Banks in the Macro-Economy and Regulation

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At the end of this activity, you will have analyzed the role of banks in the macro-economy. Most U.S. banks are privately owned, profit-making organizations. Although they provide a service just like many other businesses, banks differ because of their importance in the macro-economy. Policymakers have debated whether banks should be permitted to engage in other lines of business such as selling insurance or buying and selling stocks and bonds.

Consider the role of banks in the economy and respond to the following:

  • If a bank fails, what are the risks for the macro-economy that do not exist for other businesses?
  • Should banks be allowed to enter other lines of business? Why or why not. Part 2 The Federal Reserve System (the Fed) has a large measure of political independence. The Board of Governors, appointed by the U.S. president and confirmed by the U.S. Senate, serves 14-year terms. In addition, the Federal Open Market Committee includes representatives of private banks in the Federal Reserve System.
  • Consider the role of the Fed in the economy and respond to the following:
    • What are the best goals for the Fed? Why?
    • How does the structure of the Fed insulate monetary policy decision makers from political pressure?
    • How does the fractional reserve system limit a bank’s ability to create money?
    • What is the difference between the federal funds rate and the discount rate? Be sure to explain the differences in how these two rates are determined.

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