Ch 7-8 answers - TUTORIAL FOR CHAPTER 7 - 8: CENTRAL...

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TUTORIAL FOR CHAPTER 7 - 8: CENTRAL BANKING AND THE CONDUCT OF MONETARY POLICY 1. Why was the Federal Reserve System set up with 12 regional Federal Reserve banks rather than one central bank, as in other countries? Because of traditional American hostility to a central bank and centralized authority, the system of 12 regional banks was set up to diffuse power along regional lines. 2. In what ways can the regional Federal Reserve banks influence the conduct of monetary policy? The Federal Reserve Banks influence the conduct of monetary policy through their administration of the discount facilities at each bank and by having five of their presidents sit on the FOMC, the main policymaking arm of the Fed. 3. 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 its greater independence? The Fed is more independent because its substantial revenue from securities and discount loans allows it to control its own budget. 4. Why might eliminating the Fed’s independence lead to a more pronounced political business cycle? Eliminating the Fed’s independence might make it more shortsighted and subject to political influence. Thus, when political gains could be achieved by expansionary policy before an election, the Fed might be more likely to engage in this activity. As a result, more pronounced political business cycles might result. 5. Which goals of the Fed frequently conflict? The goal of price stability often conflicts with the goal of high economic growth and employment and interest-rate stability. When the economy is expanding along with employment, inflation may rise. In order to pursue the goal of price stability the Fed may have to pursue contractionary anti-inflationary policy that
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This note was uploaded on 10/16/2011 for the course FINANCE 101 taught by Professor Sanghoonlee during the Three '11 term at University of Wollongong, Australia.

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Ch 7-8 answers - TUTORIAL FOR CHAPTER 7 - 8: CENTRAL...

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