Monetary Policy Decision Making Theory Essay

Monetary Policy is the procedure by which the financial expert of a nation, similar to the national bank or cash board, controls the supply of money. Regularly focusing on a inflation rate or interest rate to guarantee value solidness and general trust in

(1) Explain what the Stable-Monetary-Unit Assumption is (10 points) and (2) provide an example of its application. (10 points)

For this assignment I picked “the role of the Federal Reserve” a mere recital of the economic policies of government all over the world is calculated to cause any serious student of economics to throw up his hands in despair (pg, 74). The Federal Reserve is now in the business of enforcing the United States government’s drug laws, even if that means making a mockery of both state governments’ right to set their drug policies and the Fed’s governing statutes. A Federal Reserve official who played a key role in the government 's response to the 2008 financial crisis says the government should do more to prevent a repeat of that crisis and should consider whether the nation 's biggest banks need to be broken up. Neel Kashkari says he believes the most major banks still continue to pose a "significant, ongoing" economic risk. The next ten years will see an explosion of government debt and an implosion of government’s ability to fulfill its promises. Any economic or investment model based on past performance under previous economic conditions will be worthless just as useless as the Federal Reserve’s models.

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

In order to fully grasp the meaning of this statement an understanding of the money supply is necessary. The money supply is defined as the sum of the total circulation of money in the economy including deposits at chartered banks. Monetary economists share the view that there is a direct relationship between the money supply and the average price level of the economy; primarily, an increase in the money supply will cause prices (inflation) to rise. “At the end of 1969 money supply stood at about $28 billion. By the end of [1973] the supply had soared by more than 70 percent to about $48 billion” (Corcoran, 1974). It is this rapid increase in the money supply that resulted in inflation rates as high as 10% in 1974. Table 1 contains data on the percentage increase in the money supply and the percentage increase in the Consumer Price index (CPI) from 1962 to 1973. “The Consumer Price Index (CPI) is an indicator of changes in consumer prices experienced by Canadians. It is obtained by comparing, over time, the cost of a fixed basket of goods and services purchased by consumers” (Statistics Canada, 2015). The table depicts a link between money supply and prices; where the change in the growth of the money supply in one year has an effect on the CPI the following year. For example, the rate

For as long as money has existed, governments have sought to control its supply for their own benefit. The ancient Romans, for instance, regularly debased their coins so that, by the end of the 3rd century AD, the actual content of silver had declined to less than 5% purity. The debasement of and inflation of the money supply has historically been a tool of governments to expand their power. In conventional economics, which this paper will assume as a positive background in defending the feasibility of a sound money amendment, the result is a redistribution of real wealth from savers to the government, the banking and finance system, and other

Mr. Emanuel, in the current economic climate, the Obama administration’s course of action has been to pursue aggressive countercyclical fiscal policies designed to prevent further economic deterioration. Critics of these policies argue that:

17. Suppose the money multiplier in the U.S. is 3. Suppose further that if the Federal Reserve changes the discount rate by 1 percentage point, banks change their reserves by 300. To increase the money supply by 2700 the Federal Reserve should

200). Chapter ten of Principles of Macroeconomics concludes with the three subsections of the paragraph “How the Federal Reserve Controls the Money Supply.” The first subsection printed by Case, Fair, and Oster is the required reserve ratio, and a minute summation is that the Fed’s reserves can balloon or deflate through the ratio’s requisitioning effects on the reserves of other banks. The second subsection printed on page 204 is “The Discount Rate,” and a minute summation is that the Federal Reserve’s interest rate for sequestering of segments of the reserve undulates in proportion to the Federal Reserve’s accessibility of inflation rates. Lastly, the third subsection printed on page 205 is “Open market Operations,” and a minute summation is listed by Case, Fair, and Oster on page

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.

Monetary policy, ‘The government’s policy relating to the money supply, bank interest rates, and borrowing’ (Collin: 130), is another tool available to the government to control inflation. Figure 4 shows, that by increasing the interest rate (r), from r1 to r2, the supply of money (ms) is reduced from Q1

Monetary Theory suggests how monetary policy should be carried out within an economy. It also suggests that different policies can benefit different economies based on their resources and limitations. The theory is based on factors, such as money supply, price levels and interest rate, and their impact on the economy. This theory is strongly linked to the Wörgl experiment. This experiment was set upon by the town mayor of Wörgl, Michael Unterguggenberger.

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

In conformity with Wright, R. E., & Quadrini, V. (2009), he states that the modern quantity theory is superior to Keynes’s liquidity preference theory because it is more complicated, specifying three types of assets (bonds, equities, goods) instead of just one (bonds). It also does not assume that the return on money is zero, or even a constant. In Friedman’s theory, velocity is no longer a constant; rather, it is highly predictable and, as in reality and Keynes’s formulation, pro-cyclical, rising during expansions and falling during recessions Friedman, M. (Ed.). (1956). Friedman’s reformulation of the quantity theory delayed well only until the 1970s,