Monetary Policy in the United States 1. Identify at least three problems facing the FED in achieving its goals of monetary policy and give your recommendations on how to deal with each of the problems you list. Inflation presents a problem for the FED achieving it’s goal of price stability. Inflation is unavoidable as far as the natural progression of an economy is concerned. Supply and demand also affect inflation. While the FED cannot control supply and demand of a product, I would suggest that they try to control price stability by creating regulations of what a company can charge related to the supply and value of a product.
A high unemployment rate negatively affects the FED’s goal of a high employment rate. The employment rate is directly related to the production of the economy and therefore also related to supply and demand. The FED could look into putting regulations into place regarding employment policies when the economy is on a downturn to help keep employment rates up. Finally, another goal of the FED is steady economic growth and recessions could interfere with that.
To counter economic lag created by recessions, the FED could work with other governmental organizations to provide incentives for businesses to create jobs and keep the economy and production going. 2. Identify and explain at least three ways that the Federal Reserve affects the banking system through open market operations (OMO). Open market operations affect the volume and growth of bank deposits, the value of bank stock, and the volume of lending and interest rates attached to bank borrowing and loans.
As far as volume and growth of bank deposits, the federal reserve can easily control how much funding the bank has at any given time. They can quickly decrease the supply of paper money by electronically debiting it and replacing it with a different financial instrument such as government bonds, foreign currency or gold. They can control the value of bank stock by controlling the amount of financial instruments backing up the bank’s holdings. The federal reserve can also control the volume of lending and interest rates attached to bank borrowing and loans by adjusting for inflation using repo (lending) and reverse repo (borrowing). . Explain how changes in reserve requirements and the discount rate affect the operations of banks and other depository institutions. Changes in reserve requirements and the discount rate affect the operations of banks and other depository institutions by changing the amount of actual funding that they have available to them. If they are required to hold more actual money, they may have less financial instruments such as gold to back up the value of the money. If the discount rate fluctuates, banks may have to adjust interest rates on their loans to compensate for the money they are gaining or losing. . Explain why the FED cannot set intermediate targets in terms of both monetary aggregates and interest rates. The FED can only pursue one target at any given time. For example, if they are targeting interest rates, exchange rates will fluctuate and vice versa. The FED’s influence over real interest rates is weaker than that of nominal interest rates and stabilizing the economy is more important than stabilizing interest rates. 5. Update the case information by using at least two (2) data sources in addition to the text.
Modern monetary policy does not involve gold as much as it used to in the past. In 1968, the United States reneged on it’s guarantee to pay in gold and effectively removed itself from the “gold standard”. Since then, it has been the responsibility of the FED to control the amount of money and the amount of credit in the U. S. economy. In doing this, the purchasing power of the US dollar was maintained and its comparative worth in the exchange market. (http://www. finpipe. com/monpol. tm) Monetary policy is created and maintained by the Federal Open Market Committee (FOMC), which is made up of the members of the Board of Governors of the Federal Reserve System and five Reserve Bank presidents. The FOMC holds eight regularly scheduled meetings during the course of the year, and other meetings as needed for problems or adjustments. (http://www. federalreserve. gov) References Board of Governors of the Federal Reserve System. (2010, January). Retrieved February 8, 2010, from http://www. federalreserve. gov Monetary Policy. (nd) Retrieved February 8, 2010, from http://www. finpipe. com/monpol. htm