Question

2.

a. Does the US Fed follow inflation targeting?

b. What are the US Fed’s monetary policy objectives?

c. What are the tools of US monetary policy?

d. Explain how those tools impact on interest rates and money supply.

Answer 1

a)

Under the inflation targeting, the central bank discloses its inflation targets and forms the policies accordingly. Federal Reserve has an implicit inflation target of 2 %. it seeks to maintain the inflation close to 2 %. it might be a little bit deviation when the economy faces the recession.

b)

Following are the main objectives of the Federal Reserve:

• Price stability
• Full employment.

c)

Following tools are used by the Federal Reserve :

• Open Market Operation
• Discount rate.
• Federal Fund rate.
• Reserve Ratio.

d)

These tools are used by the Federal Reserve to influence the money supply in the market. Further, the money supply affects the interest rate in the market.

For example, when Fed buys the securities through the open market operation, it releases the money supply into the market and thereby causes the decline in the interest rate.

Increase in the reserve ratio also causes the fall in money supply.

These tools are used to affect the cost and availability of credit in the market.