Question

1. Describe how the money supply is measured in the United States and how banks, the public, and the Federal Reserve can influence it.
2. Explain what we want the Federal Reserve to be independent of, why that is important, and what parts of its structure help give it independence.
3. Explain the primary things the Fed can do to help the economy recover from a recession or slow down an expansion.
4. What is the difference between monetary and fiscal policy and what are they both trying to accomplish?
5. What can Congress do to help the economy recover from a recession? Explain the tools they would use and what they are expected to do, as well as reasons why it may not work as expected.
6. Explain the difference between a progressive, regressive, and proportional tax and provide an example of each.

Answer 1

Ans 1) Money supply in US is measured by the cash hold in the hands of public, cash deposits in the bank and other reserves of the bank. It is most narrow form of measure as it measures the cash in hand. Money supply can be effected by public, banks as well as from Federal Reserve(Fed). The more cash in hand with the public less will be money supply because people are not using this money for transactions purposes, they are keeping aside or leaking of money from circulation is taking place on the other hand higher will be deposits by public in the bank larger will be money supply , bankers will create more loans from these deposits so this will further create money, as a result money supply will increase. This is the process by which public can influence the money supply in the economy. The higher the ratio of cash reserve to deposits in the bank lower will be the money supply, as this the legal amount which a bank has to keep in the bank if large amount of deposits they will keep aside the lower loan or credit created by the banks so lower will be the money supply. And Fed can also influence the money supply as it is the sole proprietor of creating money in the economy, he can supply the money by printing new notes, it decides the reserve ratio which banks have to keep , it controls the whole body of money and banking in the US.

Ans(2) The functions of Fed are as follows: it controls the money supply in the economy, it keeps the employment as well as price stable in the market, the interest stability is also maintained by Fed only in the economy. It is sole body which regulates both the market i.e goods markets and money market, nationally as well as internationally. So the rights of the Fed should be independent of government, politics etc. As in many countries the central bank have to change the policies for short run gains, in the time period of elections to gain votes from the public this change may effect the stability of long run. So Fed should have right to decide the interest rate, other rates so as to keep the money market stable in long run. Government should have no right to influence or to effect the policies or target set by the Fed.

Ans(3) The primary thing Fed can do is it can cut the interest rate in the market to increase the demand of money or for increase in investment. Investment will have multiplier effect as it will increase income of the people unemployment rate will decrease as a result the problem of recession can be solved.

Ans(4) The monetary policies are policies which are set by central bank or monetary system of the country, it can effect the bank rate, cash reserve, the exchange rate. If the country is slowing down the interest rate can be cut to increase the demand for further stability in the economy. While the fiscal policies are the policies which are implemented by the government in the economy, it can effect investment or demand of the people. For eg: unemployment fund is transfer to the unemployed people so that they can search a better job without thinking about the income for limited period. It is done for the welfare of people or for the stability of economy. Both the policies have different measures but the main aim is stability of economy by various aspects.

Ans(5) Congress can help by expansion policy i.e by increasing their expenditure by which the demand of the public will increase with their income, unemployment will increase. Congress also can reduce the tax as a result the disposable income will increase, the higher money can be spend by the public, as their is direct relation between income and consumption higher is the income higher will be the consumption, so the transaction will increase the economy further.

Ans(6) progressive tax: it is tax amount which is increased in the ratio of income. For eg: if one person is earning 1lac monthly suppose tax is 10% and if person earning 2 lac then monthly tax is 20% so this tax structure is progressive as it will increase with the income.

Regressive tax: it is the opposite of progressive tax structure in this tax rate will reduce with the income earned by the people. For eg: if person is earning 1lac tax is 10% while person is earning 2lac then tax is 5%. In this tax structure more inequality will increase in the economy.

Proportional tax: it is the tax which is proportional with the income. It is less rigid then regressive tax structure.