Title: (1) Money Train Multimedia Activity Name: Jordan Miller Course: XECO 212 Due Date: Sunday, August 29, 2010 Instructor: Eugene Kaufman
(2) Scenario 1 In 150 to 200 words, explain your reasoning for the way you are planning on using Reserve Requirements. Be sure to address the following:
1. How Reserve Requirements affect the economy
2. How your action will affect economic growth
3. Why it is important to increase economic growth
4. Your rationale for the use of Reserve Requirements
At the end of the game, you will be provided with this information to give to your instructor.
Answer: The reserve requirement is what the Federal Reserve uses as a tool to control liquidity in a free market. Whenever the reserve bank lowers its reserve requirements it will then be considered an
expansionary monetary policy. The reason this happens is that this allows for more money to come into the banking system. With the higher requirement of the reserve, the less liquidity would be allowed. For that specific reason, the economy is able to get moving at a better pace again. The lower the reserve is set the more profit can be gained by a bank. This allows a bank to have more funds available to lend to a person wishing to borrow money. A potential borrower will then have more money to spend on goods, services, employees, a business, or business investment. Businesses are typically much better off as the economy thrives and grows. The better the business is doing the more money one may see in his or her paycheck. An employee that is making more money may feel the relief of having that extra money and even go out and spend a little more than usual. This is essentially how economic stimulus works.
Scenario 2 In 150 to 200 words, explain your reasoning for the way you are planning on using the Discount Rate. Be sure to address the following :
1. How the Discount Rate can affect the economy
2. How your action will affect economic growth
3. Why it is important to slow economic growth
4. Your rationale for the use of the Discount Rate
At the end of the game, you will be provided with this information to give to your instructor.
Answer: The discount rate is the tool the Federal Reserve uses to control the money supply that a bank commercial has to pay back so that they are able to borrow more money from the reserve. This is the same as a special interest rate that banks get. The Federal Reserve can lower or raise the discount rate specifically to suit the economy. This usually results in an encouragement or discouragement in borrowing money. If interest rates were to rise, banks would be less likely to request loans from the Federal Reserve. This would result in commercial banks turning down more loans to potential borrowers. This would only potentially slow down the economy since not as many people woould have the extra money in their pockets. The Federal Reserve uses discount lending to help control the money supply as well as helping financial institutions when they need a little help with money. This is the recent scenario of the latest recession that affected some of the worlds larger banks.
Scenario 3
In 150 to 200 words, explain your reasoning for the way you are planning on using Open Market Operations. Be sure to address the following :
1. How Open Market Operations affect the economy
2. How your action will affect economic growth
3. Why it is important to increase economic growth
4. Your rationale for the use of Open Market Operations
At the end of the game, you will be provided with this information to give to your instructor.
Answer: Open Market Operations are the way monetary policies are implemented by a central bank. The central bank then controls the short term interest rate and the base supply of money. This allows for total control of the money supply. The demand of base money at the target rate must be met by buying or selling government securities. Interest rates, inflation, or exchange rates all play a role in implementing these monetary targets. As the demand for base money increases, action
must be taken to maintain the short term interest rate to increase the base money supply. The central bank will then go to the open market to buy a financial asset such as gold, government bonds, or foreign currency. To be able to pay for these purchases, the bank then transfers new base money from the bank reserves to the sellers bank account. Overall, the total amount of base money in the economy will be increased.