1. Describe the difference between an offensive and a defensive action from a Central Bank. Define:
a. Each type of action:
- Offensive: when the fed actively tries to change monetary policy to try and have contractionary or expansionary effects on the economy.
- Defensive: when the fed buys bonds during a time of crisis in order to maintain the current policy and status of the economy.
b. Under what circumstances should the bank adopt one policy or the other?
c. What is the relation of each policy with the federal funds rate, the discount rate, government securities, and the reserve requirement.