Monetary Policy

a) Why was the Federal Reserve System set up with twelve regional Federal Reserve banks rather than one central bank, as in other countries?

b) 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?

c) What are the conventional monetary tools?

d) “The federal funds rate can never be below the interest rate paid on reserves.” Is this statement true, false, or uncertain. Explain your answer. Why is paying interest on reserves an important tool for the Federal Reserve to manage crises?

e) Following the global crisis in 2008, assets on the Federal Reserve’s balance sheet increased dramatically, from approximately $800 billion at the end of 2007 to $3 trillion in 2011. Many of the assets held are longer-term securities acquired through various loan program instituted as a result of the crisis. In this situation, how could reverse-repos (matched sale-purchase transactions) help the Fed reduce its assets held in an orderly fashion, while reducing potential inflationary problems in the future?