Question

i. Examine the monetary policies in place at the start of your specific time period in relation to their effects on macroeconomic issues. For instance, consider the discount rate set by the Fed, the rates on reserves, open market operations, and so on for 2000-2010.

Answer 1

Open Market Operations are considered as one among the monetary policies framed by the Federal reserve system in order to maintain the control the macroeconomic issues in the period from 2000-2010. Fixing the rate of reserve balance allocated to the all depository banks will keep the interest rate in stable level before the crisis happened around 2010. Let us discuss some of the important monetary policies related to macroeconomic issues prevailed before 2010 briefly.

First of all, during the financial crisis period, in order to control the money supply, Fed system adopted contractionary policy by selling securities. Rate of inflation was under the control to certain extent. For example $1 trillion securities are purchased by the Fed Government which reduced the interest rate.

Secondly, Discount rate will always set below the funds rate. This is nothing but controlling the money supply will keep the funds rate tends to rise. In the Financial crisis period of 2000-2010, The Fed system set the funds rate level higher above the discount rate which in turn made the situation of expensive borrowing of the commercial banks. It obviously reduced the supply of money.

Thirdly, Rate of reserves refers to the holding of cash reserve ratio with commercial bank. During the period of financial crisis, federal bank increases the level of cash reserve ratio related to commercial bank which in turn restricted the banks to give loans and advances to the business ventures. During this period, The money supply has reduced to considerable effect. The less rate of cash reserve ratio solved the problem of macroeconomic issues in the financial crisis period gradually.