Question

1) What are the Federal Reserve’s goals, and who established them? How are Fed officials held accountable for meeting them? Explain why the chair is the most influential Fed official.

2) In 1900, there were 18 central banks in the world; today, there are about 185. Why does nearly every country in the world now have a central bank?

3) When you withdraw cash from your bank’s ATM, what happens to the size of the Fed’s balance sheet? Is there any reason for the Fed to react to your action?

4) The strategy of inflation targeting, which seeks to keep inflation close to a numerical goal over a reasonable horizon, has been referred to as a policy of “constrained discretion.” What does this mean?

Answer 1

1. Ans -

The Federal Reserve's goals are "to maintain long run growth of the monetary and credit aggregates commensurate with the economy's long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates." These were established by Congress. Fed officials are held accountable for meeting them by releasing information at each meeting of the FOMC, and are eventually released to the public. The chair is the most influential Fed official. They are also the chair of the FOMC. They control FOMC meetings and monetary policy, are appointed by the president to a four-year term, and are subject to senate confirmation.

2. Ans-

Nationalism has been a surprisingly powerful force in the twentieth century - a century in which (at least according to some people) nationalism was supposed to lose influence (Think of old soviet union, which was partially designed to dampen nationalistic passion.) Even the United kingdom is less united than it once was with Scotland demanding more and more autonomy. Thus the more that nationalism flourishes, the more national banks there are likely to be.

3. Ans -

When you withdraw cash from your bank’s ATM, Fed’s balance sheet remain unchanged. Because vault cash is part of the bank's reserves, which is a Fed liability, any withdrawals by the public decreases the amount of reserves. So if you withdraw $100 from your checking account as cash, then the Fed's bank reserve liability decreases by $100, but its currency liability increases by the same amount.

4. Constrained Discretion.- A principle which applies to the situation in which policymakers have some freedom (discretion) to vary policy instruments, such as taxes or interest rates, but within well-defined limits (constraints).