Assignment: Monetary Policy
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 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.
Board of Governors of the Federal Reserve System. (n.d.).
Based on the above summary and the detailed descriptions of the monetary policy issues in the textbook discuss the following questions.
1. 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?
2. 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?
3. Should monetary policy be made by rule rather than by discretion? Why?
4. 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?
Format your assignment according to the give formatting requirements:
1. The answer must be double spaced, typed, using Times New Roman font (size 12), with one-inch margins on all sides.
2. The response also includes a cover page containing the title of the assignment, the course title, the student's name, and the date. The cover page is not included in the required page length.
3. Also include a reference page. The references and Citations should follow APA format. The reference page is not included in the required page length.