OPPapers.com Essay Index >> Business >> The Economy And Monetarty Policy
We have many free term papers and essays on The Economy And Monetarty Policy. We also have a wide variety of research papers and book reports available to you for free. You can browse our collection of term papers or use our search engine.
The Economy and Monetarty Policy In principle, could the Federal Reserve conduct monetary policy through the purchase and sale of stocks on the New York Stock Exchange?
Submitted by jackrabbit630 on September 8, 2006
Category: Business
Words: 951 | Pages: 4
Views: 276
Popularity Rank: 50,030
Average Member Grade: N/A (Add a Comment / Grade this Paper)
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?
"In open market purchases, the Federal Reserve buys government bonds from the private sector" (O'Sullivan & Sheffrin, 2006, 646). This increases the money supply. "Each bank must keep an account with the Fed containing both its required and excess reserves. The check written against the Federal Reserve increases the bank's total reserves, essentially giving it more money to loan out" (O'Sullivan & Sheffrin, 2006, 647).
"In open market sales, the Federal Reserve sells government bonds to the private sector" (O'Sullivan & Sheffrin, 2006, 646). Open market sales will decrease the money supply. If the Federal Reserve sells government bonds to someone, that person will pay for the bonds with a check drawn on his or her bank and give this check to the Federal Reserve. The bank must either hand over the money in cash or reduce its total reserves with the Federal Reserve by that amount (O'Sullivan & Sheffrin, 2006).
Although bond interest rates are usually low, they are safe in promising to pay some money in the future. "If you own a bond, you are entitled to receive payments on it at a later time" (O'Sullivan & Sheffrin, 650).
This means of monetary policy would be achievable in the New York Stock Exchange. The government could sell stocks to the private sector, therefore, decreasing the money supply. The government could also buy stocks from the private sector, therefore, increasing the money supply.
Although it is achievable for the government to do this, there would be drawbacks to this situation. The stock market is not always stable. It rises and falls daily, sometimes by large amounts. This would potentially lead to a large loss of money for our government.
The stock market could...
You must Login to view the entire paper.
If you are not a member yet, Sign Up for free!