Question

What actions can the Fed take to conduct monetary policy? What are some of the effects we would expect to see from contractionary or expansionary monetary policy? Now do some research and find any case of monetary policy action that the Fed utilized in the past 10 years and explain what purpose the Fed had in conducting that monetary policy action. What economic effect do you feel we saw from that monetary policy action? Do your best to avoid posting duplicated examples and information if possible.

Answer 1

The Fed has various instruments or tools available with it to conduct monetary policy which includes:

a. Reserve Requirements

b. Open Market Operations

c. Interest rate on Excess Reserves

d. Discount rate

Contractionary monetary policy involves decrease in the level of money supply in the economy which can cause fall in the level of aggregate demand in the economy and is mostly pursued at the time of inflationary gap in the economy. On the other hand, expansionary monetray policy involves increase in the level of money supply in the economy which can cause increase in the level of aggregate demand in the economy and is mostly pursued at the time of recessionary gap in the economy.

In the past Fed has reduced the policy rates with the aim of increasing the level of money supply in the economy and this increase in the level of money supply has increased the level of aggregate demand in the economy and helped in eliminating recessionary gap in the economy. This increased inflation rate in the economy and also increased the growth rate of Real GDP in the economy reducing the level of recession and increasing National income in the economy.