Targeting Money Supply And Interest Rates Essay

To be more precise in the way the monetary policy works, it is under three implements that define its functions: open market operations, changes in the discount rate, and changes in the required reserve ratio. These are the functions that provide the Federal Reserves (the Fed) the ability to change the money supply in our economy. It is a matter of actions taken to maintain our country in the best way possible and, of course, stability comes with a price. With things like supporting our troops in other countries, like Iraq and Afghanistan, a cut in tax rates, and increases in overall spending, it adds up to where we have spent more than we have collected in revenue (Fix the

d) What two assumptions are included in calculating the maximum change in the money supply

Assuming the Fed chooses to shrink the money supply, explain how each of the three tools would be used. If the fed chooses to shrink the money supply

Money makes the world go round. We use it for just about anything, for example, paying bills, buying toys for the kids, getting the holiday ingredients for the family secret recipe, and we even use it as a gift for others. It adds value to some yet adds less to others. But what would happen if the supply of money was to suddenly decrease..or increase? Every bit of money you spend or receive is part of a complex organization known as the Federal Reserve System. The Federal Reserve System acts somewhat like the banks of all banks within the United States that controls our money supply by setting interest rates that can affect our economy. Determining how much you can buy or if you should buy now. The federal reserve should set a fixed interest

To stabilize the economy bonds are used which release money into the market. The responsibility of the Central Bank is to maintain the health of the banking system and regulating the purchase and sale of bonds. The interest rates are controlled to balance the markets. According to the Monetary Policy Report to Congress, “The Federal Open Market Committee (FOMC) maintained a target range of 0 to ¼ percent for the federal funds rate throughout the second half of 2009 and early 2010” while representing forecasted economic decisions to rationalize low levels for longer times on the federal funds rate (Federal Reserve, 2010). Purchases were still being made by the Fed’s to result in improvements to the economy through focusing on mortgages, the real estate market, and the credit market. Predictions by the Federal Open Market Committee depicted low levels on the federal funds rates in early 2010 which would continue for some time while over time the economy would see growth, a rise in inflation, and a decline in unemployment. Feds were in agreement though they expected the recovery process to be slower. Purchases by the Federal reserve were slowed, “$300 billion of Treasury securities were completed by October” and “the purchases of $1.25 trillion of MBS and about $175 billion of agency debt” were suppose to be finished the first quarter of 2010 (Federal Reserve, 2010).

One form of direct control can be exercised by adjusting the legal reserve ratio (the proportion of its deposits that a member bank must hold in its reserve account), and as a result, increasing or decreasing the amount of new loans that the commercial banks can make. Because loans give rise to new deposits, the possible money supply is, in this way, expanded or reduced. This policy tool has not been used too much in recent years. The money supply may also be influenced through manipulation of the discount rate, which is the rate if interest charged by the Federal Reserve banks on short-term secured loans to member banks. Since these loans are typically sought to maintain reserves at their required level, an increase in the cost of such loans has an effect similar to that of increasing the reserve requirement. The classic method of indirect control is through open-market operations, first widely used in the 1920s and now used daily to make some adjustment to the market. Federal Reserve bank sales or purchases of securities on the open market tend to reduce or increase the size of commercial bank reserves. When the Federal Reserve sells securities, the purchasers pay for them with checks drawn on their deposits, thereby reducing the reserves of the banks on which the checks are drawn. The three instruments of control explained above have been conceded to be more effective in preventing inflation in times of high economic activity than in bringing about revival from a

With that said the basic function of the FED relates primarily to the maintenance of monetary and credit conditions favorable to sound business activity in all fields; agricultural, industrial and commercial. Among this some duties include the following: lending to member banks, open market operations, establishing discount rates, fixing reserve requirements and issuing regulations concerning these and other functions. Each Federal Reserve Bank is best described as a Bankers Bank. In a nutshell, member banks use their reserve accounts with their reserve banks similar to the way we use our own checking account. They may deposit in the reserve accounts the checks on other banks and surplus currency received from their customers, and they may withdrawal on the reserve. Thus a bank with excess in the reserve requirements can enlarge its extension of credit (loans). However, let's not forget that the Fed has the

Monetary policy consists of specific changes in the money supply to influence interest rates which in return adjusts the level of spending in the economy. The goal of the policy is to achieve and maintain price stability, full employment, and economic growth. The regulation of the money supply and interest rates are controlled by a central bank, such as the Federal Reserve Board in the U.S., in order to control inflation. Monetary policy is only one of the two ways the government can affect the economy. By altering the effective cost of money, the Federal Reserve can ultimately change the amount of money that is spent by consumers and businesses.

Monetary policy comes for the nation’s central bank, “The Federal Reserve System (commonly called the Fed) in the United States is one of the largest such “banks” in the world. The fundamentals of its operations are useful for highlighting the various measures that can constitute monetary policy.” (britannica). The central banks use liquidity to help start growth in the economy though Monetary policy. The amount of how much is in the money supply is Liquidity, which includes money market mutual funds, credit, checks

From 1990-1999 there were money supply guidelines within the framework of the "eclectic approach" where there were no explicit inflation targets per say. M3 was the key intermediate target and hitting the M3 target was more the exception than the rule. (SARB, 2005)

Monetary Policy, in the United States, is the process by which the Federal Reserve controls the money supply to promote economic growth and stability. It is based on the relationship between interest rates of the economy and the total supply of money. The Federal Reserve uses a variety of monetary policy tools to control one or both of these.

“All parenting manuals tell parents to maintain credibility and to set fair and firm rules. Most parents attempt to do so. But as all, or at least most, parents know, sometimes exceptions are necessary. Not all contingencies can be planned for.” Analogous to that, as the author, David Colander, points out is that policies can be created but there can be exceptions to any policy. To begin with, let’s consider the problem that arises from the fact that there is no oversight in the Federal Reserve. In other words, the Fed can do what it wants, i.e. increase or decrease the money supply, because of the discretion it has; almost like saying that police officers have no guidelines to follow and can do whatever they want with all the power their given. Second, the problem that arises out of the fact that the Fed assumes there is only one interest rate; however, there are various different types of interest rates. So this becomes a problem in the short-run but not necessarily in the long run, after the interest rates have averaged out. This means that consumer borrowing (or when banks lend money) they’ll do so differently because of the different interest rates that do exist. Third, exists with what I mentioned about the short-term and long-term effects; essentially, inflation,

In Friedman’s monetarist construct of money has two side that is highly active. One of the side is money is being the cause of all failures and asymmetries in the economy (in the short term). The other side is neutral which money is influencing only the price level (in the long term). The nominal quantity of money is determined by its supply. On the other hand, the real volume of the money stock is expressed in the amount of goods and services that can be acquired for a given nominal amount of money and is conditioned by the demand for money, which is directly related to the price level.

| Advocates of active monetary and fiscal policy view the economy as inherently unstable and believe that policy can manage aggregate demand, and thereby, production and employment, to offset the inherent instability. When aggregate demand is inadequate to ensure full employment, policymakers should boost government spending, cut taxes, and expand money supply. However, when aggregate demand is excessive, risking higher inflation, policymakers should cut government spending, raise taxes, and reduce the money supply. Such policy actions put

They would argue that direct interest rate changes could be used to control aggregate demand. Whereas, Monetarism does not believe that government should intervene by managing the level of aggregate demand, they rather prefer the use of monetary policy to achieve a long-run view of price stability.