Question

If the initial cash in the US economy is $1 Trillion, individuals tend to keep onesixth
of their income as cash and deposit the rest, and banks can lend 90 percent
of the deposit and reserve the remaining, then:
a) What is the total money supply (M1) in this economy? (5 points)

b) If the Federal Reserve wants to expand the money supply by five percent (because
of the current crisis), what types of policies can she use, and how? Explain and
support your claim using computation if it is required. (10 points)

c) Let’s say, after implementing these policies, the economy only increased by two
percent, explain why this happened. (5 points)

d) Now the government wants to stimulate the economy by ten more percent after
the failure of the previous attempt by the Fed (the size of the economy is $20
trillion, and it is predicted that it will be contracted by at least $2 trillion by the
end of this year), what can she do? Explain the possible policies that the Gov can
implement in detail, and use computation if necessary. (10 points)

Answer 1

a) The Federal Reserve Bank, which is the central bank of the United States, is a bank regulator and is responsible for monetary policy and defines money according to its liquidity.
M1 money supply includes those monies that are very liquid such as cash, checkable (demand) deposits, and traveler’s checks.
M1 money supply includes coins and currency in circulation—the coins and bills that circulate in an economy that are not held by the U.S. Treasury, at the Federal Reserve Bank, or in bank vaults. Closely related to currency are checkable deposits, also known as demand deposits.
b)

The Federal Reserve, America's central bank, is responsible for conducting monetary policy and controlling the money supply.

The primary tools that the Fed uses are interest rate setting and open market operations (OMO).

The Fed can also change the mandated reserves requirements for commercial banks or rescue failing banks as lender of last resort, among other less common tools.

When the economy is faltering, the Fed can use these tools to enact expansionary monetary policy. If that fails it can use unconventional policy such as quantitative easing.

In the U.S., The Federal Reserve (The Fed) exists to maintain a stable and growing economy through price stability and full employment – its two legislated mandates. Historically, the Fed has done this by manipulating short-term interest rates, engaging in open market operations (OMO) and adjusting reserve requirements.
c) The Fed's most commonly used tool is open market operations.
The Fed simply creates the credit out of thin air. That's what people mean when they say the Fed is printing money.hey hire more workers, whose incomes rise, allowing them to shop even more. That's usually enough to stimulate demand and drive economic growth to a healthy 2%-3%% rate.
The Federal Open Market Committee may also lower the fed funds rate. It's the rate banks charge each other for overnight deposits
The Fed's third tool is the discount rate. It's the interest rate the Fed charges banks that borrow from its discount window.
The Fed's fourth tool is to lower the reserve requirement. Even though this immediately increases liquidity, it also requires a lot of new policies and procedures for member banks.
d)
The United States government is poised to take on a huge amount of debt to contain the effects , with budget deficits on a scale not seen since World War II looking likely.
But the only thing worse for the public debt outlook would be if it didn’t. That’s why a broad range of economic analysts — including even many fiscal conservatives who generally view high public debt as a long-term threat — support aggressive action.
Finally, this spending is meant to last only as long as needed to get the economy on track, it should be a one-time increase to public debt rather than an increase to permanent deficits.
The arithmetic of the budget deficit is stark. In forecasts prepared just before the outbreak became severe, the Congressional Budget Office projected a $1.1 trillion deficit this fiscal year, or 4.9 percent of G.D.P.
There are a large number of possible actors in policy implementation. such are as follows:
-on specific legislation, there may be legislative monitoring, oversight, and intervention to ensure that there is periodic reporting to the sponsoring committee.
-For grants-in-aid, loans, or direct service provisions, sanctions, or other coercive strategies there may be a regulatory agency that is involved in implementation and oversight
-Federal, state, and local agencies may need to cooperate in program implementation; there must be sufficient incentives and/or possible sanctions to ensure implementation by other levels
-If several agencies are required to collaborate to implement a policy, there may be bureaucratic and administrative delays, resource hoarding, withholding of information, and other games
-Within a single agency, there may be politics over where to place a new policy or program that will implement it, and arguments over whether to assign responsibility to an existing unit or create a new unit, or even contract out
-If policy is implemented through contracts with private agencies, the organization must still be involved in implementation oversight, monitoring, and control
-Professional organizations are often concerned how a new program will affect their members and want to have a say in its implementation
-Citizens, interest groups, and other bodies also want input into the implementation process at various points.

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