Assume that you are a consultant for the banking industry and you are approached by a representative of a group of investors trying to decide whether to form an Internet bank. How would you advise her about the following factors.
a. the likely target market
b. capital and labor expenses
c. technology
d. cost structure relative to brick-and-mortar banks

What are the Fed's monetary policy goals?

Construct a hypothetical scenario under which the Fed's goals of high employment and foreign-exchange market stability might conflict. In the case of such a conflict, what goal is the Fed likely to emphasize.

Suppose that the demand for money becomes less stable (that is, on the money demand-money supply diagram it shifts more frequently). Would this make selecting a monetary aggregate as an intermediate target more or less desirable? Explain.

What factors determine the variables that are selected as intermediate targets for monetary policy?

Why is price stability a goal of monetary policy?

Should a goal of monetary policy be to reduce the unemployment rate to zero? Why or why not?

Why should policymakers care about fluctuations in interest rates or exchange rates?

Why do policymakers use a two-step targeting procedure, with both operating and intermediate targets, instead of single-step targeting?

Why can't the Fed target both the money supply and interest rates simultaneously?

State whether each of the following variables is most likely to be a goal, an intermediate target, an operating target, or a monetary policy tool.
a. M2
b. Monetary base
c. Unemployment rate
d. Open market operations
e. Federal funds rate
f. Nonborrowed reserves
g. M1
h. Real GDP
i. Discount rate

A recent proposal suggested that the Fed use the monetary base as its operating target to achieve a specified nominal GDP range as its intermediate target. What are the pros and cons of this suggestion?

Milton Friedman:
“In position, power, and function, the Federal Reserve System differs materially from all other central banks. When the U.S. dollar emerged as the primary international currency serving trade and commerce the world over, the Federal Reserve emerged as the central bank of the world. It already had acquired a leading position under the Bretton Woods system that had made the U.S. dollar the international reserve money, payable in gold at a price of $35 per ounce. When, in August 1971, President Nixon repudiated the Bretton Woods agreement, the world continued to use the U.S. dollar without its redeemability. After all, the world’s merchants and bankers had grown accustomed to it. The dollar afforded access to the markets of the most productive country in the world, and its record of relative stability was one of the best in recent monetary history, despite its devaluations in 1934 and 1971. Above all, the official repudiation of gold created a void which no other fiat currency could possibly fill. It left the Federal Reserve dollar in the most prominent position for becoming the world medium of exchange and reserve asset.”
Money and Freedom, 1985, p. 18.

How did the end of Bretton Woods cause the Federal Reserve to become more globally relevant?

How is the dollar weaker because the U.S. is less productive today relative to other regions of the world?

Explain discount policy. What are its advantages (from the point of view of the Fed?) Explain and give examples of adjustment, seasonal, and extended credits.

What is moral suasion?

Why did Congress pass the Federal Reserve Act in 1913 when the United States had gotten along without a central bank since 1936?

What are the four ways that Fed organization can be divided?

What are the Board of Governors' duties and responsibilities with regard to monetary policy?

Where does most of the Fed's income come from? What features of the Fed help to make it independent of political pressure? How does the U.S. Constitution protect the Fed?

How many Federal Reserve banks are there? Where are they located?

Who guides the open market operations of the Fed?

Why do Federal Reserve districts cut across some state lines, and why do the directors of the district banks represent business, banking, and the general public?

What are the duties of Federal Reserve banks?

"It is impossible to know where the true power and authority in an organization lie just from examining the formal structure of the organization." Does this observation apply to the Federal Reserve System? Explain.

Evaluate: The Federal Reserve System is independent of the political process in the United States.

Evaluate: To conduct monetary policy in the national interest, the Federal Reserve System should be made independent of the political process in the United States.

Here is the argument that hockey is the best sport.

What are central banks and where do they come from?

What are the macroeconomic goals of the U.S. Federal Reserve? Explain in detail the purpose of Humphrey-Hawkins.

Why is price stability considered such an important goal relative to others? How successful has the Fed been in pursuing this goal?

What are the major assets and liabilities of the Federal Reserve System? Describe each briefly.

Explain how the Fed sets the reserve ratio. Is the reserve ratio and the money supply positively or inversely related? Define: excess reserves and fully loaned institution.

What is the money multiplier and how is it related to the money supply and the monetary base?
Define open market operations. How does the Fed know how much money it needs to increase (decrease) the monetary base through open market operations?

If the Fed wants to increase the money supply, should it make an open market purchase or sale? Should it make more discount loans or fewer? If the Fed wants to decrease the money supply, what should it do?

If a bank has $10,000 in excess reserves, what is the most new lending that it should do? Why shouldn't it do more than that amount?

A student remarks, "If any one bank can safely loan only an amount equal to its excess reserves, I don't understand how the banking system as a whole can loan out an amount equal to several times the initial excess reserves in the system." Resolve this seeming paradox.

Explain why you agree or disagree with the following observation: "If deposit insurance were eliminated, the Fed's control over the money supply would be reduced."