Assignment:
Questions:
1. Why do you suppose the Fed likes to signal its intentions about monetary policy ahead of time?
2. Some economists have argued that the Fed should stick to a simple "monetary rule," such as a stable growth rate of the money supply, regardless of what is going on in the economy. Given the Fed's performance history, can you suggest why we might benefit from such a rule? Why do you think the Fed has steadfastly refused to implement such a rule?
3. One effect of the September 11, 2001 terrorist attacks was to temporarily prevent banks from accessing reserves they needed to meet the demands of their customers. (This occurred because the attacks destroyed many records as well as the computers required to access backup records, and it took affected banks several weeks to become fully operational.)
In response, the Fed made many billions of dollars of reserves available to banks, gradually withdrawing the new reserves from the banking system as that system returned to normality. Suppose the Fed had not injected reserves in this way. What would likely have happened to interest rates as a result? What would have been the likely impact on the stock market and on spending by consumers and businesses? Would the unemployment rate have gone up or down?
Readings:
From The Economics of Macro Issues
by Roger LeRoy Miller and Daniel K. Benjamin