Suppose you are in charge of monetary policy. Assume your goals are a full emplo

Question

Suppose you are in charge of monetary policy. Assume your goals are a full employment level of production with price stability. Assume further the economy has excess capacity with unemployment at 7.8% (the natural rate is 5.2%), but you are concerned that past policy has raised the concern that inflation and inflationary expectations is beginning to rise. Past monetary policy has been to lower the federal funds rate through expansionary monetary policy, which has increased bank reserves. Explain completely, referring to your tools of monetary policy, operating targets, intermediate target, and your goals of policy, the type of monetary policy you would recommend to the FOMC and why you have given that recommendation.

Explanation / Answer

Since there is unemployment I would recommend FOMC to follow Deflationary policy. The reason is that it will help to attain equilibrium by achieving full employment.

TOOLS

decrease in SLR,CRR,margin requirements of loans,buying of securities BY FOMC

all such actions will primarily increase money with people leading to more demand in economy necessitating the need of more goods to be produced,thus reducing unemployment and checking inflation. With less interest rates producers can avail more capital n invest in business. A check has to be kept easy funding available should be used for investment purpose only.

GOALS - full employment and output and income

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