Federal Reserve Monetary Policy Revision Implication
https://research.stlouisfed.org/publications/page1-econ/2020/08/03/the-feds-new-monetary-policy-tools
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Original Post: Address all the elements of the assignment in complete sentences that are proofed for capitalization, usage, punctuation, and spelling (CUPS). It is a good idea to construct your answer using Word and then copy and paste it into myLearning. Each element (prompt/question) should be addressed in its own paragraph. There is no word requirement. Note that rambling will not be positively rewarded.
Read “The Fed’s New Monetary Policy Tools,” in Page One Economics written by staff at the St. Louis Fed.
Provide a summary in your own words of this source
Since the end of the Great Recession, interest rates have been at historic lows—in some cases, close to zero.
How do near-zero interest rates limit the ability of expansionary monetary policy to work? Explain fully. Try to use this article, your textbook, or an additional source (documented) that supports your opinion.
Are you concerned by the Fed’s recent actions regarding the money supply? Explain fully. Try to use this article, your textbook, or an additional source (documented) that supports your opinion.
Don’t limit yourself to ideas from the module. Always strive to be detailed, specific, and clear in your writing. Assume your audience is a high school economics student.
Federal Reserve Monetary Policy Revision Implication
The federal monetary policy has changed bringing with it drastic actions that potentially change how teachers, educators and policy makers understand the role of the Federal Reserve in shaping monetary policy (Ihrig and Wolla, 2020). The term monetary policy refers to tools the Federal Reserve, which acts as a central bank, uses to implements and influence the amount of money in circulation and credit in the general U.S economy. Under a recessionary gap, the government through the federal bank can intervene by introducing the expansionary monetary policy to increase money supply in the economy and bring the economy back to employment equilibrium.
The expansionary monetary policies affect how money and credit affect interest rate an in turn affect the performance of the U.S economy. The Federal Reserve uses three instruments of monetary policy which include the open market operations, the discount rate and reserve pre requirements. All of which work to effect interest rates and in effect define the effects of the expansionary monetary policy. The expansionary monetary policy is a tool that stimulates the economy especially in slowed or recession of the economy (Ihrig and Wolla, 2020). It does this by either increasing money supply within the economy, which lowers interest rates and in turn increase demand for credit/ borrowing.
Generally the effects is that it lowers the value of the currency, as such reduce exchange rates. Since the end of the great recession interest rates have been very low, near zero. Effectively lower interest rates, stimulate borrowing within the economy (Ihrig and Wolla, 2020). Perpetual lower interest rate under an effective expansionary monetary policy, risk pushing the economy to deflation, which signals a weaker economy, as there is lower consumer spending as a result of a general fall in prices of goods (Eggertsson and Woodford, 2003). This this limit the ability of expansionary policy and compel the implementation of contractionary monetary policy. Companies may respond to falling prices by slowing down their production to create demand, this has the potential to increase unemployment rates and reduced salary reductions.
References
Ihrig, Jane and Wolla, Scott. (2020) “The Fed’s New Monetary Policy To” National Council for
the Social Studies Social Education, 84(2), pp. 93-99.
Eggertsson, Gauti and Woodford, Michael (2003) “The Zero Bound on Interest Rates and Optimal
Monetary Policy,” Brookings Papers on Economic Activity, vol. 1, edited by W. Brain.
