Question

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?

Answer 1

5. a) Contractionary monetary policy is a form of the economic policy used to fight high inflation which involves steps like decreasing the money supply in order to increase the cost of borrowing. in turns there is a decreasing GDP and dampens inflation.

contractionary monetary policy steps:

1. Contractionary monetary policy is a policy used by monetary authorities to contract the money supply and reduce economic activity by raising interest rates to slow the rate of borrowing by companies, individuals, and banks.

2. when the money supply reduce by high-interest rate or some time by selling government bonds as a part of fiscal policy, the availability of money will be less with people and banks.

3. the decrease in money quantity will decrease the demand. or the real GDP.

4. when there is a decrease in demand automatically it has an impact on inflation.

5. Inflation will be under limited the economy will be adjusted accordingly.

b) it is argued that contractionary policy is stronger than the expansionary policy. it is true. contractionary policy as anything that directly reduces government deficits or increases surpluses. to purchase government debt securities affects interest rates and asset prices. If private individuals are interested to increase their savings to purchase government debt, the real interest rate tends to rise. When real interest rates rise, it is more difficult for individuals and small companies to obtain loans. If the government's contractionary fiscal policy leads to a surplus, the government can act as a creditor rather than a debtor.

6. The Federal Reserve System (FRS) is the central bank of the United States and the most powerful financial institution in the world. It was founded to provide the US (mostly some other close countries) with a safe, flexible, and stable monetary and financial system. The system is often known simply as “the Fed."

7. When there is less demand less money supply and more unemployment prevails in the economy fed will suggest supplying a loan. but contrary if there is high inflation and extra money supply is there in the economy then it will enforce its banks to impose contractionary measures to bring inflation down.

8. Recently the economic phenomenon Fed had taken expansionary measures to control the impact of the recession. due to recession, there is a shortage of demand so to enhance it it purchases government bonds so that the bank will have more money to lend loans with a low-interest rate and gradually demand will increase and the economy will stable.

9. They have taken this step to boost the economic growth and bridge-up the gap between the demand and supply .and interest rate and real GDP. Recently the US economy facing recession due to various national and international reasons.