Question

1a)

What are some of the ways in which the Federal Reserve provides banking services to commercial banks and to the federal government?

b)

In your own words, briefly explain how changing reserve requirements and changing discount rates can change lending behaviors.

c)

When considering the Board of Governors’ selection process and the structure of the Federal Reserve, do you think the Federal Reserve is adequately insulated from political pressure? Should the Federal Reserve be insulated from political pressure? Why or why not?

Answer 1

a. The Federal Reserve Bank is commonly called the banker of the lower level banks because it makes the commercial banks aware of the banking rules and regulates them.

Commercial banks can store their surplus funds with the Federal Reserve Bank.

Commercial banks can take loans from the Federal Reserve Bank if required.  

Federal Reserve Bank also advises on monetary topics to commercial banks.

The Federal Reserve Bank is also called the government's bank as it issues licenses to new banks and also represents the federal economy internationally as well as regulates the foreign exchange market.

b. From time to time, the Federal Reserve Bank keeps increasing the interest rate for commercial banks by using monetary policies like repo rate and reverse repo rate, thereby increasing and decreasing the reserves with commercial banks. Because of this, if the hardest monetary policy is used by the Federal Reserve Bank, then the banks have a shortage of reserves due to which the bank provides loans to the customers with a higher interest rate, as a result of this, the customers take less loans. Which reduces the rate of inflation in the economy.

Likewise, if the Federal Reserve Bank uses a soft monetary policy, then banks have more reserves, so that they provide loans at a lower interest rate to the customers. As a result, the customers take more loans, so the inflati rate increases .

C This issue is debatable because the government has influence directly or indirectly on every institution. Similarly, there will be a direct or indirect effect here. According to me, the Federal Reserve Bank should not act under any pressure because the Federal Reserve Bank is considered to be the foundation of the country's economy, if the government intervenes here too, the Reserve Bank will not be able to give full participation in the economy and its economy Will be negatively affected. On the other hand, the Federal Reserve Bank should also set its limits so that the government does not have to intervene.