Question

1. What, exactly, is “monetary policy”? Please describe the two types of monetary policy. 2. “Expansionary” monetary policy has been described as a complex 5 step process. Please take me through each step, starting at step 1, then moving through steps 2, 3, 4, then step 5, and describe each step in detail. 3. There are, in theory, four “links” between the 5 steps. Please describe them for me. 4. a) In theory, how could Link A be weak? How could link B be weak? How could link C be weak? How could link D be weak?   b) What is the ‘cash drain’, exactly? 5. a) What, exactly, is “contractionary” monetary policy? Please describe each of the 5 steps of contractionary monetary policy. 5.b) It has been argued that ‘contractionary’ monetary policy is “stronger” than ‘expansionary’ monetary policy. How may this be true?   6. What is the “Fed”, exactly? 7. Why is it that many economists argue that the Fed may ASK the U.S. banking system to EXPAND the supply of loans, but the Fed may FORCE the U.S. banking system to CONTRACT the supply of loans? 8. WHAT SPECIFIC STEPS HAS THE FED TAKEN RECENTLY TO HELP THE U.S. ECONOMY? Please list and discuss four specific actions. 9. Why have they done this? What has happened recently to the U.S. economy? THANK YOU FOR STAYING WITH THIS CLASS!!!!

Answer 1

1) Monetary policy refers to the macroeconomic policy adopted by the monetary authority of a country to ensure price stability and general trust in the currency. Monetary policy affects the interest rate in the economy and money supply in the economy. Monetary policy instruments include discount rate, reserve requirements and open market operations. Two types of monetary policy are expansionary monetary policy and contractionary monetary policy. Under expansionary monetary policy, money supply and interest rates are increased in the economy to deal with inflationary pressures in the economy and under contractionary monetary policy money supply and interest rates are reduced to deal with recession.