open market purchases of government bonds
As a member of the Federal Reserve you are speaking with a
group of newly elected members of Congress to explain your operations. The
members of Congress have asked you to address the following issues.
The Federal Reserve has traditionally conducted open market
operations through the purchase and sale of government bonds. In principle,
could the Federal Reserve conduct monetary policy through the purchase and sale
of stocks on the New York Stock Exchange? Do you see any possible drawbacks to
such a policy?
Suppose the Federal Reserve purchased gold or foreign
currency. How would this purchase affect the domestic money supply? [Hint:
Think about open market purchases of government bonds.]
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