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Federal Reserve Bank Policy Conflicts and Limitations of Monetary Policy

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1-The charter of the U.S. Federal Reserve Bank makes it responsible for monetary policy and the maintenance of low unemployment. How do these responsibilities conflict with each other?

2-Discuss the principal limitations of monetary policy relative to current economic conditions?

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Solution Summary

Limitations and conflicts in monetary policy are explained in a structured manner in this response. The answer includes references used.

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1. The charter of the US Federal Reserve Bank makes it responsible for monetary policy and maintenance of low unemployment. Specifically, the Federal Reserve has been given the responsibility of maximum employment, price stability, and moderate long-term interest rates (1). These responsibilities conflict when there is inflation. The Federal Reserve has to increase interest rates to maintain price stability. When it does this, the funds available to business become costly. The businesses reduce investment and this action reduces employment (2). The Federal Reserve has several other tools during inflation to reduce the liquidity in the market. When it uses these tools the businesses reduce investment and employment declines. Similarly, when the Federal Reserve increases interest rates to fulfill its objective of maintaining long term interest rates, it reduces business activity and this reduces employment. These responsibilities conflict with each other (3).
However, in practice, when the economy is in a recession or the economic growth rate is low, the Federal ...

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