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GB/540 GB540 GB 540 Unit 5 Discussion 2

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GB 540 Unit 5 Discussion 2 The Federal Reserve is responsible for regulating the U.S. monetary system and setting monetary policy. 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. The Fed controls the money supply primarily through open-market operations. Accordingly, the purchase of government bonds increases the money supply, and the sale of government bonds decreases the money supply. The Fed can also expand the money supply by lowering reserve requirements or decreasing the discount rate. It can contract the money supply by raising reserve requirements or increasing the discount rate. http://www.federalreserve.gov/ Based on the above summary and the detailed descriptions of the issues in the textbook (Cchapter 33) discuss any of the following set of 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? 2. Do you think monetary policy or fiscal policy is likely to be the more effective tool of stabilization policy? Why? 3. 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? 4. Should monetary policy be made by rule rather than by discretion? Why? Business Management Assignment Help, Business Management Homework help, Business Management Study Help, Business Management Course Help

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