1) What is the main problem with having a central bank that is not independent of the rest of the government?

A.

Research studies have shown that the most independent central banks had the highest average rates of inflation during the 1970s and 1980s.

B.

Less independent central banks tend to lead to lower interest rates.

C.

Less independent central banks tend to lead to higher unemployment.

D.

Less independent central banks tend to lead to higher inflation. An independent central bank can more freely focus on keeping inflation low.

2) [Related to Solved Problem

13.1]

Suppose that Bank of America pays a

44%

annual interest rate on checking account balances while having to meet a reserve requirement of 10%. Assume that the Fed pays Bank of America an interest rate of

0.250.25%

on its holdings of reserves and that Bank of America can earn

66%

on its loans and other investments.

How do reserve requirements affect the amount that Bank of America can earn on $1,000 in checking account deposits? Ignore any costs Bank of America incurs on the deposits other than the interest it pays to depositors.

The 10% reserve requirement reduces the amount Bank of America can earn on $1,000 by

$nothing.

(Enter

your answer rounded to two decimal

places.)

PART 2 Is the opportunity cost to banks of reserve requirements likely to be higher during a period of high inflation or during a period of low inflation?

A.

The opportunity cost to banks of reserve requirements would likely be higher during a period of high inflation when nominal interest rates on loans are lower.

B.

The opportunity cost to banks of reserve requirements would likely be higher during a period of high inflation when nominal interest rates on loans are high.

C.

The opportunity cost to banks of reserve requirements would likely be higher during a period of lower inflation when nominal interest rates on loans are high.

D.

The opportunity cost to banks of reserve requirements would likely be higher during a period of lower inflation when nominal interest rates on loans are lower.

3) What are the main arguments for the Fed's independence?

(Check

all that

apply.)

A.

It would be less democratic for elected officials to control monetary policy.

B.

An independent Fed makes a political business cycle less likely.

C.

Only an independent central bank can deal with a financial crisis without causing an increase in unemployment and inflation.

D.

Monetary policy is too important to be left to politicians, who are not economists and have their own political interests at stake.

Part 2: What are the main arguments against the Fed's independence?

(Check

all that

apply.)

A.

Monetary policy is too important to be left to politicians, who are not economists and have their own political interests at stake.

B.

The public is unable to hold Fed officials accountable for their policies, unlike elected officials.

C.

Only an independent central bank can deal with a financial crisis without causing an increase in unemployment and inflation.

D.

It would be more democratic for elected officials to control monetary policy.

4) [Related to the

Making the Connection

Michael McAvoy's explanation of how the Federal Reserve Bank cities were selected is more consistent with a _______ of how the decision was made since he finds that locations were determined based on _______.

A.

principal-agent view: political favoritism

B.

public interest view: sound economic reasons

C.

public interest view: public opinion polls

D.

principal-agent view: a random selection of cities within each region

5) In what ways is the Fed subject to external pressure?

(Check

all that

apply.)

A.

Through negative reporting journalists can rally public sentiment against Fed policies.

B.

The Congress scrutinizes Fed's budgetary requests and can reduce the amounts requested if the Fed has fallen out of favor with key members of the House or Senate.

C.

The Congress can amend the Fed's charter and powers or even abolish it entirely.

D.

The president can exercise control over the membership of the Board of Governors and appoint a new chairman every four years.

6) Why was the Federal Reserve System split into 12 districts?

A.

The Federal Reserve System was split into 12 districts because communications among regions was so poor that having a single central bank was not feasible.

B.

The Federal Reserve System was split into districts based on state borders.

C.

The Federal Reserve System was split into 12 districts because there was opposition in Congress to establishing a single, unified central bank.

D.

The Federal Reserve System was split into 12 districts so that the 12 states with the largest populations would each have a district bank.

7) Is it easier for a central bank to be independent in a high-income country or in a low-income country?

A.

The independence of a central bank does not depend on the level of a country's income.

B.

It is often difficult for a central bank to act independently in a high-income country.

C.

It is often difficult for a central bank to act independently in a low-income country.

D.

Low-income countries rarely have central banks.

PART 2 What implications does your answer have for what the average inflation rate is likely to be in high-income countries as opposed to low-income countries?

A.

Research has shown that the more independent a central bank is, the lower the inflation rate will be. Thus, one would expect the average inflation rate inless-developed countries to be higher than in industrial countries.

B.

Research has shown that the rate of inflation does not depend on the level of the central bank's independence.

C.

The average inflation rate will be higher in low-income countries, but only because of the limited ability of the economy to expand production.

D.

Research has shown that the more independent a central bank is, the lower the inflation rate will be. Thus, one would expect the average inflation rate inless-developed countries to be lower than in industrial countries.