Week 4 - Discussion Forum 2

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Ashford University *

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Course

203

Subject

Economics

Date

Jan 9, 2024

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pdf

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Uploaded by lorenr2610

The Federal Reserve uses various policy tools known as monetary policy to manage financial conditions. This can involve bonds, reserves, bank loans, and Federal Reserve notes. The Federal Reserve also uses the money supply and interests to affect output, employment, and price. There are three ways they can influence the money supply by opening market operations, such as buying and selling bonds to affect banks' reserves, changes in the discount rates can affect the bank borrowing from the Federal Reserve, and changes to the reserve ratio affect excess reserves. Using a contractionary monetary policy during a recession or depression would cause the economy to fall into further turmoil. This is because a contractionary monetary policy is used to decrease the money supply, which would leave the economy with little to no funds to live off of. However, if a contractionary monetary policy is used during a robust economy, it helps slow economic growth. This can be done by increasing interest rates to make borrowing expensive. In a recession or depression, the expansionary policy can help the economy because it expands the size of the monetary supply. This can be done by minimizing taxes, lowering interest rates, and encouraging people to take out loans for houses, cars, or businesses. However, during a robust economy, the expansionary policy will hurt the economy by causing the dollar's value to decrease due to an overabundance of available assets. In our textbook, Amacher and Pate (2019) mention that "The Fed's preferred tool is open market operation" (Ch. 12.4, para 5). The Fed's use of open market operations allows them to purchase and sell bonds on the open market. This will enable them to increase or decrease bank reserves as a form of payment (Amacher & Pate, 2019). This allows for flexible opportunities to impact or reverse bank reserves as desired and work to expand the economy. Amacher, R., & Pate, J. (2019). Principles of macroeconomics (2nd ed.). Bridgepoint Education.

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