Directions: Answer the following questions I would expect each answer would take up about 1 page, double spaced. Please take care to properly construct your answer, use spell check and good grammar.

QUESTION #1

The Federal Reserve is a creature of "Congress"

A. Explain what this statement means and who actually owns the Federal Reserve Bank system.

B. How does the structure of the Federal Reserve indicate that it is relatively independent from the political process

C. Do you agree with the independence of the Federal Reserve or should it answer to the President of the United States who is responsible for overall economic policy.

D. What would happen if the Federal Reserve came under the Treasury Department.

QUESTION #2

A) Describe the lags in the Fed's  policymaking process and how might these lags lead to destabilizing policy.

B) Why do monetarists favor the use of a non-activist rule for monetary policy

QUESTION #3

The textbook makes the following statement: "Some economists think that central banks should set policy based on a rule instead of having policy set by policymakers using their discretion at each policy meeting.

A. Explain the difference between these two concepts of policymaking and give examples of each one.

B. In your opinion, which approach (discretion or rules based) should the Federal Reserve operate under and why.

BONUS QUESTION (10 POINTS)

In the early 2000s the Federal Reserve made two significant changes relating to the demand and supply of bank reserves--1) demand--decided to pay interest on banks' reserves held by the Fed, and 2) supply--made loans to banks of good standing at the Prime Credit Discount Rate.

• Explain how these two changes will limit the swings in the actual Fed funds rate