ASSIGNMENT Monetary Policy ( monetary policy) Suppose that you are a member of t

Question

ASSIGNMENT Monetary Policy ( monetary policy)

Suppose that you are a member of the Board of Governors of the Federal Reserve System. The economy is experiencing a sharp and prolong inflationary trend.

What changes in would you recommend?
Explain how monetary tool would affect commercial bank reserves, the money supply, interest rates, and
aggregate demand.

For more information click on: http://www.frbsf.org/publications/federalreserve/monetary/tools.html

a. the reserve ratio

b. the discount rate

c. open-market operations

Explanation / Answer

Raise the Fed Funds rate over a period of time (it's bad to make a drastic change at once) in accordance with the severity of the increase in inflation.

Historically the Fed has raised the interest rate a half a percent at a time in intervals of every 6 months during severe times of inflation.

Raising the Fed Funds rate would reduce lending, raise the real interest rate, reduce spending and reduce inflation.

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