Chapter 26: The Federal Reserve System and Monetary Policy
1. If you wish to add a historical note to you class, you may want to discuss how the Fed s structure
arose from general distrust of New York financial interests.
2. Another historical note of potential interest may be why non-member banks are now subject to the
same reserve requirements as Federal Reserve member banks (the penalty for holding larger
3. The discussion of the structure of the Fed may be a good time to show students just how much
4. Note that the ability of the Fed to change monetary policy more quickly than fiscal policy can be
5. You may want to make sure that students see that velocity is just another way of viewing money
demand (at a higher opportunity cost, you want to hold less money, which means that each dollar held
has to work harder by being used more frequently to conduct a given volume of transactions).
6. Another useful way to think of velocity is to think of money as a hot potato, and the interest rate as its
7. Note that while expansionary monetary policy has the same effect as expansionary fiscal policy on
8. Note that Friedman s proposed 3% monetary growth rule, based on an average real growth rate of
9. A good classroom exercise about open market operations is to ask students why, if you write them a
check to buy a government bond from them, there will be no change in the money supply, but if the Fed
does the same thing, the money supply ultimately increases by an amount far more than the purchase.
10. You may want to show students how blunt an instrument changes in required reserves are by
11. A good classroom exercise for understanding the Fed s policy variables is to ask students why the
Fed would seldom do open market purchase at the same time it was increasing the discount rate or the
12. Garage sales can illustrate the transactions motive for holding dollars, and its proportionality to the
dollar value of transactions conducted. If the prices at garage sales rise, the amount of money I would
have to take to buy the same goods would rise proportionately. Similarly, if I was to buy more goods, the
amount of money I would have to take would rise proportionately.
14. Note that increasing the availability and acceptability of credit cards (which were introduced earlier in
the text as substitutes for holding money) would be a good way of introducing the analysis of a leftward
15. A potentially useful extension of the text s discussion of the Fed s monetary control would be to ask
what would happen to the money supply if the Fed decreased the required reserve ratio in a situation of
16. Note that the fact that monetary policy can be changed faster than fiscal policy allows the Fed to go
last, and change policy once fiscal policy is revealed, which is one of the reasons the Fed may have
17. Emphasize that it is the interaction between forecasting (both what the situation will be and what the
consequences of particular policy changes will be) and long and variable lags that makes effective
macroeconomic stabilization policy so difficult.
18. Note that the different monetary policy lags for output/employment and inflation means that we can