Question

A)How does contractionary monetary policy use interest rates and required reserves to achieve its goals of reducing inflation? Answer:

B) The Fed is the most independent federal agency there is, with loyalty first to the American public and the wellbeing of its economy, but just how truly independent is it from the political motives of politicians, especially from those of White House’s? Answer:

Answer 1

a. Monetary policy is the actions and communications of a central bank that manages the money supply. It involves mutual funds from the credit, currency, checks and money market. Credit is the most significant of these kinds of money. This consists of loans, shares and mortgages. In order to create economic growth, monetary policy increases liquidity. To prevent inflation, it reduces liquidity. Central banks use interest rates, requirements for bank reserves, and the amount of government bonds that banks have to hold. All of these measures have an effect on how much banks can lend. The amount of loans affects the supply of money. To order to reduce inflation, central banks use contractionary monetary policy. Through limiting the amount of money banks can lend, they reduce the money supply. The banks are paying a higher interest rate, increasing the cost of loans. Higher borrowing through companies and individuals, slowing growth.

b. Politicians were normal to manipulate interest rates in the 1970s to boost their own popularity. Which resulted in an inflation epidemic. And so rich and many poorer countries switched to a process where policymakers set a specific goal— stable prices and left independent central bankers to know it. Billions of people around the world have grown used to low and stable inflation in a single generation and the belief that interest rates are under control on their bank deposits and mortgages. Today, this success is threatened by a confluence of populism, nationalism, and economic forces that turn monetary policy back into politics. President Donald Trump called for interest rates to be cut, joked about firing the Federal Reserve president, and said he would name two unqualified cronies, Stephen Moore and Herman Cain, to his committee. Brexiteers doubt the Bank of England's integrity and intentions, while President Recep Tayyip Erdogan was in a tug-of-war with the central bank in Turkey. The government of India has replaced a capable head of the central bank with a pliant insider who has cut rates ahead of an election.