Question

a) The Federal Reserve is constructed to insulate it from political pressure. State and explain one argument in favor of the political independence of the Federal Reserve (or any central bank) and one argument in favor of less political independence, that is in favor of more political accountability, for a central bank. (8-12 sentences)

Answer 1

Argument in favor of political independence:

With Federal Reserve being politically independent, there will be no bias in the Fed with respect to framing policies. The Fed will be free to adopt policies which best suit the economy and not what makes the politicans happy.

For eg during times of elections approaching, politicans might ask Fed to adopt Expansionary monetary policy to make the people happy, however it would be unfavorable for the economy already fighting inflation.

Argument against political independence:

By being an independent organization free from political interference, there would be chances of the members of Fed trying to control the economy all by themselves and consider themselves above Politicans and political parties, which can make them more power hungry and adopt irrelevant policies which might harm the economy, and with no one to regulate them.