Explore BrainMass
Share

contractionary policy

What type of monetary policy has the Federal Reserve been using for the past year (easy/expansionary, tight/contractionary, or neutral/non-involvement)? Why have they been using this policy? How have they implemented the policy (changing the "interest rate", changing the reserve ratio, or open market operations)? How has this policy impacted you and/or your company?

Solution Preview

The term "monetary policy" refers to the actions undertaken by a central bank, such as the Federal Reserve, to influence the availability and cost of money and credit to help promote national economic goals. The Federal Reserve Act of 1913 gave the Federal Reserve responsibility for setting monetary policy.
The Federal Reserve controls the three tools of monetary policy--open market operations, the discount rate, and reserve requirements. The Board of Governors of the Federal Reserve System is responsible for the discount rate and reserve requirements, and the Federal Open Market Committee is responsible for open market operations. Using the three tools, the Federal Reserve influences the demand for, and supply of, balances that depository institutions hold at Federal Reserve Banks and in this way alters the federal funds rate. The federal funds rate is the interest rate at which depository institutions lend balances at the Federal Reserve to other depository institutions overnight.

Changes in the federal funds rate trigger a chain of events that affect other short-term interest rates, foreign exchange rates, long-term interest rates, the amount of money and credit, and, ultimately, a range of economic variables, including employment, output, and prices of goods and services.

The central bank influences interest rates by expanding or contracting base money, which consists of currency in circulation and banks' reserves on deposit at the central bank. The primary ways that the central bank can affect base money is by open market operations or sales and purchases of second hand government debt, or by changing the reserve requirements. If the central ...

Solution Summary

Types of policy, such as contractionary policy, are overviewed.

$2.19