Question

Monetary Policy

FOMC Press Release - 10/30/19

Watch the following video of Federal Reserve Chairman, Jerome Powell, presenting the findings of the last Federal Open Market Committee Meeting on October 30, 2019. You can click on the FOMC Press Conference Video, October 30, 2019, and watch about the first 10 minutes of the overall press conference in the Videos section of the Federal Reserve website.

Federal Reserve Videos (Links to an external site.)

1. What type of monetary policy are they using and why (expansionary or contractionary)? Explain.
2. What economic factors are they trying to mitigate with this policy?
3. How will the change implemented by the FOMC (Federal Open Market Committee) likely affect the macroeconomy according to the Chair?
4. Using the aggregate supply and aggregate demand model, explain the predicted impact of this monetary policy on Aggregate Demand, price level, Real GDP, and unemployment.
5. Include a correct graph (AS/AD) for this monetary policy.

Answer 1

Federal Reserve Board has approved actions decreasing the discount rate (the primary credit rate) at the Banks from 2-1/2 percent to 2-1/4 percent, effective immediately on 10/31/19.

This is an expansionary monetary policy aimed at decreasing the borrowing cost on the loans by people and the businesses. It will result in an increase in supply of money.

They are trying to mitigate slowdown due to decrease in aggregate demand in the economy. The Fed expects an increase in money supply will result in an increase in economic activities in the economy, thereby leading to increase in real GDP and employment in the economy.