political pressures that influence       B) Bank of Argentina.
        other government agencies.                                                           C) Bank of Korea.
    B) since the president can protect the Fed from Congress, the Fed may be                 D) Bank of New Zealand.
        responsive to the president’s policy preferences.
                                                                                             Answer: A
    C) the Fed appears to be more responsive to the political pressures that influence
        other government agencies.                                                       50) Which of the following central banks has the greatest degree of independence?
    D) both (A) and (B) of the above.                                                        A) Bank of England
    E) both (B) and (C) of the above.                                                        B) European Central Bank
    Answer: D                                                                                C) Bank of Japan
                                                                                             D) Federal Reserve System
                                                                                             Answer: B

                                          79                                                                                        80
51) Which of the following central banks has the greatest degree of independence?          56) Which of the following actions are consistent with the theory of bureaucratic
    A) Bank of England                                                                         behavior?
    B) Bank of Canada                                                                          A) The Fed reports its target paths for more than one monetary aggregate.
    C) Bank of Japan                                                                           B) The Fed delays the release of Federal Open Market Committee directives.
    D) Swiss National Bank                                                                     C) The Fed blames high interest rates on budget deficits rather than on
    Answer: D                                                                                      inflationary money growth.
                                                                                               D) All of the above are consistent with the theory of bureaucratic behavior.
52) Of the following central banks, the one that enjoys the least degree of independence       E) Only (B) and (C) are consistent with the theory of bureaucratic behavior.
    is the                                                                                     Answer: D
    A) Federal Reserve System.
    B) Deutsche Bundesbank.                                                                57) According to the theory of bureaucratic behavior,
    C) Bank of Italy.                                                                          A) the objective of a bureaucracy is to maximize its own welfare, meaning that it
    D) Swiss National Bank.                                                                        seeks additional power and prestige.
    Answer: C                                                                                  B) the objective of a bureaucracy is to maximize consumers’ surplus, meaning
                                                                                                   that it seeks additional regulatory powers.
53) A trend in recent years is that more and more governments                                  C) the objective of a bureaucracy is to protect the industry it regulates, meaning
    A) have been granting greater independence to their central banks.                             that it seeks additional regulatory powers.
    B) have been reducing the independence of their central banks to make them more            D) none of the above describes the objective of a bureaucracy.
         accountable for poor economic performance.                                            Answer: A
    C) have mandated that their central banks give up multiple policy goals to focus
         strictly on inflation.                                                            58) According to the theory of bureaucratic behavior,
    D) have required their central banks to coordinate policies with their ministers of        A) the objective of a bureaucracy is to maximize its own welfare, meaning that it
         finance.                                                                                  seeks additional power and prestige.
    Answer: A                                                                                  B) the bureaucracy will fight vigorously to preserve its autonomy; thus, it will
                                                                                                   attempt to avoid conflict with the President and Congress
54) The theory of bureaucratic behavior suggests that the objective of a bureaucracy is        C) the bureaucracy will support legislation that gives it additional regulatory
    to maximize                                                                                    power.
    A) the public’s welfare.                                                                   D) all of the above describe bureaucratic behavior.
    B) profits.                                                                                Answer: D
    C) its own welfare.
    D) conflict between the executive and legislative branches of government.              59) The theory of bureaucratic behavior when applied to the Fed helps to explain why
                                                                                               the Fed
    Answer: C
                                                                                               A) resists so vigorously congressional attempts to limit the central bank’s
55) The theory of bureaucratic behavior suggests that the Federal Reserve will                      autonomy.
    A) try to avoid a conflict with the President and Congress over increases in               B) is so secretive about the conduct of future monetary policy.
         interest rates.                                                                       C) sought less control over banks in the 1980s.
    B) try to gain regulatory power over more banks.                                           D) all of the above.
    C) devise clever strategies in an effort to avoid blame for poor economic                  E) only (A) and (B) of the above.
         performance.                                                                          Answer: E
    D) do all of the above.
    Answer: D                                                                              60) 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 so 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.
                                                                                               Answer: B
                                           81                                                                                        82
61) The strongest argument for an independent Federal Reserve rests on the view that     66) The case for Federal Reserve independence does not include the idea that
    subjecting the Fed to more political pressures would impart                              A) political pressure would impart an inflationary bias to monetary policy.
    A) an inflationary bias to monetary policy.                                              B) a politically insulated Fed would be more concerned with long-run objectives
    B) a deflationary bias to monetary policy.                                                    and thus be a defender of a sound dollar and a stable price level.
    C) a disinflationary bias to monetary policy.                                            C) a Federal Reserve under the control of Congress or the President might make
    D) a counter-cyclical bias to monetary policy.                                                the so-called political business cycle more pronounced.
    Answer: A                                                                                D) 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.
62) Politicians in a democratic society may be shortsighted because of their desire to       Answer: D
    win reelection; thus, the political process can
    A) impart an inflationary bias to monetary policy.                                   67) Advocates of Fed independence fear that subjecting the Fed to direct presidential or
    B) impart a deflationary bias to monetary policy.                                        congressional control would
    C) generate a political business cycle, in which just before an election                 A) impart an inflationary bias to monetary policy.
          expansionary policies are pursued to lower unemployment and interest rates.        B) force monetary authorities to sacrifice the long-run objective of price stability.
    D) cause both (A) and (C) of the above.                                                  C) make the so-called political business cycle even more pronounced.
    Answer: D                                                                                D) do all of the above.
                                                                                             E) do only (A) and (B) of the above.
63) The case for Federal Reserve independence includes the idea that                         Answer: D
    A) political pressure would impart an inflationary bias to monetary policy.
    B) a politically insulated Fed would be more concerned with long-run objectives      68) Advocates of Fed independence fear that subjecting the Fed to direct presidential or
         and thus be a defender of a sound dollar and a stable price level.                  congressional control would
    C) a Federal Reserve under the control of Congress or the President might make           A) impart an inflationary bias to monetary policy.
         the so-called political business cycle more pronounced.                             B) force monetary authorities to sacrifice the long-run objective of price stability.
    D) all of the above.                                                                     C) make the so-called political business cycle less pronounced.
    Answer: D                                                                                D) do all of the above.
                                                                                             E) do only (A) and (B) of the above.
64) The case for Federal Reserve independence includes the idea that
                                                                                             Answer: E
    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.              69) Supporters of the current system of Fed independence believe that a less
    B) a Federal Reserve under the control of Congress or the President might make           autonomous Fed would
         the so-called political business cycle more pronounced.                             A) adopt a long-run bias toward policymaking.
    C) the principal-agent problem is perhaps worse for the Fed than for congressmen         B) pursue overly expansionary monetary policies.
         since the former does not answer to the voters on election day.                     C) be more likely to create a political business cycle.
    D) only (A) and (B) of the above.                                                        D) do only (B) and (C) of the above.
    Answer: D                                                                                Answer: D
65) The case for Federal Reserve independence does not include the idea that             70) Critics of the current system of Fed independence contend that
    A) political pressure would impart an inflationary bias to monetary policy.              A) the current system is undemocratic.
    B) a politically insulated Fed would be more concerned with long-run objectives          B) voters have too much say about monetary policy.
         and thus be a defender of a sound dollar and a stable price level.                  C) the President has too much control over monetary policy on a day-to-day basis.
    C) policy is always performed better by an elite group such as the Fed.                  D) all of the above are true.
    D) a Federal Reserve under the control of Congress or the President might make           Answer: A
         the so-called political business cycle more pronounced.
    Answer: C




                                           83                                                                                       84
71) Critics of Fed independence argue
    A) that it is undemocratic to have monetary policy controlled by an elite group       5) All nationally chartered banks are required to be members of the Fed.
          responsible to no one.                                                             Answer: TRUE
    B) that an independent Fed conducts monetary policy with a consistent
                                                                                          6) Designers of the Federal Reserve Act of 1913 intended the Fed to use open market
          inflationary bias.
                                                                                             operations as a policy tool.
    C) that the Fed, since it does not face a binding budget constraint, spends too
          much of its earnings.                                                              Answer: FALSE
    D) only (A) and (B) of the above.
                                                                                          7) Each member of the seven-member board is appointed by the President and
    Answer: A                                                                                confirmed by the Senate to serve 14-year terms.
72) Critics of Fed independence argue                                                        Answer: TRUE
    A) that it is undemocratic to have monetary policy controlled by an elite group
                                                                                          8) The Board of Governors does not set reserve requirements.
          responsible to no one.
    B) that independence seemingly does little to guarantee good monetary policy.            Answer: FALSE
    C) that its independence may encourage the Fed to pursue a course of narrow self-     9) Monetary policy is set by the Board of Governors.
          interest rather than the public interest.
                                                                                             Answer: FALSE
    D) all of the above.
    Answer: D                                                                            10) Federal Reserve monetary policy decisions must be approved by the Secretary of
                                                                                             the Treasury before they may be implemented.
                                                                                             Answer: FALSE
6.2 True/False                                                                           11) The FOMC issues directives to the trading desk at the New York Fed.
                                                                                             Answer: TRUE
 1) The unusual structure of the Federal Reserve System is best explained by
    Americans’ fear of centralized power.                                                12) Critics of the current system of Fed independence contend that the President has too
    Answer: TRUE                                                                             much control over monetary policy on a day-to-day basis.
                                                                                             Answer: FALSE
 2) Rapid money supply growth and uncontrollable inflation were among the factors
    which motivated the creation of the Federal Reserve System.
    Answer: FALSE
                                                                                         6.3 Essay
 3) The Washington, D.C. Fed bank, with over 30 percent of the system’s assets, is the
    most important Federal Reserve Bank.
                                                                                          1) Congressman Jack Kemp is reported to have said that he wanted to become the most
    Answer: FALSE
                                                                                             powerful man in Washington, D.C.—the chairman of the Board of Governors of the
 4) The FOMC is an element of the Federal Reserve System.                                    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
    Answer: TRUE
                                                                                             exaggerating? Explain.

                                                                                          2) Paul Volcker is reported to have 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?




                                          85                                                                                        86
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?




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