Youve Read How The Federal Reserve Attempts To

Question

You've read how the Federal Reserve attempts to use the money supply to stabilize the economy. One criticism is that much of this policy is dependent on private banks to execute. What are the pro…

You've read how the Federal Reserve attempts to use the money supply to stabilize the economy. One criticism is that much of this policy is dependent on private banks to execute. What are the pros and cons if the Fed lent directly to households and small businesses? Is this a good idea?

Solutions

Expert Solution

If the FED lent directly to households and small businesses then
the advantage would be that there will be no intermediate banks .
FED can directly control the target money supply and carry on the
lending process without private banks intervening . Even if the FED
lowers repo rate or interest rate , it is upto the private banks
the amount they wish to lent out and amount they wish to maintain
as reserves to some extent .

The disadvantages are that FED cannot maintain records of such
large number of financial transactions alone , financial inclusion
is hampered since FED alone cannot reach all parts of country .


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