The Federal Reserve is in charge of handling monetary policy for the U.S. List a

Question

The Federal Reserve is in charge of handling monetary policy for the U.S. List and describe the tools the Federal Reserve would institute if it needed to slow down the economy because it believes that inflation is too high or that it will soon become a problem. Be specific about the changes that would take place in each of the following if the Fed's strategy works: the nation's overall money supply, availability of capital for individuals and businesses, demand, production, employment, and gross income taxes collected by government.

Explanation / Answer

The monetary authority has two routes to control money supply in the economy:

1. Quantitative

Under quantitative instrument the following are the tools with the Fed regulation money supply.

2. Qualitative.

Under this Fed try to target specific area, and these are,

a. Morel Suisan: The Fed tries to convince certain banks to control credit to achieve its monetary targets.

b. Marginal requirement. When there is inflationary pressure, the banks increases the securities under the marginal requirement, so as to discourage the people from taking loans.

All these instruments actually decrease- money supply, availability of capital, demand production, employment, and gross income tax by the government in the short-run. But in the long-run, theses variable reaches their optimal level, as these factors are determined by real factors.

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