Question

Visit the Fed's Summary of Commentary on Current Economic Conditions, also known as the Beige Book. Prepare a proposal recommending monetary policy actions designed to correct problems with spending, employment, and prices. Defend your choices.

Answer 1

Monetary policy has lived under many guises. But however it's going to appear, it generally boils right down to adjusting the availability of cash within the economy to realize some combination of inflation and output stabilization.

Most economists would agree that within the end of the day , output—usually measured by gross domestic product (GDP)—is fixed, so any changes within the funds only cause prices to vary . But within the short run, because prices and wages usually don't adjust immediately, changes within the funds can affect the particular production of products and services. This is why monetary policy—generally conducted by central banks like the U.S. Federal Reserve (Fed) or the ecu financial institution (ECB)—is a meaningful policy tool for achieving both inflation and growth objectives.

Conducting monetary policy :- How does a central bank go about changing monetary policy? The basic approach is just to vary the dimensions of the cash supply. This is usually done through open-market operations, during which short-term government debt is exchanged with the private sector. If the Fed, for instance , buys or borrows Treasury bills from commercial banks, the financial institution will add cash to the accounts, called reserves, that banks are required keep with it. That expands the money supply. By contrast, if the Fed sells or lends treasury securities to banks, the payment it receives in exchange will reduce the cash supply.

Transmission mechanisms :- Changing monetary policy has important effects on aggregate demand, and thus on both output and prices. There are variety of the way during which policy actions get transmitted to the important economy (Ireland, 2008).The one people traditionally specialise in is that the rate of interest channel. If the financial institution tightens, for instance , borrowing costs rise, consumers are less likely to shop for things they might normally finance—such as houses or cars—and businesses are less likely to invest in new equipment, software, or buildings. This reduced level of economic activity would be according to lower inflation because lower demand usually means lower prices.Monetary policy has a crucial additional effect on inflation through expectations—the self-fulfilling component of inflation. Many wage and price contracts are agreed to beforehand , supported projections of inflation. If policymakers hike interest rates and communicate that further hikes are coming, this might convince the general public that policymakers are serious about keeping inflation in check . Long-term contracts will then integrate smaller wage and price increases over time, which successively will keep actual inflation low.