Monetary Policy in the United States Essay

738 Words Jul 31st, 2010 3 Pages
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
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3. 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.

4. 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
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