Unlock document.
This document is partially blurred.
Unlock all pages and 1 million more documents.
Get Access
Chapter 16 Interest Rates and Monetary Supply
Thoughtfully answer the following questions. Fifteen (15) points.
• What is the basic objective of monetary policy?
The basic objective of monetary policy is too help the economy reach a full level of employment, and to
assist achieving a non-inflationary level of total output.
• Describe the tools available to you to implement monetary policy?
The Fed uses three main tools: Open-Market Operations, the Discount Rate, and the Reserve
Requirements.
The first tool is the most important because by buying or selling government securities/bonds, the Fed or
a central bank affects the money supply and interest rates. This help to ease the availability of credit and
reduce interest rates, motivating busisness to invest more and consumers like me to spend more.
The second tool which is the interest rate at which the Fed lends to commercial banks. An increase in the
discount rate reduces the amount of lending made by banks. Higher rates can also discourage lending and
spending by consumers and businesses.
The third tool is the portions of deposits that banks must hold in cash, either in their vaults or on deposit
at a Reserve Bank.
• What are the major strengths of monetary policy?
The strengths of monetary policy are its flexibility and speed as opposed to fiscal policy. The Board of
Governors is somewhat removed from political pressure, and its successful record in preventing inflation
and keeping prices stable.
• Why is monetary policy easier to conduct than fiscal policy?
Monetary policy is easier to conduct because of less administrative hold up based on the structure of both
policies.
Now choose one of the following to complete your essay
• Suppose that you are a member of the Board of Governors of the Federal Reserve System. The
economy is experiencing a sharp rise in the inflation rate. What change in Open Market
