Unit 5 was all about the financial crisis and how Central Bank acts in this distress or how it should prevent the financial crisis from happening. There are two types of financial crisis: non-systematic and systematic. Often Fed can stop the systematic crisis from happening if starts acting in the non-systematic crisis. Let’s have a look at the tools it can use.
Which of the monetary tools available to the Federal Reserve is most often used? Why?
The monetary tool that is most used in the event of Crisis is Lender of last resort. When there is a crisis (often starts with non-systematic and that’s the time when Fed should intervene possibly) Fed acts as the Lender of last resort which means that the Central bank credits a big institution. That
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For that, Fed uses the tools of keeping stable interest rates which affect the inflation rate (as per the Fisher equation) and control the money supply in the economy. Those duties can’t be done by any other commercial banks or other financial institutions and hence it is one of the most important tools of the monetary policy of Fed.
Describe how expansionary activities conducted by the Federal Reserve impact credit availability, the money supply, interest rates, and security prices.
The term expansionary is self-explaining in the sense that it is used to “expand” the economic activities. Fed uses expansionary monetary activities to keep the economic growth at a healthy 2-3% (Amaden, 2017). Fed will release more money to enhance liquidity. How will Fed do it? Buy its Treasuries through the open market operations. This will provide banks with more money available for making loans. This will result in more credit available which will lead to lower interest rates. People and businesses will be able to borrow money that they can spend which will keep the economy growing. Securities prices will grow because of the inflation (explained by the Fisher