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Hi Alex, Can you do this for today The Federal Reserve is
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Hi Alex, Can you do this for today
The Federal Reserve is responsible for regulating the U.S. monetary system and setting monetary policy. Monetary policy refers to what the Federal Reserve, the nation's central bank, does to influence the amount of money and credit in the U.S. economy. What happens to money and credit affects interest rates (the cost of credit) and the performance of the U.S. economy.
The Federal Reserve’s three instruments of monetary policy are open market operations, the discount rate and reserve requirements. The Fed controls the money supply primarily through open-market operations. Accordingly, the purchase of government bonds increases the money supply, and the sale of government bonds decreases the money supply. The Fed can also expand the money supply by lowering reserve requirements or decreasing the discount rate. It can contract the money supply by raising reserve requirements or increasing the discount rate.
Based on the above summary and the detailed descriptions of the issues in the textbook (Cchapter 33) discuss any of the following set of questions:
1.What are the expansionary monetary policy and contractionary monetary policy? What are their policy instruments? How are they used to deal with the inflationary gap and recessionary gap?
2.Do you think monetary policy or fiscal policy is likely to be the more effective tool of stabilization policy? Why?
3.If the Fed wants to increase aggregate demand, it can increase the money supply. If it does this, what happens to the interest rate and rate of inflation? Why might the Fed choose not to respond in this way?
4.Should monetary policy be made by rule rather than by discretion? Why?
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replied 3 years ago.
Assume a good paragraph for each. Is this evening ok ? What time is your deadline and what time zone?
deadline is at 7:00 pm ET
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replied 3 years ago.
All set with 723 words in plenty of time for your deadline. Thanks for requesting me!
Expansion and contraction as it related to monetary policy is a function provided by the federal reserve that allows for adjustments in the liquidity of the money supply. Controlling the amount of money that is available including the rate at which it can be borrowed is a way to control the amount of money being borrowed. Less borrowing means less money traversing through the economy and provides for contraction. The opposite is true in order to increase money flow as interest rates come down people and businesses are more inclined to borrow. Controlling the federal funds rate is a component of expansion and contraction just as the case is when buying or selling government bonds to either take money out of circulation or put more into circulation. The final piece is the reserve requirement that requires banks to have so much in reserve before they can lend and as a result the higher the reserve the less they lend and the same is true for the opposite. In order to help manage inflationary and recessionary gap these tools can be used to reduce the cyclical nature of an overheated or slow economy.
Monetary policy is the best way to control the economy in terms of stabilization as it provides an equal framework for everyone to work within such the effect is felt by everyone and equally across the economy. Cutting spending will provide this same form of control but has virtually never been used as there are political ties that go along with decreased spending and turning voters against elected officials. As such that option is virtually not viewed as even possible. In addition those spending cuts or increases in terms of the fiscal policy don’t apply to every facet of the economy as it just relates to things the government is buying. If fiscal policy simply calls for more spending in some cases the money is targeted at certain industries like in cases of the auto bailout and only certain people receive the rewards of such policies. An overall adjustment to the economy as a whole is a much more fair approach that controls the overall economy and doesn’t protect certain industries.
While not immediate the increase in the money supply as a way to control aggregate demand eventually leads to higher interest rates and more inflation. The primary drivers are the fact that while more money is in supply in the short run interest rates drop as more money is available but inflationary pressure almost occurs immediately as more money flows through the economy there are more people spending and when there is ample money flowing in the market tends to equalize by increasing the cost of goods to meet the new demand. While interest rates may fall initially they will later have to raise in order to slow the injection of cash that spurred the economy. Even though being manipulated the market will eventually reach the market equilibrium between interest rates, inflation and the recessionary or inflationary gap. The Fed may not respond by increasing aggregate demand as they may have done that already and continually increasing the money supply could result in quick inflationary spike at some point once the market becomes overheated. Other reasons for not adjusting the money supply relate to the use of other measures that may better help to control the aggregate demand such as lowering interest rates. The target of where the money will likely flow and the amount of impact will help determine this.
If monetary policy were controlled by rule I believe there may be a problem in such cases where the market doesn’t respond according to what is expected. Such is the case now where the economy isn’t recovering but companies are making profits. Even though profits are increasing hiring is not and simply throwing more money into the economy may not encourage people to hire more as there may be other reasons for not doing so. If only rules were used there may be cases where aggregate demand could be spurred indefinitely at a serious cost of inflation in the long run. In addition, it would make the stock market highly volatile as a rule would control the economy and not someone who was making decisions targeted to deal with all of the variables related to expansionary and contractionary policy.
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