4 - Since the failed attempt to control inflation by targeting the growth of monetary aggregates in the late 1970s and early 1980s the Federal

4 - Since the failed attempt to control inflation by...

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Since the failed attempt to control inflation by targeting the growth of monetary aggregates in the late 1970s and early 1980s, the Federal Reserve (the Fed) has explored the use of various policy guides, including price indices, gold prices, and indicators of future price levels (Wray 2004). Each was used, with varying success, to assist the Fed in carrying out its dual mandate: the promotion of price stability and maximum employment (Bell-Kelton 2006). National income accounting is a measure of the economy's overall performance. It does for the economy as a whole what private accounting does for the individual firm or for the individual household (McConnell, Brue 2004). The Bureau of Economic Analysis (BEA), compiles the National Income and Product Accounts NIPA), for the U.S. economy (McConnell, Brue 2004). Through this measure economists and policymakers are able to track production levels at regular intervals, create policies for maintaining and protecting a healthy economy, and review the economy for growth, consistency or decline. The primary measure of the economy's performance is its annual total output of goods and services or its aggregate output (McConnell, Brue 2004). Aggregate output is labeled gross domestic product (GDP), the total market value of all final goods and services produced in a year (McConnell, Brue 2004). The BEA determines the GDP as well. Monetary policies can affect the GDP. The way banks lend money, how people obtain credit or spend money and the distribution of goods and services domestically and globally are affected as well. The Federal Reserve implements monetary policy and the federal government implements fiscal policy in the U.S. The Fed can use three tools to set their monetary policy. The tools work by changing the amount of excess reserves in the banking system (McConnell, Brue 2004). Conducting open- market operations (the buying and selling of government bonds to the public and banks), changing the reserve ratio (percentage of commercial bank deposit liabilities required as reserves) and changing of the discount rate (McConnell, Brue 2004). The Fed utilizes the open-market operations and changing of the discount rate the most.

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