Question

Increased skepticism about the role of the Federal Reserve as well as the spread of misinformation (e.g., that increasing the money supply devalues the dollar and amounts to counterfeiting) have led some politicians to propose that the Federal Reserve be abolished. If this happens, monetary policy would essentially cease to exist as the money supply would no longer be flexible. This was the case about 50 years ago when the money supply was still tied to the amount of gold in reserves.

Given your knowledge of the role of the Federal Reserve (the Fed), identify potential risks to the economy if the Fed is abolished.
Choose each statement that represents a potential risk to the economy if the Fed is abolished.
a. There would be a lack of management of cash in circulation.
b. During a panic, banks could be forced into insolvency.
c. Fluctuations in the business cycle could increase in frequency and severity.
d. There would be an inability to increase or decrease government spending.

Answer 1

a. There would be a lack of management of cash in circulation.

b. During a panic, banks could be forced into insolvency.

c. Fluctuations in the business cycle could increase in frequency and severity.

Step-by-step explanation:

The Fed manages the money supply and if there is absence so it would create a serious mismanagement of the money supply. In addition to this, fed is the last resort lender and if it is not present than there would be the high chances of failure of banks. Also, the Fed would help in smoothening the business cycles via having monetary policies

Therefore the above 3 statements represent the potentital risk