BU204_01_Bryant_Stephanie_Unit 9 Assignment

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UNIT 9 - BU204 - MACROECONOMICS 1 Unit 9 Assignment Template: Monetary Policy Name: __ Stephanie Bryant ____________ BU204 Section Number: _ 01 _____ Date: _ January 17 th , 2023 _____________ Assignment This assignment addresses how the Federal Reserve uses monetary policy and its monetary policy tools to try to stabilize the economy while meeting its dual mandate of controlling inflation and regulating unemployment. This assignment assesses your knowledge on the following Course Outcome: BU204-3: Examine the roles of money, banking, and the Federal Reserve System, and how monetary policy is used to mitigate negative impacts on the national economy. 1. The economy of a hypothetical country has been stable for two or three years with very low unemployment. Wages have been gradually increasing during this time. Now stock market prices begin significant increases, causing peoples’ investments, such as their retirement accounts and other investments to increase in value. People feel confident about the future. They believe they will keep their jobs, get regular pay raises and life will be good. With this positive feeling, people feel better about making purchases. They now use their new-found sense of wealth to buy many things that they had been hesitant to purchase in the past. Given this scenario, insert your answers below each of the following questions. a. What kind of economic gap will start to occur (inflationary or recessionary)? An inflationary gap would occur because the prices are fluctuating. b. Which of these graphs, Figure 1 or Figure 2, depicts this economic gap? Figure 1 would depict the economic gap. Figure 1

UNIT 9 - BU204 - MACROECONOMICS 2 Figure 1: Graph of the economy showing demand shifted to the right. Figure 2 Figure 2: Graph of the economy showing demand shifted to the left. c. What part of the Federal Reserve’s congressional mandate does this scenario trigger (price stability and maximum sustainable employment)? The Federal Reserve mandate would trigger the price stability because of the varying prices. d. What kind of monetary policy might be helpful to stabilize the economy (expansionary or contractionary)? Contractionary monetary policy is a policy that intends to reduce the rate of monetary expansion to fight inflation (Corporate Finance Institute, 2022). This type of policy would be best it will help stabilize the economy because it reduces the rate to help fight inflation. e. What specific monetary policy tools does the Federal Reserve have available to use in this scenario? Monetary policy tools that the Federal Reserve have available to them is the ability to sell bonds and securities. Also, a rise in interest rates can help as well. f. Explain, in detail, how the Federal Reserve should use each of these tools to maximize their effect in stabilizing the economy. What will be the likely effect of each monetary tool’s use on the money supply and the resulting impact on the economy? In an inflationary gap in the economy, the Federal Reserve should work on lowering the rise in prices due to inflation. Also, the Federal Reserve could use the open market as a tool where they would sell securities in the market. This will decrease the money supply

UNIT 9 - BU204 - MACROECONOMICS 3 and create a rise in interest rates. Because the liquidity or the money supply will decrease, people will have less money themselves and the spending would be limited. When the interest rates are high, people and businesses are not taking out loans and they will instead be saving more. 2. The economy of a hypothetical country has been stable for two or three years with very low unemployment. Wages have been gradually increasing during this time. Now, an aggressive policy of increasing tariffs on foreign goods imported into the country results in retaliatory actions from the other countries against the country’s products and services. This causes great loss of business in the country and results in a significant portion of workers losing their jobs. Given this scenario, insert your answers below each of the following questions. a. What kind of economic gap will start to occur (inflationary or recessionary)? A recessionary gap would occur. This kind of economic gap is the difference between real GPD and potential GDP at full employment level (Wall Street Mojo, 2023). When the demand decreases, it would create an influx of products that have not been sold. When the demand for products lowers and the income of exporters decreases this could cause a recession. b. Which of these graphs, Figure 1 or Figure 2, depicts this economic gap? Figure 2 would depict this type of economic gap. Figure 1 Figure 1: Graph of the economy showing demand shifted to the right.

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UNIT 9 - BU204 - MACROECONOMICS 4 Figure 2 Figure 2: Graph of the economy showing demand shifted to the left. c. What part of the Federal Reserve’s congressional mandate does this scenario trigger (price stability and maximum sustainable employment)? The price stability of the Federal Reserve mandate would be triggered because the money supply and the increase in demand would cause inflation in the economy. d. What kind of monetary policy might be helpful to stabilize the economy (expansionary or contractionary)? An expansionary monetary policy would help to stabilize the economy because with this type of monetary policy the money supply and demand will increase while the interest rates are lowered. e. What specific monetary policy tools does the Federal Reserve have available to use in this scenario? Monetary policy tools that the Federal Reserve can use when its available to them can be the reserve requirement and the discount rate. f. Explain in detail, how should the Federal Reserve use each of these tools to maximize their effect in stabilizing the economy, what will be the likely effect of each monetary tool’s use on the money supply, and the resulting impact on the economy?

UNIT 9 - BU204 - MACROECONOMICS 5 The federal reserve can reduce the reserve requirement when dealing with commercial banks. This will increase the lending banks amount and the money supply will increase as well. A reduction in the discount rate can increase the level of money supply which will increase the GDP in the economy. ---------------------- References: Corporate Finance Institute. (2022, December 5 th ). Contractionary Monetary Policy. Retrieved from https://corporatefinanceinstitute.com/resources/economics/contractionary-monetary-policy/ Srviastav, A.K. (2023). Recessionary Gap. Wall Street Mojo. Retrieved from https://www.wallstreetmojo.com/recessionary-gap/

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