Introduction to Finance

dynamic 
actions
 
that stimulate or repress economic activity or the level of prices. However, we 
should recognize that this area is but a minor part of the continuous operation of the Fed-
eral Reserve System. Far more signifi cant in terms of time and eff ort are the defensive 
and accommodative responsibilities. 
Defensive activities
 
are those that contribute to the 
smooth, everyday functioning of the economy. Unexpected developments and shocks occur 
continually in the economy; unless these events are countered by appropriate monetary 
actions, disturbances may develop. Large, unexpected shifts of capital out of or into the 
country and very large fi nancing eff orts by big corporations may signifi cantly alter the 
reserve positions of the banks. Similarly, buyouts and acquisitions of one corporation by 
another, supported by bank fi nancing, also aff ect reserve positions. In our competitive mar-
ket system, unexpected developments contribute to the vitality of our economy. Monetary 
policy, however, has a special responsibility to absorb these events smoothly and prevent 
many of their traumatic short-term eff ects. The 
accommodative function
 
of the nation’s 
monetary system is the one with which we are the most familiar. Meeting the credit needs 
of individuals and institutions, clearing checks, and supporting depository institutions rep-
resent accommodative activities.
monetary policy 
formulated by 
the Fed to regulate money supply 
growth
defensive activities 
Fed activities 
that off set unexpected monetary 
developments and contribute to the 
smooth, everyday functioning of 
the economy
accommodative function 
Fed 
eff orts to meet credit needs of 
individuals and institutions, 
clearing checks, and supporting 
depository institutions