Question:
As a member of the Federal Reserve you are speaking with a group of newly elected members of Congress to explain your operations. The members of Congress have asked you to address the following issues.
The Federal Reserve has traditionally conducted open market operations through the purchase and sale of government bonds. 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?
Suppose the Federal Reserve purchased gold or foreign currency. How would this purchase affect the domestic money supply? Think about open market purchases of government bonds.