Question

The Federal Reserve is responsible for regulating the U.S. monetary system and setting monetary policy. Monetary policy refers to what the Federal Reserve does to influence the amount of money and credit in the U.S. economy. Policy instruments that affect the quantity of money and credit affect interest rates (the cost of credit) and the performance of the U.S. economy.

The Federal Reserve’s three instruments of monetary policy are open market operations, the discount rate and reserve requirements. The Fed controls the money supply primarily through open-market operations.

What are the expansionary monetary policy and contractionary monetary policy? What are their policy instruments? How are they used to deal with the inflationary gap and recessionary gap? Which do you think is more appropriate today?

If the Fed wants to increase aggregate demand, it can increase the money supply. If it does this, what happens to the interest rate and rate of inflation? Why might the Fed choose not to respond in this way?

Should monetary policy be made by rule rather than by discretion? Why? The only thing backing up a nation’s currency (fiat money) in the modern world is faith in the government issuing it. If this is so, what should governments do to maintain a stable currency? How can the Central Bank (the Federal Reserve) build trust in the U.S. currency? What actions would undermine a currency?

Answer 1

Only first part of question are answer as it include 4 parts.

What are the expansionary monetary policy and contractionary monetary policy?

Expansionary monetary policy is the instrument in the hand of federal reserve in which it increase money supply in economy to influence the Aggregate demand and reduce interest rate so investment demand and consumption demand may increase simultaneously to nurture the economy. this lead to increase in inflation condition as well.

Contractionary monetary policy is the instrument in the hand of federal reserve in which it decrease money supply in economy to influence the Aggregate demand and increase interest rate so investment demand and consumption demand may contract simultaneously to control  the economy. this policy is used to bring down the inflation condition in the economy.

What are their policy instruments?

instruments	expansionary monetary policy	contractionary monetary policy
discount rate interest rate charged by Federal Reserve Banks from depository institutions on short-term loans and long term loan	decrease	increase
Open market operations It involves the buying and selling of government securities. this is  flexible measure and used as tool of monetary policy.	purchasing of security( government security	sell of security ( government security)
Legal reserve requirments portions of deposits that banks must keep with themselves either in their vaults or on deposit with  Federal Reserve Bank. cash reserve ratio statuary liquidity ration	decrease CRR and SLR	increase CRR and SLR

How are they used to deal with the inflationary gap and recessionary gap?

instruments	inflatinary Gap	Recessionary Gap
discount rate interest rate charged by Federal Reserve Banks from depository institutions on short-term loans and long term loan	it is condition of increase aggregate demanad in the economy federal reserve wants to control it discount rates are increased to bring down the level of inflation and aggregate demand	it is condition of Decreased aggregate demanad in the economy federal reserve wants to increase or improve it. discount rates are reduced to increase the level of inflation and aggregate demand to some extent.
Open market operations It involves the buying and selling of government securities. this is  flexible measure and used as tool of monetary policy.	federal reserve sell government securities to sqeeze the liquidity from the hand of customers. it allows the less income in the hand of customer to purchase goods and services	federal reserve purchases government securities to increase  the liquidity in the hand of customers by providing money by financial institution. it allows the more income in the hand of customer to purchase goods and services
Legal reserve requirments portions of deposits that banks must keep with themselves either in their vaults or on deposit with  Federal Reserve Bank. cash reserve ratio statuary liquidity ration	increase CRR and SLR so they commercial bank can not easily disperse the loan amount for consumptiion and for investment	decrease CRR and SLR so they commercial bank can easily disperse the loan amount for consumptiion and for investment

Which do you think is more appropriate today?

today expansionary monetary policy is consider appropriate as we need to control  recessionary gap which is some how taking place in world economy . consumer and investment demand need to be increased. federal reserve some how increase the employment opportunites by having industry establishment.