Question

Naked Economics: Wheelan

Briefly describe the process that this group uses for doing monetary policy (what is its target and how does it achieve that target)?

Answer 1

The manipulation by government of monetary variables such as interest rates and money supply to achieve its objectives . The monetary policy instruments are interest rates,quantitative easing,the exchange rates and inflation targets. Contractionary Monetary policy will reduce economic growth and inflation , lead to an improvement on the current account and raise unemployment.

The Federal uses four tools to achieve its monetary policy targets.

• Discount rates
• Reserve requirements
• Open market operations
• Interest on Reserves

Money supply and interest rates are the main monetary policy targets. The effect of a change in the federal funds rate on long term interest rate is usually smaller than it is on short term interest rates. It is believed that changes in federal funds rate usually will result in changes in both long and short term interest rates on financial assets.

A majority of economists support the Fed's choice of the interest rate as its monetary policy targets, but some economists believe the Fed should concentrate on the money supply instead. The money demand curve shift to the right if the real GDP increases. The money demand curve shift to the left if the praice level decreases. The money supply grows at constant rate if the economy moves into recession. If the federal believes the economy is about to fall into recession , it should use an expansionary monetary policy to lower the interest rate

In general, Monetary policy is defined as the actions the Federal reserves takes to manage the money supply and interest rates. To achieve its targets there implemented in connection with the monetary policy as expansionary monetary policy, the strategy of increasing the money supply and lowering interest rates inorder to increase the real GDP. A decrease in the money supply and increase in the rates is what happened in contractionary monetary policy.

The other area of concentration to achieve the targets of the Monetary policy are

• Stability of Financial markets
• Price stability
• High employment