Question

David Wheelock of the Federal Reserve Bank of St. Louis describes the following episode at the beginning of the Great​ Depression: Following the stock market crash​[of October​ 1929], the Federal Reserve Bank of New York used open market purchases​ [of Treasury​ securities] and liberal discount window lending​ [to commercial​banks] to inject reserves into the banking system. . . . The Federal Reserve Board reluctantly approved the New York​ Fed's actions ex​ post, but many members expressed displeasure that the New York Fed had acted independently.

​Source: David​ C.Wheelock, "Lessons​ Learned? Comparing the Federal​ Reserve's Responses to the Crises of 1929–1933 and 2007–​2009,"Federal Reserve Bank of St. Louis Review​, Vol.​ 92, No.​ 2, March/April​ 2010, pp. 97–98.

What are the arguments for a Federal Reserve Bank operating​ independently?

A. A regional Federal Reserve Bank acting independently can act quickly to address regional issues. This is the correct answer.

B. A regional Federal Reserve Bank would be circumventing the checks and balances built into the system.

C. A regional Federal Reserve Bank acting independently can increase the stability of the entire banking system. Your answer is not correct.

D. A regional Federal Reserve​ Bank's actions might exacerbate a crisis.

What are the arguments against a Federal Reserve Bank operating​ independently? ​(Check all that apply.​)

A. A regional Federal Reserve Bank acting independently can increase the stability of the entire banking system.

B. A regional Federal Reserve Bank would be circumventing the checks and balances built into the system.

C. A regional Federal Reserve​ Bank's actions might exacerbate a crisis.

D. A regional Federal Reserve Bank acting independently can act quickly to address regional issues.

Answer 1

Answer 1:

Option A. A regional Central Bank acting independently can act quickly to address regional issues which is not the case in case of government interfering in the functioning of the Central Bank because it leads to delay in decision making and increase the number of approvals required.

Answer 2:

Option B.A regional Federal Reserve Bank would be circumventing the checks and balances built into the system which the government takes into consideration when the Central Bank formulates any policy.