Author Question: When and why did Congress create the Federal Reserve System? What other attempts, if any, were made ... (Read 117 times)

KWilfred · **on:** Jun 30, 2018

When and why did Congress create the Federal Reserve System? What other attempts, if any, were made to establish a central bank in the United States?

What will be an ideal response?

Question 2

Given the table above, suppose consumption in period two is 40,000. Then, the interest rate rises to five percent, and period-two consumption does not change. We may infer that ________.

A) the income effect is stronger than the substitution effect
B) the substitution effect is stronger than the income effect
C) the substitution and income effects cancel out
D) this consumer has a binding borrowing constraint

randomguy133 · **Reply #1 on:** Jun 30, 2018

Answer to Question 1

The Federal Reserve System was created in 1913, when president Woodrow Wilson signed the Federal Reserve Act into law. Severe nationwide financial panics in 1873, 1884, 1893, and 1907, along with accompanying economic downturns, raised fears in Congress that the U.S. financial system was unstable, and the severity of the 1907 panic convinced many that the United States needed a central bank to act as lender of last resort to make loans to banks experiencing runs. The Federal Reserve System represents the third attempt at establishing a central bank in the United States. The first attempt, in 1791, has Treasury Secretary Alexander Hamilton organizing the Bank of the United States, which was granted a 20-year charter. Congress did not renew the charter when it expired in 1811. The second attempt came in 1816, when Congress established the Second Bank of the United States. This bank was also under a 20-year charter, and although Congress passed a bill to recharter the bank in 1836, president Andrew Jackson vetoed the bill, so the charter expired and the Second Bank of the United States disappeared.

Answer to Question 2

D