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MAKING THE FEDERAL RESERVE MORE TRANSPARENT

question 22

Multiple Choice

MAKING THE FEDERAL RESERVE MORE TRANSPARENT
What are the advantages and disadvantages of the Federal Reserve becoming more transparent about its actions and
decisions and disclosing more information to the public?
In recent years, the Fed has gradually become more open in its deliberations. For many years, the Fed would not even say if it
had changed interest rates. These policies began to change slowly in the 1990s. Starting in 2000, after each FOMC meeting the
Fed announces its target for the federal funds rate and makes a brief statement
explaining its actions. But should the Fed go further in describing its intended future policies?
There was enough interest on this very topic for the FOMC to hold a special meeting—the first since 1979—to discuss the
issue. Some members of the FOMC, including the current chairman Ben Bernanke, believed that the financial markets
needed more information so that they would have a clearer idea of what future Fed
policy—and short-term interest rates—were likely to be. Other members, including William Poole, the president of the St.
Louis Federal Reserve Bank, disagreed. Poole felt that the financial markets understood the implicit rules that the Fed
followed and that issuing a more complex public statement would just confuse
matters.
The special meeting did not lead to any dramatic change in the Fed’s communication policies. But now the members of the
FOMC participate in drafting statements. The Fed clearly recognizes that its statements
may be just as important as its actions.
-According to the application, the Federal Reserve started announcing its targeted federal funds rate only after:

Definitions:

Reserve Ratio

The Reserve Ratio is the fraction of total deposits that a bank is required to hold in reserve and not lend out, a critical tool in monetary policy used to control the money supply.

Deposit Expansion Multiplier

A ratio that measures the maximum amount of money a bank can create with a given level of reserves.

Currency

A system of money in general use in a particular country or economic context.

Issued

Pertains to the act of officially distributing or releasing something, such as securities or legal documents.