Course Hero Logo

ECON 545 Week 6, Discussion Question 2 - Monetary...

Course Hero uses AI to attempt to automatically extract content from documents to surface to you and others so you can study better, e.g., in search results, to enrich docs, and more. This preview shows page 1 - 2 out of 8 pages.

Monetary Policy (graded)What are the monetary policies required to fight unemployment? What about those required tofight inflation? What are some of the downside risks & potential problems involved when usingmonetary policy?What are the monetary policies required to fight unemployment? What about those required tofight inflation? What are some of the downside risks & potential problems involved when usingmonetary policy?Monetary policy is not the same as fiscal policy, which is carried out through government spending& taxation.To understand monetary policy, it is important to understand a bit about the Federal Reserve, whichis the central bank of the United States.The Federal Reserve is a bank for banks. It has several branches around the U.S. hold deposits for &lend to banks. As a means of ensuring the safety of the nation's financial institutions, the FederalReserve requires banks to keep a strict percentage of their deposits on reserve at a Federal Reservebank. The Federal Reserve determines the appropriate percentage, called the reserve requirement. Ifa bank is unable to meet its reserve requirement, it can borrow from the Federal Reserve to meetthe requirement. The interest rate on these funds is called the discount rate. (Banks can also borrowthe excess reserves of other banks, & this interest rate, called the federal funds rate, is determinedby the open market. The Federal Reserve works to keep the discount rate close to the federal fundsrate.)Monetary policies are policies that are used by banks to control the supply of money.They do this indifferent ways.One way the bank can use monetary policy is to change interest rates for borrowing.When the goal is to control inflation the bank increases rates to decrease the amount of borrowing &prices will fall.When the goal is to remove deflation the banks will decrease the rate so people willinvest more & take out more loans.This will increase production, employment & prices.One major downside or risk of this type of monetary policy tool is that the success rate fully dependson how flexible the economic system is.What I mean is that what the bank does needs to be onboard with the central controller of the banks.All banks need to be on board.Monetary policy is the process by which the Central Bank manages the supply of money. It istypically referred to as being in an expansionary or contractionary. The expansionary policy increasesthe size of the money supply or lowers the interest rates. The contractionary policy decreases thesize of the money supply, or makes the interest rates higher. The expansionary part of the monetarypolicy is usually used to fight unemployment during a recession by lowering interest rates. Thecontractionary part of the monetary policy targets to raise interest rates to combat inflation. Theexpansionary & contractionary policies must be carefully used so that they do not go too far in eitherdirection (expanding or contracting) or cause a big problem in the economy.

Upload your study docs or become a

Course Hero member to access this document

Upload your study docs or become a

Course Hero member to access this document

End of preview. Want to read all 8 pages?

Upload your study docs or become a

Course Hero member to access this document

Term
Spring
Professor
King
Tags
Monetary Policy, Federal Reserve System

Newly uploaded documents

Show More

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture