Question

How well do the monetary policies enacted by the Fed regulate the national economy?

Answer 1

Monetary policy by fed is very important policy. Particularly if we consider that there are very very few policy tools available to authorities to achieve desired goals, it's relevance becomes much more important. During depression the fed increases money supply, decreases cost of credit etc so as to stimulate economy. But according to Keynes and others during depression expectations of investors are low so that investors do not go to banks to take loans even when cost of loans is very low. However in recent times monetarists have shown that money supply definitely hss effect on real variables in short run and nominal variables in long run. During inflation fed decreases money supply, makes credit costly etc to contain inflation. Also remember one thing that if banks have surplus funds decreasing cost of credit by central bank and fall in money supply may not have much effect on inflation. Furthermore if expectations about economy doing are too good, cutting money supply and making credit costly will not have much effect. Investors will still invest and speculators speculate.

One of the biggest problems is that quite often monetary policy is used to curtail inflation without looking into supply side factors. Monetary policy has major impact on demand rather than on supply. Thus such a policy is bound to fail in longrun