Critical Thinking Questions


Why do presidents typically reappoint Chairs of the Federal Reserve Board even when they were originally appointed by a president of a different political party?


In what ways might monetary policy be superior to fiscal policy? In what ways might it be inferior?


The term moral hazard describes increases in risky behavior resulting from efforts to make that behavior safer. How does the concept of moral hazard apply to deposit insurance and other bank regulations?


Explain what would happen if banks were notified they had to increase their required reserves by one percentage point from, say, 9 percent to 10 percent of deposits. What would their options be to come up with the cash?


A well-known economic model called the Phillips Curve (discussed in The Keynesian Perspective chapter) describes the short-run trade-off typically observed between inflation and unemployment. Based on the discussion of expansionary and contractionary monetary policy, explain why one of these variables usually falls when the other rises.


How does rule-based monetary policy differ from discretionary monetary policy, that is, monetary policy not based on a rule? What are some of the arguments for each?


Is it preferable for central banks to primarily target inflation or unemployment? Why?