...U. S. Federal Reserve's Monetary Policy Eco 561 June 22, 2010 Douglas C. Holbrook U. S. Federal Reserve's Monetary Policy The Fed can be considered second to the President of the United States as one of the most influential and powerful men in the United States. As the world tunes in to the and monetary decisions that the Federal Reserve makes, those deacons impacts trillions of dollars and hundred of millions of people. It is important to understand the function of money, the structure of the Fed Reserve and purpose, how the central bank controls the money supply and lastly what current monetary policy has the Fed enacted to boost up the economy. The Purpose and Function of Money Money is an economic resource. It is a mean to obtain value to be utilized for different purposes in ways other than the manner earned or realized. Money and its function simplify the production and use of wealth. It is defined as anything that is “widely accepted as a medium of exchange” (McConnell, Brue, & Flynn, 2009). Some of its functions are as follows: * Unit of account – monetary units are used as yardsticks to measure the comparative value of an array of goods and services, and resources. * Store of value/wealth – enables people to purchase goods and services in the present or future. * Medium of exchange – it is usable for buying and selling of goods and services. Money allows society to escape the complication of barter. As for the medium of exchange or...
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...The U. S. financial markets play a major part in contributing to the health and efficiency of the economy. Financial markets assist in directing the flow of savings and investment in the economy in a manner that facilitates the accumulation of capital and the production of goods and services. A combination of progressive financial markets and a variety of excellent financial products and instruments meets the needs of borrowers, lenders and the overall economy (Chong & Miffre, 2009). One of the biggest ways that businesses are impacted is access to credit. The financial markets are still in upheaval, so there is a great deal of concern about lending. Large and small businesses are having problems obtaining the capital they need to keep operating. These businesses are being impacted by the wariness banks feel to lend. One reason that banks are reluctant to lend is because so many businesses have failed. Additionally, many small businesses are behind on their payments, and commercial real estate, business loans and others are also giving in to the stress. One way that individuals are impacted by the U. S. financial markets is when companies lay people off. People stop spending money when they lose their jobs, which has an affect on individuals, businesses, and the entire economy (Chong & Miffre, 2009). The central bank of the United States, better known as the Federal Reserve System, was created by Congress in 1913. The reason for creating the Federal Reserve System was to...
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...Monetary policy is the process by which the monetary authority government controls the downturn economy through supply of money, often targeting a rate of interest for the purpose of promoting economic growth and stability in the world down turn. The official goals usually include relatively stable prices and low unemployment. Formulating a country's monetary and fiscal policy is extremely important when it comes to promoting sustainable economic growth. More specifically, monetary policy focuses on how a country determines the size and rate of growth of its money supply in order to control inflation within the country. In the United States, a committee within the Federal Reserve is responsible for implementing monetary policy. The Federal Open Market Committee (FOMC) is comprised of the Board of Governors and five reserve-bank presidents, and It meets eight times throughout the year to set key interest rate and to determine whether to increase or decrease the money supply within the economy. United States Government has adjust its monetary policy in response to the world down turns economy by increasing interest rates by fiat; reducing the monetary base, money supply and increasing reserve requirements. The United States central bank influences interest rates by expanding or contracting the monetary base, which consists of currency in circulation and banks' reserves on deposit at the central bank. In the United States, the great depression began in...
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...Monetary Policy ECN 201(ITV) Principles of Macroeconomics S u m m a r y In our society today money has three functions. One paramount function is money as a medium of exchange that enables us to buy and sell goods and services. Money is also a unit of account. Society needs a quantifiable measure to account for the value of goods, services, and resources. The third function of money is the store of value; where the value of current services is transferred into the future. In the aftermath of the great depression, governments of the 1930’s realized that the collapsing money supply versus credit available greatly contributed to the depression. Monetary policy is one vital tool of the national government uses to influence its economy. The British economist John Maynard Keynes analyzed, that full employment is not an automatic result of flexible pricing and sliding pay scales of economic systems. Instead it is crucial that the government relies on fiscal and monetary policy to balance demand and supply for full employment. The Federal Reserve System (Fed) consists of the Board of Governors for the Federal Reserve and the twelve Federal Reserve Banks, which control the lending activity of the nation’s banks and thrifts. The Fed controls the money supply to determine the interest rates. Monetary policy encompasses all political and economic measures available to the Central Bank for achieving their objectives, such as providing price-level stability, economic growth...
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...Tools of Monetary Policy In the chapters describing the structure of the Federal Reserve System and the money supply process, we mentioned three policy tools that the Fed can use to manipulate the money supply and interest rates: open market operations, which affect the quantity of reserves and the monetary base; changes in discount lending, which affect the monetary base; and changes in reserve requirements, which affect the money multiplier. Because the Fed’s use of these policy tools has such an important impact on interest rates and economic activity, it is important to understand how the Fed wields them in practice and how relatively useful each tool is. In recent years, the Federal Reserve has increased its focus on the federal funds rate (the interest rate on overnight loans of reserves from one bank to another) as the primary indicator of the stance of monetary policy. Since February 1994, the Fed announces a federal funds rate target at each FOMC meeting, an announcement that is watched closely by market participants because it affects interest rates throughout the economy. Thus, to fully understand how the Fed’s tools are used in the conduct of monetary policy, we must understand not only their effect on the money supply, but their direct effects on the federal funds rate as well. The chapter thus begins with a supply-and-demand analysis of the market for reserves to explain how the Fed’s settings for the three tools of monetary policy determine the federal funds rate...
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...rates. Should those economic indicators prove to be positive, then the markets turn upwards or even “fly”. When the markets experience an intense downtown, it can lead to a severe recession with the prices of financial assets declining sharply, which can cause individuals, businesses, and financial institutions to become less able to handle their debt payments or it can even lead to financial system failure with widespread bank closures and mortgage foreclosures in extreme cases such as the 2008-09 crisis, when the U.S. Government and the Fed were required to step in and take action to prevent total system failure. The U.S. economy still hasn't fully recovered. The U.S. Federal Reserve Is a Central Bank of the U.S. and is responsible for monetary policy and regulating the banking system. The Federal Reserve System consists of member banks,...
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...The Impact of Monetary Policy on Economic Growth and Inflation in Sri Lanka C.Amarasekara 1 Abstract Based on a vector autoregressive (VAR) framework and utilising both recursive and structural specifications, this study analyses the effects of interest rate, money growth and the movements in nominal exchange rate on real GDP growth and inflation in Sri Lanka for the period from 1978 to 2005. The results of the recursive VARs are broadly in line with the established empirical findings, especially when the interest rate is considered the monetary policy variable. Following a positive innovation in interest rate, GDP growth and inflation decrease while the exchange rate appreciates. When money growth and exchange rate are used as policy indicators, the impact on GDP growth contrasts with established findings. However, as expected, an exchange rate appreciation has an immediate impact on the reduction of inflation. Interest rate innovations are persistent, supporting the view that the monetary authority adjusts interest rates gradually, while innovations in money growth and exchange rate appreciation are not persistent. Several puzzling results emerge from the study: for most sub-samples, inflation does not decline following a contractionary policy shock; innovations to money growth raises the interest rate; when inflation does respond, it reacts to monetary innovations faster than GDP growth does; and exchange rate appreciations almost always lead to an increase in GDP growth. The...
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...Course: Name Monetary System In The U.S. And In Foreign Countries Yours Name Professor’s Name [optional] DOS: University Table of Contents Introduction 3 Types of Monetary Policies 4 Different monetary terms that were used and are still used 4 Federal Reserve System and concerned problems 6 The problems with the system 7 Conclusions 8 References 10 Introduction The U.S. Government provides money in a country's economy with the help of a set of institutions known as monetary system. To facilitate international trade, global investment and generally the reallocation of capital between nation states the term international monetary system came into existence. Which help buyers and sellers to communicate more effectively by providing the acceptable means of payment. Now getting towards US monetary system, the United States dollar used to be backed by gold, but in 1971 the US officially withdrew its promise to convert dollars into gold. The US dollar is now considered fiat money because the value of the dollar is derived from legal tender laws that require people to accept dollars as payments of debt. There is no physical limit regarding the amount of unbacked dollars that can be created, because of which there is very little preventing inflation of the US money supply. The Continental Congress issued the first unified currency during the Americal Revolution, which was declared redeemable in gold and silver. Because of excessive printing of notes...
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...ZERO on the exam! v. You MUST write your answer in the indicated space in order to get credit. vi. Good luck and remember: just try the best you can. Part I – Multiple Choices (2 points each, 8 points total) 1) A firm's value added equals: A) its revenue minus its cost of intermediate goods. B) its revenue minus all of its costs. C) its revenue minus its wages. D) its revenue minus its wages and profit. E) none of the above. Answer: ___ 2) Suppose C = 200 + 0.75YD. How much of an increase in government spending must occur for equilibrium output to increase by 1200? A) 300 B) 400 C) 800 D) 900 E) 1200 Answer: ___ Page 1 of 12 3) Suppose that the firms’ markup over cost is 100%, and the wage setting equation is W = P(0.6 – u), where u is the unemployment rate. What is the natural rate of unemployment? A) 6% B) 10% C) 12% D) 20% Answer: ___ 4) The natural level of employment will decrease when which of the following occurs? A) a reduction in unemployment benefits. B) a reduction in the markup of prices over costs. C) all of the above. D) none of the above. Answer: ___ Page 2 of 12 Part II – Working with Equations (14 points total) 5) Consider the...
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...British headquarters is located on the Fenchurch Street of London while the European headquarters is situated in La Défense, Paris, while the Asian main office is situated in Hong Kong. Reports from the 2008 Forbes Global 2000 listing highlighted that AIG was by then the 18th-biggest public corporation worldwide, and also appeared in the reports of the Dow Jones Industrial survey between April 8, 2004 and September 22, 2008. AIG experienced a liquidity catastrophe when its financial ratings dropped below "AA" rankings around September 2008. The U. S. Federal Reserve Bank on September 16, 2008 formed an $85 billion credit capacity to allow the company to overcome its increased collateral requirements following the credit ranking downgrade, in a swap over for the issuance assets merit to the Federal Reserve Bank for 79.9% equity of the AIG. The Federal Reserve Bank along with the U. S. treasury around May 2009 extended the potential monetary boost to the AIG, with the enhancement support in form of $70 billion investment, of which $60 billion was channeled on credit line as well as $52.5 billion to purchase mortgage-based properties belonging to or insured by AIG, raising the total sum available to around $182.5 billion. AIG later sold some of its subsidiaries as well as other assets in order to settle down loans, and carry on with enticing buyers of its properties. American International Group AIG origin can be traced from 1919, when Cornelius Vander Starr located an insurance...
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...Eventually, people lost faith in the notes and they quickly became worthless. This would lead to three failed attempts to decentralized US Banking in an effort to restore trust and avoid economic disaster, after the failed attempts, The Federal Reserve Act was established in 1913 by Congress. This, at the time secured and stabilized the nation’s economy. From December 1912 to December 1913, the proposal underwent heated debates, a lot compromising, molding, and reshaping. By December 23, 1913, when President Woodrow Wilson signed the Federal Reserve Act into law. This was the first accepted decentralized central bank that balanced the competing interests of private banks and populist sentiment. The Federal Reserve or the “Feds” has the authority to make bank loans and back the notes printed. The purpose of the Federal Reserve System is to regulate banks and to manage the amount of money that is accessible within the economy. The Feds uses two of its tools to accomplish this, one, it can change the interest rates on the money it lends to banks. A higher interest rate makes money more expensive, thus discouraging banks to lend. Lowering interest rates causes the opposite effect. Two, they have the authority to change reserve requirements. A reserve requirement is the percentage banks must keep in their vaults of their total loan portfolio. Obviously, if the Fed lowers this requirement, the banks can increase their leverage and lend out more. By controlling...
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...|ELECTRONIC ASSIGNMENT COVERSHEET |[pic] | |Student Number |32477916 | |Surname |Helliwell | |Given name |James Maxwell | |Email |Jhel8204@uni.sydney.edu.au | | | | |Unit Code |BUS290 | |Unit name |International Financial Markets and Institutions | |Enrolment mode |External | |Date |10/4/2014 | |Assignment number |1 ...
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...The Federal Reserve Denise Hammer ECO/212 July 11, 2011 Professor Hulya Arik The Federal Reserve Money was invented to expedite the exchange of values from person to person. It began through a barter system. That is, people would trade one thing for another. For example, Bill has a cow Bob wants. Bob has 10 extra bushels of wheat. Bill needs the wheat so his wife can make bread. Bill will accept the 10 bushels of wheat for the cow. However, barter is limited. In order for a barter to work, “each person must want what the other one has” (Hubbard & O’Brien, 2010). For a government to be more efficient, the medium of exchange must be one thing that is recognized by everyone. That is why paper is used for money in today’s society. Paper money has specific values so it is easier to determine what a person can get with the value of their paper. Four functions must be satisfied for anything to be used as money. The first function is medium of exchange. The seller must be willing to accept what is offered in exchange for his goods or services. A medium of exchange allows a seller to sell his or her goods or services for money and use that money to buy whatever he or she desires. The second function is a unit of account. A unit of account is a way of determining the value of the money. With barter, one item could be worth many prices. A plow could be worth a cow, 20 ears of corn, or a horse. When a single good is used for the first time as money, the item no longer has several...
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...with a very stable economy to experience a small amount of trade deficit from time to time, prolonged periods with a significant imbalance between exports and imports can create significant economic issues within the country. At the same time, a trade deficit may also weaken the currency of the country on the Forex market. What division in the U.S. makes the decision to increase interest rates? Central Bank, IE The FED, Federal Reserve What division in the U. S. makes the decision to increase taxes? U.S Congress What is monetary policy? p478, p516 - Monetary policy affects the exchange rate primarily through its effect on the real interest rate. * Monetary policy refers to the decisions that determine the nation’s money supply and interest rates * Monetary policy is set and implemented by a nation’s central bank * In the U.S. the central bank is called the Federal Reserve System or simply the Fed Founded in 1913 * Primary mission of fostering economic growth, keeping inflation low, and maintaining stability in financial markets What is fiscal policy? p478 - refers to discussions to decisions that determine the governments budget, including the amount and composition of government expenditures and government revenues. When the government officials spend more than they collect in taxes, the government runs a deficit, and when they spend less, the governments budget is in surplus. What is a recession? p488 A period in which the economy is growing at a rate significantly...
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...To find and discuss quantitative information concerning the economy--for example, term structure of interest rates, GDP growth, inflation, etc. In inflation news, Ben Bernanke, the Federal Reserve Chairman, expects the monthly $85 billion Quantitative Easing (QE) purchase of assets to taper off by the end of 2013 (“Global Economy”, 2013).The tapering of QE in the United States is causing major concerns because this affects emerging market currencies. Currency in other countries is hitting a low. This markets have reacted rather quickly to their sliding currencies. Economists contend the severe reaction by investors has been unwarranted (“Global Economy”, 2013). A reduction in the pace of asset purchases by the Fed should be evaluated in the context of the nearly $3.5 trillion of assets already held on the Fed’s balance sheet and its ‘forward guidance’ on the main reserve rate (“Global Economy”, 2013). The Fed has consistently said that interest rates will not rise if unemployment is above 6.5%, and if inflation remains under control. With the unemployment rate moving at its current pace the unemployment target is unlikely to be reached until early 2015 (“Global Economy”, 2013). However it does look like the Fed is at the beginning of a path back toward operating normal monetary policy that could take as long as 5 years (“Global Economy”, 2013) . The Fed is not being pushed to consider tightening, mainly because of developments in the U.S. labor market and because...
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