1. (Mishkin 16.5) Which entities in the Federal Reserve System control the disco
ID: 1120810 • Letter: 1
Question
1. (Mishkin 16.5) Which entities in the Federal Reserve System control the discount rate? Reserve requirements? Open market operations? 2. (Mishkin 16.15) 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? 3. (Mishkin 16.20) Why might eliminating the Fed's independence lead to a more pronounced political business cycle? 4. (Mishkin 19.2) What incentives arise for a central bank to fall into the time-inconsistency trap of pursuing overly expansionary monetary policy? 5. (Mishkin 19.7) How does inflation targeting help reduce the time-inconsistency problem of discretionary policy? 6. (Mishkin 19.19) What procedures can the Fed use to control the federal funds rate? Why does control of this interest rate imply that the Fed will lose control of nonborrowed reserves? 7. (Mishkin 19.20) Compare the monetary base to M1 on the grounds of controllability and measurability. Which do you prefer as an intermediate target? Why?Explanation / Answer
1. The three entities of the US Federal Reserve Systems are 1) Federal Reserve Board, 2) Federal Reserve Banks, 3) Federal Open Market Committee. These entities control various aspects of the banking and financial systems in the country. The reserve requirements and the discount rates are set by the Federal Reserve Board, which is located in the Washington DC. The Federal Reserve board has 7 members i.e. governors. The open market operations of the Fed are conducted by the Federal Open Market Committee (FOMC), which controls the monetary policy of Fed. Open market operations in a tool of monetary policy of the Fed.
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