Question

4. How could the Fed "finance the government's debt"? How does that work, exactly?

5. In one sentence describe the so-called Taylor Rule. This rule is considered by many to be the cornerstone of modern Fed policy during non-crisis periods; that is, during normal times. However, no Fed president will ever admit that they strictly follow the Taylor Rule at any time (because the Fed doesn't want investors or firms to think they are strictly following any rule-based policy). It is named after John Taylor, the economists whose congressional testimony you read for the previous module.

Answer 1

4) The Federal Reserve, also known as the Fed, is the central bank, and it monetizes finnace debt in U.S. when it buys U.S. bonds, Treasury bills, and notes. It conduct open market operations, that involve purchases and sales of government debt. In United States, when Fed is interested in giving stimulus to the economy it increases the money supply and purchases government bonds from commercial banks as well as the public. On contrast, when Fed is interested in a control of inflation, it sells government bonds to the commercial banks as well as the public.

As per policy we have to answer first question