Question

1. Who is responsible for setting monetary policy in the U.S.? How is this group chosen?
2. If the Fed wants to increase the money supply, list and describe 3 ways they can accomplish this.
3. Under what economic conditions would the Fed wish to increase (expansionary policy) or decrease (contractionary policy) the money supply?
4. How would an increase in the money supply likely affect interest rates, investment, aggregate demand, the price level, output, and employment?
5. Why might monetary policy fail?

6. What does “inflation targeting” mean?

Answer 1

1. Who is responsible for setting monetary policy in the U.S.? How is this group chosen?

Federal Reserve is responsible for setting monetary policy in the USA. Board members are nominated by the president but these members must be confirmed by the congress.

1. If the Fed wants to increase the money supply, list and describe 3 ways they can accomplish this.

Three ways to increase money supply:

• Buying Securities through open market operation.
• Reducing required reserve ratio.
• reducing discount rate,

1. Under what economic conditions would the Fed wish to increase (expansionary policy) or decrease (contractionary policy) the money supply?

Expansionary monetary policy is taken when economy faces problem of recession. Further, contractionary policy pursued when economy faces boom and inflationary pressure.

1. How would an increase in the money supply likely affect interest rates, investment, aggregate demand, the price level, output, and employment?

Increase in money supply reduce interest rate, and investment increases due to fall in cost of investment. So, aggregate demand will rise further, price will rise partially. If economy is operating below the full employments, there will be rise in employments and output.

1. Why might monetary policy fail?

Monetary policy fails when investors are highly fearful about potential returns, or banks do not pass on benefits to investor by increasing credit.

6. What does “inflation targeting” mean

Inflation targeting means setting certain level of target of inflation and maneuvering monetary policy achieve such target. it provides certainty to policy actions of government,