Part 1How does the Federal Reserve have a high degree of instrument independence? A. The Federal Reserve can choose any method it wants in order to achieve a given set of policy objectives. B. The Federal Reserve is not subject to the influence of Congress. C. The Federal Reserve is able to set the goals of monetary policy. D. The Federal Reserve can contract with independent experts to choose the appropriate fiscal instruments.

Question

Part 1How does the Federal Reserve have a high degree of instrument​ independence? A. The Federal Reserve can choose any method it wants in order to achieve a given set of policy objectives. B. The Federal Reserve is not subject to the influence of Congress. C. The Federal Reserve is able to set the goals of monetary policy. D. The Federal Reserve can contract with independent experts to choose the appropriate fiscal instruments.

BlackTom AI · Accepted Answer

Question restatement: Part 1 asks how the Federal Reserve has a high degree of instrument independence, and provides four options to choose from.

Option A: 'The Federal Reserve can choose any method it wants in order to achieve a given set of policy objectives.' This option highlights instrument independence by pointing to the Fed's control over the tools or instruments (like open market operations, reserve requirements, and the discount rate) used to achieve policy goals. The nuance here is that while the Fed can select among policy instruments appropriate to its objectives, in practice it uses a set of standard tools. The essence of instrument independence is the freedom to choose among instruments rather than being directed by lawmakers on which tools to deploy. So this option captures the core idea, even though in the real world choices are bounded by established policy frameworks.

Option B: 'The Federal Reserve is not subject to the influence of Congress.' This states that Congress has no influence, which overstates independence. While the Fed is designed to operate independently within the government and is insulated from political pressures in its day-to-day decisions, it is still subject to oversight and accountability to Congress. Therefore, saying it is not subject to any influence is inaccurate and reflects a misunderstanding of the institutional balance.

Option C: 'The Federal Reserve is able to set the goals of monetary policy.' This is a tempting but misleading statement. The Fed participates in formulating monetary policy goals, particularly within its dual mandate, but the explicit setting of broader policy goals involves Congress and the President as part of the policy framework. Instrument independence pertains to choosing tools, not to unilaterally setting overarching objectives alone. Thus, this option mislabels the scope of independence by conflating tools with goals.

Option D: 'The Federal Reserve can contract with independent experts to choose the appropriate fiscal instruments.' This is incorrect because fiscal instruments (taxation, spending) are under legislative control, not monetary policy instruments. The Fed does not select fiscal tools through contracts with external experts; monetary policy instruments are chosen and implemented by the central bank, while fiscal policy is determined by Congress and the executive branch. This option confuses the domains of fiscal policy with monetary policy and misrepresents the Fed’s authority.

Putting it together, option A correctly characterizes instrument independence, focusing on the Fed’s ability to select among monetary policy instruments to achieve policy objectives, while options B, C, and D either overstate independence, misstate the division of policy goals, or confuse fiscal versus monetary instruments. The differences hinge on understanding what ‘instrument independence’ means in monetary policy—freedom to choose tools within a policy framework, not complete exemption from oversight, nor control over goals, nor handling fiscal tools.

Homework:Chapter 16 Homework

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