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Chapter 14: Q9. (page 300)

Why do economists nearly uniformly support an independent Fed rather than one beholden directly to either the president or Congress?

Short Answer

Expert verified

The economist prefers an independent Fed since it keeps it free from political pressure and therefore provides flexibility and speed in the actions taken through monetary policy to stabilize the economy.

Step by step solution

01

Step 1. Federal Reserve independence 

The Federal Reserve is an independent body of the government. The independence of the Fed was established by Congress purposely since it keeps the Fed away from the political pressure and enables it to function smoothly.

There are two significant policies, the fiscal policy and monetary policy, responsible for maintaining stability in the economy. The fiscal policy is directed through the government. There is much political pressure involved while making decisions regarding tax cuts, etc. since politicians fear a backlash. This results in the failure of the fiscal policy many times. To keep the monetary policy away from this, the Fed is kept as the independent agency of government since monetary policy is directed through the Fed.

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Most popular questions from this chapter

Suppose that Lady Gaga goes to Las Vegas to play poker, and at the last minute, her record company says it will reimburse her for 50 percent of any gambling losses that she incurs. Will Lady Gaga probably wager more or less as a result of the reimbursement offer? Explain.

Explain and evaluate the following statements:

a. The invention of money is one of the great achievements of humanity, for without it the enrichment that comes from broadening trade would have been impossible.

b. Money is whatever society says it is.

c. In the United States, the debts of government and commercial banks are used as money.

d. People often say they would like to have more money, but what they usually mean is that they would like to have more goods and services.

e. When the price of everything goes up, it is not because everything is worth more but because the currency is worth less.

f. Any central bank can create money; the trick is to create enough, but not too much, of it.

Suppose that a small country currently has \(4 million of currency in circulation, \)6 million of checkable deposits, \(200 million of savings deposits, \)40 million of small-denominated time deposits, and \(30 million of money market mutual fund deposits. From these numbers we see that this small country’s M1 money supply is _______ , while its M2 money supply is  _______.

a. \)10 million; \(280 million

b. \)10 million; \(270 million

c. \)210 million; \(280 million

d. \)250 million; $270 million

Why are federal prosecutors reluctant to bring major charges against large financial firms? What was the main regulatory action of the Glass-Steagall law? Why might having many smaller financial firms be more stable than having fewer larger firms? What argument can be made for the possibility that larger financial firms might be more stable than smaller financial firms?

Identify three functions of the Federal Reserve, other than its main role of controlling the supply of money.
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