Question

I need to know about specific monetary policies in place in the beginning of the 1980s. The instructor told us to remember that the Federal Reserve controls our monetary policy and they have a four main goals: 1. Price Stability 2. High Employment 3. Economic Growth 4. Financial Market Stability. So I need to know specific monetary policies used in that time period and what the goals were of those policies. (I need at least two policies). I already know that the main tools the Fed uses are the decreasing or increasing of the money supply (through open market operations, changing the required-reserve ratio, and changing the discount rate) and changes to interest rates. This is for a macroeconomics class if that helps.

Answer 1

Monetary policy consists of management of money supply and interest rates, aimed at achieving macroeconomic objectives such as controlling inflation, consumption, growth, and liquidity. These are achieved by actions such as modifying the interest rate, buying or selling government bonds, regulating foreign exchange rates, and changing the amount of money banks are required to maintain as reserves.

The Fed can achieve its monetary policy goals in one of two ways:

• Targeting the quantity of money (commonly measured by the monetary aggregates: M1, M2 and M3)
• Targeting the price of money (commonly known as the
  "federal funds rate")

Monetary Policy can be classified as Expansionary and Contractionary Monetary Policy.The main aim of Expansionary Monetary policy is to increase the money supply in the market. The interest rates are lowered. As a result the aggregate demand by consumers and organizations increase. This results in increase in money supply and leads to economic development and reduces unemployment

The opposite of this is Contractionary Monetay Policy. The Fed adopts this policy when it wants to reduce the money supply in the market. This is particularly adopted to controlinflation. The interest rates are raised. This leads to reduction in money supply. The purchasing power of people is reduced.That makes money more expensive, slowing the economy down. A slower economy means that businesses can't afford to raise prices without losing customers. They may even need to lower prices to gain customers. This combats inflation.

Monetary Policy adopted in Early 1980's

Targeting Quantity of Money

In October 1979, under Chairman Paul Volcker, the FOMC changed its approach to monetary policy and began to target the quantity of money—specifically nonborrowed reserves. It was believed that targeting the level of nonborrowed reserves was a better approach to controlling inflation which, had risen to very high levels in the mid- and late-1970s. FOMC members expected that the new approach to monetary policy would result in greater volatility in the fed funds rate. This was indeed the result.

The late 1970 was the period when significant interest rate deregulation and financial innovation took place. As a result Federal Reserve devised a monetary policy which targetted monetray aggregates. This was a period when money market mutual funds gained popularity as an alternate saving vehicle and there was elimination of interest rate ceilings on all deposit accounts except for demand deposits.As households shifted balances between traditional deposit accounts and the deregulated accounts and money market mutual funds, it had a profound impact on the level and growth rates of the various monetary aggregates, depending on which accounts were included in each aggregate. The fedreal fund rate and M1 growth rate remained volatile durig the period of 1979 to 1982.

Targeting the Price rateher than quantity in Late 1982

There was decreased inflation and financial market innovation. As a result Fed targeted the price instead of money in the late 1982.The FOMC, through the Trading Desk at the Federal Reserve Bank of New York, began to conduct open market operations that targeted a particular degree of tightness or ease in reserve market conditions. The focus was on broader money market aggregate known as M2.

To conclude Fed has devised the monetray policy as per the prevailing economic conditions and regulatory requirements. Monetary policy has been successfully tailored to meet changing economic conditions.