Kenneth R. Szulczyk
- A defensive transaction offsets unexpected changes in the money supply like bad weather
slowing down the check clearing process. A dynamic transaction is the Fed implements
monetary policy as specified in the general directive. - The Fed has complete control over the quantity of securities it can buy or sell. Thus, it can
change the money supply by a little or a lot, easy to correct mistakes, and implement
monetary policy quickly. - If the Fed decreases the discount rate, then the Fed encourages banks to borrow more from
the Fed. A lower discount rate is expansionary monetary policy because it could inject more
funds into the banking system, expanding the money supply. If the Fed raises the discount
rate, subsequently, it implements contractionary monetary policy. - The Fed could grant adjustment credit, seasonal credit, or extended credit.
- The Fed could audit the bank more, could impose fines on the bank, or stop lending to a
bank. - The Federal Reserve cannot force banks to accept loans. The Fed could lower the discount
rate, but banks might not increase their borrowings from the Fed. - When the Fed conducts monetary policy, the policy affects the federal funds rate first. If the
federal funds rate rises, then the Fed may be pursuing contractionary monetary policy. If the
federal funds rate drops, subsequently, the Fed may be using expansionary monetary policy. - Changing the reserve requirements changes the money multipliers. Thus, even a small
change in the reserve requirement could have a large impact on the money supply. - One benefit is the government could eliminate deposit insurance. Banks would hold all
deposits. Furthermore, the money multipliers will be one, and the Fed has exact control over
the money supply. However, this stops banks from being financial intermediaries. They
connect savers to borrowers. Banks are critical to finance mortgages and lend to businesses
and households. - The Fed's goals are price stability, high employment, economic growth, financial market and
institution stability, interest rate stability, and foreign-exchange market stability. - Information, administrative, and impact time lags. Economy could be leaving a recession.
By the time monetary policy influences an economy, the economy is already growing, and
the monetary policy causes the economy to grow quickly, creating inflation. - Although the Fed has six goals, it cannot control them. However, the Fed uses targets
because it has better control over them and in turn, the targets influence the goals.