Question

1. Why was the Federal Reserve System set up with twelve regional Federal Reserve Banks, rather than one central bank as in other countries? 2. Which entities in the Federal Reserve System control the discount rate? Reserve requirements? Open market operations? 3. In what ways can the regional Federal Reserve Banks influence the conduct of monetary policy? 4. How is the president of the United States able to exert influence over the Federal Reserve?

Answer 1

1) The Federal Reserve System is built around with 12 regional banks with a 7-member Board of Governors. In establishing the Federal Reserve System, the America was divided geographically into 12 Districts, each district with a separately incorporated Reserve Bank. The setting of a separately determined discount rate appropriate to each District was considered the most appropriate and significant tool of monetary policy at that time. Because of the traditional hostility of American to a centralized authority and central bank, the system of 12 regional banks built for diffusing the power along regional lines.

2) The Board of Governors of the Federal Reserve System controls discount rate as well as the reserve requirements, and the Federal Open Market Committee controls the open market operations. The main tools are open market operations through the purchase and sale of government securities; discount policy through controlling the price and quantity of discount loans to banks; and reserve requirements through setting the percentage of deposits that bank must hold in reserve. Among these open market operations and the discount rate affect the monetary base, and reserve requirements affect the money multiplier

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