Question

Continue your observation of the 10-year period of 2005-2015 for Milestones One and Two, and research the government monetary policies during that time frame. Specifically, the following critical elements must be addressed:

 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.

 Analyze new monetary policy actions undertaken by the U.S. government throughout the time period by describing their intended effects, using macroeconomic principles to explain the actions.

 Explain the impact of the new monetary policy actions on individuals and businesses within the economy

Answer 1

-) Monetary policy impacts the money supply in an economy, which influences interest rates and the inflation rate. It also impacts business expansion, net exports, employment, the cost of debt and the relative cost of consumption versus saving—all of which directly or indirectly impact aggregate demand.

Monetary policy includes the manipulation in the money supply by the Federal Reserve that will influence interest rates, which will cause a snowball effect in total overall spending. The change in interest rates, in many cases are a determining factor in the decision-making process to purchasing a house, a new car, borrow money for home improvements and many other decisions on purchases which will impact the total level of spending in the economy. The Federal Reserve has two main assets, securities and loans to commercial banks, thrifts-savings and loans, mutual savings and loans and credit unions.

Monetary policy has a greater impact on aggregate demand in an open economy than in a closed economy. An expansionary fiscal policy may result in higher interest rates. In an open economy, higher interest rates will also lead to an increase in the foreign exchange value of the dollar and a decrease in net exports.

The term "monetary policy" refers to what the Federal Reserve, the nation's central bank, does to influence the amount of money and credit in the U.S. economy. What happens to money and credit affects 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.

Open market operations involve the buying and selling of government securities. The term “open market” means that the Fed doesn’t decide on its own which securities dealers it will do business with on a particular day. Rather, the choice emerges from an “open market” in which the various securities dealers that the Fed does business with – the primary dealers – compete on the basis of price. Open market operations are flexible, and thus, the most frequently used tool of monetary policy.

The discount rate is the interest rate charged by Federal Reserve Banks to depository institutions on short-term loans.Reserve requirements are the portions of deposits that banks must maintain either in their vaults or on deposit at a Federal Reserve Bank.

The vast majority of open market operations are not intended to carry out changes in monetary policy. Instead, open market operations are conducted on a daily basis to prevent technical, temporary forces from pushing the effective federal funds rate too far from the target rate.

-) The impact of monetary policy on investments is thus direct as well as indirect. The direct impact is through the level and direction of interest rates, while the indirect effect is through expectations about where inflation is headed.

Monetary policy affects the primary asset classes across the board – equities, bonds, cash, real estate, commodities and currencies. The effect of monetary policy changes is summarized below

Low interest rates mean lower interest expense for businesses and higher disposable income for consumers. This combination usually means higher business profits. Interest-rate changes can affect stock prices, which can impact consumer spending.

When the monetary policy increases demand enough, wages and prices will increase at greater rates. A monetary policy that keeps interest rates artificially low eventually leads to increased inflation without a corresponding increase in either production or employment.