Discussion:
1. Suppose that in an effort to stimulate the economy, the Federal Reserve decided to engage in an open market operation to expand the M2 money supply by 10%. What are some potential drawbacks of such a move?
2. Instead of engaging in open market operations, suppose the Fed simply printed an extra $500 billion and disbursed it equally among the population. Why is this a problem?
3. Briefly explain the impacts of increasing the reserve requirement ratio on banks.
4. Why are decisions by the FOMC regarding changes in the overnight lending rate so closely followed by the financial markets?