Chapter7StructureofCentralBanksandtheFederalReserveSystem77

Chapter7
StructureofCentralBanksandtheFederalReserveSystem
.1

Multiple Choice Questions

1.

AmericansfearofcentralizedpowerandtheirdistrustofmoneyedinterestsexplainswhytheU.S.
didnothaveacentralbankuntilthe
(a) 17thcentury.
(b) 18thcentury.
(c) 19thcentury.
(d) 20thcentury.
Answer: D

2.

Bankpanicsin1819,1837,1857,1873,1884,1893,and1907convincedmanythat
(a) theFederalReserveneededgreatercontroloverthebankingsystem.
(b) theFederalReserveneededgreaterauthoritytodealwithproblembanks.
(c) acentralbankwasneededtopreventfuturefinancialpanics.
(d) both(a)and(b)oftheabove.
Answer: C

3.

TheunusualstructureoftheFederalReserveSystemisperhapsbestexplainedby
(a) Americansfearofcentralizedpower.
(b) thetraditionalAmericandistrustofmoneyedinterests.
(c) AmericansdesiretoremovecontrolofthemoneysupplyfromtheU.S.Treasury.
(d) alloftheabove.
(e) only(a)and(b)oftheabove.
Answer: E

4.

ThetraditionalAmericandistrustofmoneyedinterestsandthefearofcentralizedpowerhelpto
explain
(a) thefailuresofthefirsttwoexperimentsincentralbankingintheUnitedStates.
(b) thedecentralizedstructureoftheFederalReserveSystem.
(c) whytheBoardofGovernorsoftheFederalReserveSystemisnotlocatedinNewYork.
(d) alloftheabove.
(e) only(a)and(b)oftheabove.
Answer: D

78Mishkin/EakinsFinancialMarketsandInstitutions,FifthEdition

5.

Thefinancialpanicof1907resultedinsuchwidespreadbankfailuresandsubstantiallossesto
depositorsthattheAmericanpublicfinallybecameconvincedthat
(a) theFirstBankoftheUnitedStateshadfailedtoserveasalenderoflastresort.
(b) theSecondBankoftheUnitedStateshadfailedtoserveasalenderoflastresort.
(c) theFederalReserveSystemhadfailedtoserveasalenderoflastresort.
(d) acentralbankwasneededtopreventfuturepanics.
Answer: D

6.

Nationwidefinancialpanicsin1873,1884,1893,and1907mighthavebeenavoidedhad
(a) theFirstBankoftheUnitedStatesserveditsintendedroleoflenderoflastresort.
(b) theSecondBankoftheUnitedStatesnotbeenabolishedin1836byPresidentAndrewJackson.
(c) theSecondBankoftheUnitedStatesserveditsintendedroleoflenderoflastresort.
(d) theFederalReserveserveditsintendedroleoflenderoflastresort.
Answer: B

7.

ThemanyregionalFederalReservebanksresultedfromacompromisebetweenpartiesfavoring
(a) establishmentofacentralbankandthoseopposedtoitsestablishment.
(b) aprivatecentralbankandthosefavoringagovernmentinstitution.
(c) establishmentoftheBoardofGovernorsinWashington,D.C.andthosepreferringits
establishmentinNewYorkCity.
(d) noneoftheabove.
Answer: B

8.

WhichofthefollowingisanelementoftheFederalReserveSystem?
(a) TheFederalReserveBanks
(b) TheBoardofGovernors
(c) TheFDIC
(d) Alloftheabove
(e) Only(a)and(b)oftheabove
Answer: E

9.

WhichofthefollowingisanelementoftheFederalReserveSystem?
(a) TheFederalReserveBanks
(b) TheBoardofGovernors
(c) TheFOMC
(d) Alloftheabove
Answer: D

10.

WhichofthefollowingisnotanentityoftheFederalReserveSystem?
(a) FederalReserveBanks
(b) TheFDIC
(c) TheBoardofGovernors
(d) TheFederalAdvisoryCouncil
(e) Membercommercialbanks
Answer: B

Chapter7StructureofCentralBanksandtheFederalReserveSystem79

11.

WhichofthefollowingfunctionsarenotperformedbyanyofthetwelveregionalFederalReserve
Banks?
(a) Checkclearing
(b) Conductingeconomicresearch
(c) Settinginterestratespayableontimedeposits
(d) Issuingnewcurrency
Answer: C

12.

WhichFederalReserveBankpresidentalwayshasavoteintheFederalOpenMarketCommittee?
(a) Philadelphia
(b) NewYork
(c) Boston
(d) SanFrancisco
Answer: B

13.

EachFedbankpresidentattendsFOMCmeetings;althoughonly_________Fedbankpresidents
voteonpolicy,all_________provideinput.
(a) three;ten
(b) five;ten
(c) three;twelve
(d) five;twelve
Answer: D

14.

The_________Fedbank,withabout25percentofthesystemsassets,isthemostimportantofthe
FederalReserveBanks.
(a) Chicago
(b) LosAngeles
(c) Miami
(d) NewYork
(e) Washington,D.C.
Answer: D

15.

MembercommercialbankshavepurchasedstockintheirdistrictFedbanks;thedividendpaidby
thatstockislimitedto
(a) fourpercentannually.
(b) fivepercentannually.
(c) sixpercentannually.
(d) eightpercentannually.
Answer: C

16.

All_________arerequiredtobemembersoftheFed.
(a) statecharteredbanks
(b) nationallycharteredbanks
(c) bankswithmorethan$100millioninassets
(d) bankswithmorethan$500millioninassets
Answer: B

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17.

WhichofthefollowingbanksarerequiredtobemembersoftheFederalReserveSystem?
(a) statecharteredbanks
(b) insuredbanks
(c) bankshavingover$500millioninassets
(d) noneoftheabove
Answer: D

18.

Ofallcommercialbanks,about_____percentbelongtotheFederalReserveSystem.
(a) 15
(b) 20
(c) 30
(d) 50
Answer: C

19.

BankssubjecttoreserverequirementssetbytheFederalReserveSysteminclude
(a) onlystatecharteredbanks.
(b) onlynationallycharteredbanks.
(c) onlybankswithlessthan$100millioninassets.
(d) onlybankswithlessthan$500millioninassets.
(e) allbankswhetherornottheyaremembersoftheFederalReserveSystem.
Answer: E

20.

TheFedssupportoftheDepositoryInstitutionsDeregulationandMonetaryControlActof1980
stemmedinpartfromits
(a) concernoverdecliningFedmembership.
(b) beliefthatallbankingregulationsshouldbeeliminated.
(c) beliefthatinterestrateceilingsweretoolow.
(d) beliefthatdepositorshadtobecomemoreknowledgeableaboutbankingoperations.
Answer: A

21.

WhichofthefollowingaredutiesoftheBoardofGovernorsoftheFederalReserveSystem?
(a) Settingmarginrequirements,thefractionofthepurchasepriceofsecuritiesthathastobepaid
forwithcash.
(b) Settingthemaximuminterestratespayableoncertaintypesoftimedepositsunder
RegulationQ.
(c) RegulatingcreditwiththeapprovalofthePresidentundertheCreditControlActof1969.
(d) NoneoftheabovehasbeenadutyoftheBoardsincethemid1980s.
Answer: A

22.

WhichofthefollowingarenotdutiesoftheBoardofGovernorsoftheFederalReserveSystem?
(a) Settingmarginrequirements,thefractionofthepurchasepriceofsecuritiesthathastobepaid
forwithcash.
(b) Settingthemaximuminterestratespayableoncertaintypesoftimedepositsunder
RegulationQ.
(c) ApprovingthediscountrateestablishedbytheFederalReservebanks.
(d) RepresentingtheUnitedStatesinnegotiationswithforeigngovernmentsoneconomicmatters.

Chapter7StructureofCentralBanksandtheFederalReserveSystem81

Answer: B

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23.

ThechairmanoftheBoardofGovernorsoftheFederalReserveSystemexercisesahighdegreeof
controlovertheBoard
(a) throughhisabilitytosettheagendaoftheBoardandtheFOMC.
(b) throughhisroleasspokesmanfortheFedwiththePresidentandbeforeCongress.
(c) becausehecanvetodecisionsmadebyamajorityoftheotherboardmembers.
(d) becauseofalloftheabove.
(e) becauseofonly(a)and(b)oftheabove.
Answer: E

24.

MembersoftheBoardofGovernorsare
(a) chosenbytheFederalReserveBankpresidents.
(b) appointedbythenewlyelectedPresidentoftheUnitedStates,asarecabinetpositions.
(c) appointedbythePresidentoftheUnitedStatesandconfirmedbytheSenateasmembersresign.
(d) neverallowedtoservemorethansevenyearterms.
Answer: C

25.

EachmemberofthesevenmemberBoardofGovernorsisappointedbythepresidentandconfirmed
bytheSenatetoserve
(a) 4yearterms.
(b) 6yearterms.
(c) 14yearterms.
(d) aslongastheappointingpresidentremainsinoffice.
Answer: C

26.

TheBoardofGovernors
(a) establishes,withinlimits,reserverequirements.
(b) effectivelysetsthediscountrate.
(c) setsmarginrequirements.
(d) doesalloftheabove.
(e) doesonly(a)and(b)oftheabove.
Answer:D

27.

Althoughneither_________northe_________isofficiallysetbytheFederalOpenMarket
Committee,decisionsconcerningthesepolicytoolsareeffectivelymadebythecommittee.
(a) marginrequirements;discountrate
(b) marginrequirements;federalfundsrate
(c) reserverequirements;discountrate
(d) reserverequirements;federalfundsrate
Answer: C

28.

AlthoughtheFederalOpenMarketCommitteedoesnothaveformalauthoritytoset_________and
the_________,itdoespossesstheauthorityinpractice.
(a) marginrequirements;discountrate
(b) marginrequirements;federalfundsrate
(c) reserverequirements;discountrate
(d) reserverequirements;federalfundsrate

Chapter7StructureofCentralBanksandtheFederalReserveSystem83

Answer: C

84Mishkin/EakinsFinancialMarketsandInstitutions,FifthEdition

29.

Whichofthefollowingaretruestatements?
(a) TheFOMCusuallymeetseverysixweekstosetmonetarypolicy.
(b) TheFOMCissuesdirectivestothetradingdeskattheNewYorkFed.
(c) DesignersoftheFederalReserveActdidnotenvisiontheuseofopenmarketoperationsasa
monetarypolicytool.
(d) Alloftheabovearetruestatements.
(e) Only(a)and(b)oftheabovearetruestatements.
Answer: D

30.

TheFederalOpenMarketCommitteeconsistsof
(a) thefiveseniormembersofthesevenmemberBoardofGovernors.
(b) thesevenmembersoftheBoardofGovernorsandsevenpresidentsoftheregionalFedbanks.
(c) thesevenmembersoftheBoardofGovernorsandfivepresidentsoftheregionalFedbanks.
(d) thetwelveregionalFedbankpresidentsandthechairmanoftheBoardofGovernors.
Answer: C

31.

TheFederalReserveentitythatdeterminesmonetarypolicystrategyisthe
(a) BoardofGovernors.
(b) FederalOpenMarketCommittee.
(c) ChairmanoftheBoardofGovernors.
(d) ShadowOpenMarketCommittee.
Answer: B

32.

Whichofthefollowingaretruestatements?
(a) TheFOMCusuallymeetseverysixweekstosetmonetarypolicy.
(b) TheFOMCissuesdirectivestothetradingdeskattheNewYorkFed.
(c) DesignersoftheFederalReserveActdidnotenvisiontheuseofdiscountlendingasamonetary
policytool.
(d) Alloftheabovearetruestatements.
(e) Only(a)and(b)oftheabovearetruestatements.
Answer: E

33.

DesignersoftheFederalReserveActof1913hadnotintendedfortheFedtouse
(a) openmarketoperationsasamonetarypolicytool.
(b) reserverequirementsasamonetarypolicytool.
(c) thediscountrateasamonetarypolicytool.
(d) either(a)or(b)oftheabove.
(e) either(a)or(c)oftheabove.
Answer: D

34.

ThedesignersoftheFederalReserveActof1913intendedtheFedtohaveoneprimary
monetarytool:
(a) openmarketoperations.
(b) discounting.
(c) settingreserverequirements.
(d) settingmarginrequirements.

Chapter7StructureofCentralBanksandtheFederalReserveSystem85

Answer: B

86Mishkin/EakinsFinancialMarketsandInstitutions,FifthEdition

35.

ThedesignersoftheFederalReserveActmeanttocreateacentralbankcharacterizedbyits
(a) systemofchecksandbalancesanddecentralizationofpower.
(b) strongconcentrationofpowerinthehandsofafewpeople.
(c) inabilitytofunctionasalenderoflastresort.
(d) responsivenesstotheelectorate.
Answer: A

36.

Whichofthefollowingaretruestatements?
(a) TheBankingActof1933setinmotionaseriesofchangesthatgavetheBoardofGovernors
morecontroloverFedoperations.
(b) TheFOMCissuesdirectivestothetradingdeskattheNewYorkFed.
(c) DesignersoftheFederalReserveActdidnotenvisiontheuseofdiscountlendingasamonetary
policytool.
(d) Alloftheabovearetruestatements.
(e) Only(a)and(b)oftheabovearetruestatements.
Answer: E

37.

Whichofthefollowingaretruestatements?
(a) TheBankingActof1933setinmotionaseriesofchangesthatgavetheBoardofGovernors
morecontroloverFedoperations.
(b) TheFOMCissuesdirectivestothetradingdeskattheNewYorkFed.
(c) DesignersoftheFederalReserveActdidnotenvisiontheuseofopenmarketoperationsasa
monetarypolicytool.
(d) Alloftheabovearetruestatements.
(e) Only(a)and(b)oftheabovearetruestatements.
Answer: D

38.

ThepowerwithintheFederalReservewaseffectivelytransferredtotheBoardofGovernorsby
(a) thebankinglegislationoftheGreatDepression.
(b) SupremeCourtdecisionsinthe1950s.
(c) theDepositoryInstitutionsDeregulationandMonetaryControlActof1980.
(d) theTreasuryFederalReserveAccordof1951.
Answer: A

39.

FactorsthatprovidetheFederalReservewithahighdegreeofindependenceinclude
(a) 14yeartermsformembersoftheBoardofGovernors.
(b) afouryeartermforthechairmanoftheBoardofGovernorsthatisnotcoincidentwiththe
Presidentstermofoffice.
(c) constitutionalindependencefromCongressandthePresident.
(d) alloftheabove.
(e) only(a)and(b)oftheabove.
Answer: E

Chapter7StructureofCentralBanksandtheFederalReserveSystem87

40.

FederalReserveindependenceisthoughtto
(a) introduceashorttermbiastomonetarypolicymaking.
(b) leadtobetterfiscalandmonetarypolicycoordination.
(c) introducelongerrunconsiderationstomonetarypolicymaking.
(d) doboth(a)and(b)oftheabove.
Answer: C

41.

MembersofCongressareabletoinfluencemonetarypolicy,albeitindirectly,throughtheirabilityto
(a) withholdappropriationsfromtheBoardofGovernors.
(b) withholdappropriationsfromtheFederalOpenMarketCommittee.
(c) proposelegislationthatwouldforcetheFedtosubmitbudgetrequeststoCongress,asmust
othergovernmentagencies.
(d) doalloftheabove.
Answer: C

42.

Althoughitenjoysahighdegreeofautonomy,theFedisstillsubjecttotheinfluenceofCongress
because
(a) CongresscanpasslegislationthatwouldrestricttheFedsindependence.
(b) CongresscanwithholdtheFedsbudgetrequests.
(c) CongresscanremovemembersoftheBoardofGovernorswhoseviewsonpolicydifferfrom
thoseofkeymembersofCongress.
(d) Alloftheabove.
Answer: A

43.

Accordingtothetextbookauthors,theFedis
(a) remarkablyfreeofthepoliticalpressuresthatinfluenceothergovernmentagencies.
(b) moreresponsivetothepoliticalpressuresthatinfluenceothergovernmentagencies.
(c) probablysomewhatconstrainedinitspolicymakingbythecongressionalthreattoreduceFed
independence.
(d) both(a)and(c)oftheabove.
Answer: D

44.

Accordingtothetextbookauthors,
(a) theFedappearstoberemarkablyfreeofthepoliticalpressuresthatinfluenceothergovernment
agencies.
(b) sincethepresidentcanprotecttheFedfromCongress,theFedmayberesponsivetothe
presidentspolicypreferences.
(c) theFedappearstobemoreresponsivetothepoliticalpressuresthatinfluenceothergovernment
agencies.
(d) both(a)and(b)oftheabove.
(e) both(b)and(c)oftheabove.
Answer: D

88Mishkin/EakinsFinancialMarketsandInstitutions,FifthEdition

45.

WhichofthefollowinghaveactedtolimittheFederalReservesindependence?
(a) TheFullEmploymentandBalancedGrowthActof1978
(b) HouseConcurrentResolution133
(c) Bothoftheabove
(d) Neitheroftheabove
Answer: C

46.

TheFedmayfeelpressuretosupportthepresidentspoliciessincethepresidentcan
(a) dismissmembersoftheBoardofGovernorsappointedbypreviouspresidents.
(b) appointanewchairmanoftheBoardofGovernorsimmediatelyafter
takingoffice.
(c) vetolegislationthatmightlimittheFedsdiscretionaryauthorityandpower.
(d) doalloftheabove.
(e) doboth(a)and(c)oftheabove.
Answer: C

47.

TheFedmayfeelpressuretosupportthepresidentspoliciessincethepresident
(a) canappointamajorityoftheBoardofGovernorsafterafewyears,asfewappointeesserve
theirfull14yearterms.
(b) canvetolegislationthatmightlimittheFedsdiscretionarypowerandauthority.
(c) candismissBoardmembersthathavebeenappointedbypreviouspresidents.
(d) candoalloftheabove.
(e) candoonly(a)and(b)oftheabove.
Answer: E

48.

Theoldestcentralbank,foundedin1694,isthe
(a) BankofEngland.
(b) DeutscheBundesbank.
(c) BankofJapan.
(d) FederalReserveSystem.
Answer: A

49.

Thenewestcentralbank,whichbeganoperationsinJanuary,1999,isthe
(a) EuropeanCentralBank.
(b) BankofArgentina.
(c) BankofKorea.
(d) BankofNewZealand.
Answer: A

50.

Whichofthefollowingcentralbankshasthegreatestdegreeofindependence?
(a) BankofEngland
(b) EuropeanCentralBank
(c) BankofJapan
(d) FederalReserveSystem
Answer: B

Chapter7StructureofCentralBanksandtheFederalReserveSystem89

51.

Whichofthefollowingcentralbankshasthegreatestdegreeofindependence?
(a) BankofEngland
(b) BankofCanada
(c) BankofJapan
(d) SwissNationalBank
Answer: D

52.

Ofthefollowingcentralbanks,theonethatenjoystheleastdegreeofindependenceisthe
(a) FederalReserveSystem.
(b) DeutscheBundesbank.
(c) BankofItaly.
(d) SwissNationalBank.
Answer: C

53.

Atrendinrecentyearsisthatmoreandmoregovernments
(a) havebeengrantinggreaterindependencetotheircentralbanks.
(b) havebeenreducingtheindependenceoftheircentralbankstomakethemmoreaccountablefor
pooreconomicperformance.
(c) havemandatedthattheircentralbanksgiveupmultiplepolicygoalstofocusstrictlyon
inflation.
(d) haverequiredtheircentralbankstocoordinatepolicieswiththeirministersoffinance.
Answer: A

54.

Thetheoryofbureaucraticbehaviorsuggeststhattheobjectiveofabureaucracyistomaximize
(a) thepublicswelfare.
(b) itsownwelfare.
(c) profits.
(d) conflictbetweentheexecutiveandlegislativebranchesofgovernment.
Answer: B

55.

ThetheoryofbureaucraticbehaviorsuggeststhattheFederalReservewill
(a) trytoavoidaconflictwiththePresidentandCongressoverincreasesininterestrates.
(b) trytogainregulatorypowerovermorebanks.
(c) devisecleverstrategiesinanefforttoavoidblameforpooreconomicperformance.
(d) doalloftheabove.
Answer: D

56.

Accordingtothetheoryofbureaucraticbehavior,theobjectiveofabureaucracyis
(a) tomaximizeitsownwelfare,meaningthatitseeksadditionalpowerandprestige.
(b) tomaximizeconsumerssurplus,meaningthatitseeksadditionalregulatorypowers.
(c) toprotecttheindustryitregulates,meaningthatitseeksadditionalregulatorypowers.
(d) noneoftheabove.
Answer: A

90Mishkin/EakinsFinancialMarketsandInstitutions,FifthEdition

57.

Accordingtothetheoryofbureaucraticbehavior,
(a) theobjectiveofabureaucracyistomaximizeitsownwelfare,meaningthatitseeksadditional
powerandprestige.
(b) thebureaucracywillfightvigorouslytopreserveitsautonomy;thus,itwillattempttoavoid
conflictwiththePresidentandCongress.
(c) thebureaucracywillsupportlegislationthatgivesitadditionalregulatorypower.
(d) alloftheabovedescribebureaucraticbehavior.
Answer: D

58.

ThetheoryofbureaucraticbehaviorwhenappliedtotheFedhelpstoexplainwhytheFed
(a) resistssovigorouslycongressionalattemptstolimitthecentralbanksautonomy.
(b) issecretiveabouttheconductoffuturemonetarypolicy.
(c) soughtlesscontroloverbanksinthe1980s.
(d) alloftheabove.
(e) only(a)and(b)oftheabove.
Answer: E

59.

ThetheoryofbureaucraticbehaviorwhenappliedtotheFedhelpstoexplainwhytheFed
(a) issupportiveofcongressionalattemptstolimitthecentralbanksautonomy.
(b) issecretiveabouttheconductoffuturemonetarypolicy.
(c) soughtlesscontroloverbanksinthe1980s.
(d) iswillingtotakeonpowerfulgroupsthatmaythreatenitsautonomy.
Answer: B

60.

ThestrongestargumentforanindependentFederalReserverestsontheviewthatsubjectingtheFed
tomorepoliticalpressureswouldimpart
(a) aninflationarybiastomonetarypolicy.
(b) adeflationarybiastomonetarypolicy.
(c) adisinflationarybiastomonetarypolicy.
(d) acountercyclicalbiastomonetarypolicy.
Answer: A

61.

Politiciansinademocraticsocietymaybeshortsightedbecauseoftheirdesiretowinreelection;
thus,thepoliticalprocesscan
(a) impartaninflationarybiastomonetarypolicy.
(b) impartadeflationarybiastomonetarypolicy.
(c) generateapoliticalbusinesscycle,inwhichjustbeforeanelectionexpansionarypoliciesare
pursuedtolowerunemploymentandinterestrates.
(d) causeboth(a)and(c)oftheabove.
Answer: D

Chapter7StructureofCentralBanksandtheFederalReserveSystem91

62.

ThecaseforFederalReserveindependenceincludestheideathat
(a) politicalpressurewouldimpartaninflationarybiastomonetarypolicy.
(b) apoliticallyinsulatedFedwouldbemoreconcernedwithlongrunobjectivesandthusbea
defenderofasounddollarandastablepricelevel.
(c) aFederalReserveunderthecontrolofCongressorthePresidentmightmakethesocalled
politicalbusinesscyclemorepronounced.
(d) alloftheabove.
Answer: D

63.

ThecaseforFederalReserveindependenceincludestheideathat
(a) apoliticallyinsulatedFedwouldbemoreconcernedwithlongrunobjectivesandthusbea
defenderofasounddollarandastablepricelevel.
(b) aFederalReserveunderthecontrolofCongressorthePresidentmightmakethesocalled
politicalbusinesscyclemorepronounced.
(c) theprincipalagentproblemisperhapsworsefortheFedthanforcongressmensincetheformer
doesnotanswertothevotersonelectionday.
(d) only(a)and(b)oftheabove.
Answer: D

64.

ThecaseforFederalReserveindependencedoesnotincludetheideathat
(a) politicalpressurewouldimpartaninflationarybiastomonetarypolicy.
(b) apoliticallyinsulatedFedwouldbemoreconcernedwithlongrunobjectivesandthusbea
defenderofasounddollarandastablepricelevel.
(c) policyisalwaysperformedbetterbyanelitegroupsuchastheFed.
(d) aFederalReserveunderthecontrolofCongressorthePresidentmightmakethesocalled
politicalbusinesscyclemorepronounced.
Answer: C

65.

ThecaseforFederalReserveindependencedoesnotincludetheideathat
(a) politicalpressurewouldimpartaninflationarybiastomonetarypolicy.
(b) theprincipalagentproblemisperhapsworsefortheFedthanforcongressmensincetheformer
doesnotanswertothevotersonelectionday.
(c) apoliticallyinsulatedFedwouldbemoreconcernedwithlongrunobjectivesandthusbea
defenderofasounddollarandastablepricelevel.
(d) aFederalReserveunderthecontrolofCongressorthePresidentmightmakethesocalled
politicalbusinesscyclemorepronounced.
Answer: B

66.

AdvocatesofFedindependencefearthatsubjectingtheFedtodirectpresidentialorcongressional
controlwould
(a) impartaninflationarybiastomonetarypolicy.
(b) forcemonetaryauthoritiestosacrificethelongrunobjectiveofpricestability.
(c) makethesocalledpoliticalbusinesscycleevenmorepronounced.
(d) doalloftheabove.
(e) doonly(a)and(b)oftheabove.
Answer: D

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67.

AdvocatesofFedindependencefearthatsubjectingtheFedtodirectpresidentialorcongressional
controlwould
(a) impartaninflationarybiastomonetarypolicy.
(b) forcemonetaryauthoritiestosacrificethelongrunobjectiveofpricestability.
(c) makethesocalledpoliticalbusinesscyclelesspronounced.
(d) doalloftheabove.
(e) doonly(a)and(b)oftheabove.
Answer: E

68.

SupportersofthecurrentsystemofFedindependencebelievethatalessautonomousFedwould
(a) adoptalongrunbiastowardpolicymaking.
(b) pursueoverlyexpansionarymonetarypolicies.
(c) bemorelikelytocreateapoliticalbusinesscycle.
(d) doonly(b)and(c)oftheabove.
Answer: D

69.

CriticsofthecurrentsystemofFedindependencecontendthat
(a) thecurrentsystemisundemocratic.
(b) votershavetoomuchsayaboutmonetarypolicy.
(c) thePresidenthastoomuchcontrolovermonetarypolicyonadaytodaybasis.
(d) alloftheabovearetrue.
Answer: A

70.

CriticsofFedindependenceargue
(a) thatitisundemocratictohavemonetarypolicycontrolledbyanelitegroupresponsibleto
noone.
(b) thatanindependentFedconductsmonetarypolicywithaconsistentinflationarybias.
(c) thattheFed,sinceitdoesnotfaceabindingbudgetconstraint,spendstoomuchofitsearnings.
(d) only(a)and(b)oftheabove.
Answer: A

71.

CriticsofFedindependenceargue
(a) thatitisundemocratictohavemonetarypolicycontrolledbyanelitegroupresponsibleto
noone.
(b) thatindependenceseeminglydoeslittletoguaranteegoodmonetarypolicy.
(c) thatitsindependencemayencouragetheFedtopursueacourseofnarrowselfinterestrather
thanthepublicinterest.
(d) alloftheabove.
Answer: D

72.

Instrumentindependencemeansthecentralbankisfreefrom
(a) politicalpressureregardinghowitusesthetoolsofmonetarypolicy.
(b) politicalpressureregardingthegoalsitpursues.
(c) both(a)and(b).
(d) neither(a)nor(b).
Answer: A

Chapter7StructureofCentralBanksandtheFederalReserveSystem93

73.

SupposelegislationrequiringtheFedtokeeptheinflationratebetween1.5%and2.5%peryearis
passedbyCongress.ThislawrestrictstheFeds
(a) instrumentindependence.
(b) goalindependence.
(c) both(a)and(b).
(d) neither(a)nor(b).
Answer: B

74.

Crosscountryevidencesuggeststhatanincreaseiscentralbankindependenceresultsina
_________inflationrateand_________unemployment.
(a) lower;higher
(b) lower;noworse
(c) higher;lower
(d) higher;higher
Answer: B

94Mishkin/EakinsFinancialMarketsandInstitutions,FifthEdition

.2

True/False

1.

TheunusualstructureoftheFederalReserveSystemisbestexplainedbyAmericansfearof
centralizedpower.
Answer: TRUE

2.

Rapidmoneysupplygrowthanduncontrollableinflationwereamongthefactorswhichmotivated
thecreationoftheFederalReserveSystem.
Answer: FALSE

3.

TheWashington,D.C.Fedbank,withover30percentofthesystemsassets,isthemostimportant
FederalReserveBank.
Answer: FALSE

4.

TheFOMCisanelementoftheFederalReserveSystem.
Answer: TRUE

5.

AllnationallycharteredbanksarerequiredtobemembersoftheFed.
Answer: TRUE

6.

DesignersoftheFederalReserveActof1913intendedtheFedtouseopenmarketoperationsasa
policytool.
Answer: FALSE

7.

EachmemberofthesevenmemberboardisappointedbythePresidentandconfirmedbytheSenate
toserve14yearterms.
Answer: TRUE

8.

TheBoardofGovernorssetsreserverequirements.
Answer: TRUE

9.

MonetarypolicyissetbytheBoardofGovernors.
Answer: FALSE

10.

FederalReservemonetarypolicydecisionsmustbeapprovedbytheSecretaryoftheTreasury
beforetheymaybeimplemented.
Answer: FALSE

11.

TheFOMCissuesdirectivestothetradingdeskattheNewYorkFed.
Answer: TRUE

12.

CriticsofthecurrentsystemofFedindependencecontendthatthePresidenthastoomuchcontrol
overmonetarypolicyonadaytodaybasis.
Answer: FALSE

13.

Countrieswithmoreindependentcentralbankshavelowerinflationrates,butthesehavecomeat
theexpenseofgreateroutputfluctuations.
Answer: FALSE

14.

AnnouncingtheFOMCspolicydecisionimmediatelyaftertheFOMCmeetingisanexampleof
howFedpolicymakinghasbecomemoretransparent.
Answer: TRUE

Chapter7StructureofCentralBanksandtheFederalReserveSystem95

15.

TheFedhasgoalindependencebutnotinstrumentindependence.
Answer: FALSE

96Mishkin/EakinsFinancialMarketsandInstitutions,FifthEdition

.3

Essay

1.

FormerCongressmanJackKempreportedlyoncesaidthathewantedtobecomethemostpowerful
maninWashington,D.C.thechairmanoftheBoardofGovernorsoftheFederalReserveSystem.
WhatdoesRepresentativeKempscommentimplyaboutthepowerofthechairmanoftheFederal
Reserve?Doyouthinkhemayhavebeenexaggerating?Explain.

2.

FormerBoardofGovernorschairmanPaulVolckerreportedlyoncesaidthattheFederalReserveis
freetopursueanypolicyitdesires,aslongasitconvincesCongressthatsuchapolicyisreasonable.
WhatdoesVolckerscommentsuggestabouttheindependenceoftheFed?Explain.

3.

WhatarethefactorsthatpromotetheindependenceoftheFederalReserve?

4.

WhatfactorslimittheindependenceoftheFederalReserve?

5.

WhataretheargumentsforandagainstanindependentFed?

6.

Whatisthetheoryofbureaucraticbehavior?WhattypesofbehaviordoesitpredicttheFedmight
undertake?

7.

InrecentyearshasFedpolicymakingbecomemoreorlesstransparent?Why?