Question

• How does the Federal Reserve implement monetary policy and how does this implementation affect the economy? Do you believe that the Federal Reserve is still as efficient as it was when it was first created? Why or why not? Who is the Fed, are they elected, to whom are they responsible, given their expansive power.
• What economic policies (fiscal or monetary policy) might you recommend if you were Chief Economic Adviser of a poor, struggling country to try to attain growth and fight poverty? How would you promote GDP growth?

Answer 1

Federal reserve implements monetary policy by monitoring the inflation level in the economy at 2% and adjusting the rate of interest according to that. For example if the inflation rate is above 2%, it will increase the interest rate in order to decrease the money supply so that the inflation rate reduces. Higher the money supply, higher is the inflation rate and vice versa. When the interest rates are increased, deposits in the banking system increase and the goods turn cheaper which increases the purchasing power. At the same time, if inflation rate is below 2%, the interest rates are reduced so that people invest by seeking more credit, which propels the economy and increases the level of output.

It still is under the control of the Government, indirectly, even if not on paper. In terms of quantitative aspects such as controlling the level of inflation, it is still as efficient and innovative, and more advanced. But in terms of decision making it hasn't attained autonomy even though it claims to be an independent body as the president still pressures how much the interest rates should be reduced by which reduces the efficiency in terms of decision making.

Fed is the central banking authority of the United states and they are appointed by the president and then confirmed by the senate for a period of 14 years. They are responsible for monitoring the banking system of a country and they are responsible to the public in ensuring stable prices and maximum level of employment.

If I were the Chief Economic Advisor of a poor, struggling economy, I would reduce the level of interest rates so that firms and businesses borrow more at a cheap rate and invest in the domestic economy. This will help fight poverty as firms will employ more number of people because of increase in investments and capital inflow from abroad. In terms of fiscal policy, there could be increased government expenditure and less taxe rates so that firms would spend more. This would propel growth and promote GDP growth as employment opportunities would increase.