Question

A) What is quantitative easing, a term often used in the news? Answer:

B) How is the Fed different from the Treasury? And why were they separated in 1913, the year the Fed was created? Answer:

C) How does expansionary monetary policy use open market operations to achieve its goal of economic stimulation (raising the RGDP)? Answer:

Answer 1

a. Quantitative easing is an unorthodox monetary policy in which a central bank buys from the market government securities or other securities to increase the supply of capital and stimulate borrowing and investment. If short-term interest rates are at or near zero, regular open market operations targeting interest rates are no longer effective, so a central bank can instead target allocated amounts of capital to buy. Quantitative easing increases the supply of money by buying assets with newly created bank reserves to provide more liquidity to banks.

b. The primary justification for an independent Federal Reserve is the need for short-term political pressure to weaken it. Without a degree of autonomy, elect-focused policymakers may pressure the Fed to adopt an overly restrictive monetary policy to reduce short-term unemployment. This could result in high inflation and a lack of long-term regulation of unemployment.Critics argue that the allocation of a constitutional power to an independent government entity by Congress is unconstitutional. Congress has the power to coin money and control its value, according to the Constitution. In 1913, through the Federal Reserve Act of 1913, Congress delegated this power to the Fed. Many contend, however, that such a delegation is fundamentally unconstitutional. Fed autonomy critics also say that it is undemocratic to have an incompetent institution that sets monetary policy, unaccountable to the US public.

c. A good example of how expansionary monetary policy works is the U.S. central bank, the Federal Reserve. Open market operations are the most widely used method of the Fed. That's when the member banks purchase Treasury notes. The Fed gives them more money to lend by replacing the banks ' Treasury bills with cash. Banks lower lending rates to lend the excess cash. That makes loans less costly for cars, schools, and homes. We also lower interest rates on credit cards. All of this extra credit will improve product expenditure. The Committee of the Federal Open Market may also lower the rate of fed funds. For overnight deposits, it's the rate banks charge each other. At night, the Fed allows banks to keep some of their deposits in reserve at their local branch of the Federal Reserve. Some banks that have more than they need to lend the excess to banks that don't have enough to charge the price of fed funds. It becomes easier for banks to retain their deposits when the Fed lowers the target rate, giving them more money to lend.