Abstract
The nation is in an economic crisis and it desperately needs a solution to get the economy back in a stable state. The GDP of the economy is growing to slow, unemployment is at too high of a rate in addition to a high inflation rate and a trillion dollar deficit. I will explain why the Contractionary Monetary Policy is the best method to solve all of the aforementioned problems. I made this decision based on I thought was the best solution based on what I thought what was the most important factor which was the high inflation. The result was inflation was lowered and the deficit was lowered as a result of using this policy. In addition the GDP growth went down and the unemployment rate went up.
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Economic Problem Solving Assignment
The main issue of out of all the economic problems is inflation. The rate of inflation for this scenario is 10 percent while ideally it should be around 2 percent. GDP is growing at alarmingly slow rate of 0.1 percent. The goal would be to get it at 2-3 percent anything above might risk even more inflation. Also. Factories are operating at 70 percent while we need them at around 85 percent because the amount of unsold goods are increasing. Finally unemployment is at a high rate of 10 percent. Lowering that number to
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The Contractionary Monetary policy lowers inflation by reducing the amount of the money supply. Using this slows the economic growth which is needed since inflation is an increase of price level and goods. The Federal Reserve increases interest rates at which banks which makes it more expensive to use loans which leads to less spending. The Reserve Requirement increase which means banks can lend out less money than before. Central banks will borrow money from people or institutions with the interests increased on the bonds more investors will buy thus causing money to be taken out of
According to the policy, the provision of money in the economy as an effect of increasing or decreasing the inflation rate, thus, the side effect of money supply on the economy can be monitored and the inflation effect associated with the policy should be check by reducing the money supply to the economy (Hoag & Hoag, 2006). . The demand and supply of money in the economy depends on the interest rate of the country. An interest rate of almost zero suggests that the demand for money in the economy by investors is slight. Thus, the production of the economy is very small. From the supply side means the economy is full of money already therefore the policy necessary by monetary is to reduce the money supply by raising interest rate of the central bank and selling treasury bills and treasury bonds to the public.
I will describe how expansionary activities by the FED impacts credit availability, money supply, interest rates, and security prices. The FED uses expansionary activities to control credit availability to banks either up or down depending on what it sees as needed. This is done through the ratio rate. The lower the rate the more money a bank has to loan. The lower the rate the less money the bank has to keep on hand which means the bank has more money to loan(Tarver, E.,2015, May 28).
This resulted out of control inflation where paper money downgrade the value of its worth. Failed to pay close attention and monitor the spending resulted in a semi depression.
“If you want to understand geology, study earthquakes. If you want to understand the economy, study the Depression” (Ben Bernanke Quotes). Ben Bernanke, a tenured professor at Princeton University, served two terms as the Federal Reserve chairman from 2006-2014 and orchestrated the Fed’s actions during the Great Recession. Being a student of the Great Depression, Mr. Bernanke’s policies and regulations surrounding the late 2000’s crisis reflected the adaptations to the Fed’s failed actions in the 1930’s. Throughout economic history, the stability and health of our economy depends on the balance achieved by the Federal Reserve over their three major roles: Monetary Policy, Regulation, Lender of Last Resort.
He inherited an economy of double-digit inflation. To try and combat the recession, he cut taxes from 70% to 28% as well as cut the corporate tax rate from 48% to 34%. He wanted to slow government spending and encouraged the federal reserve to beat inflation by lowering the money supply. The growth domestic product was spurred for the next few years and the economy grew. The growth in the economy lowered the unemployment rate.
This took the excess money put into taxes and government spending and gave it back to the public, who then could have a surplus of income, thus having the opportunity to go out, enjoy life, take their extra money and spend it on recreational things, which boosted the economy in an all-round way. People began to thrive again and this meant hope for the
It controls interest rates through the federal fund rate, which is correlated with the prime rate of lenders. If the economy is growing too fast and inflation is on the rise, it will “slow” the economy by raising interest rates. These raised interest rates cause people to borrow less, and thus inflation decreases. If the economy needs to be catalyzed, the Federal Reserve lowers interest rates. This causes people to borrow more, thus stimulating the economy and raising inflation.
2. Describe how expansionary activities conducted by the Federal Reserve impact credit availability, the money supply, interest rates, and security prices. Expansionary activities conducted by the Federal Reserve impact the credit availability because the interest rates are lower, which promotes small business to expand as well as to making it easy for consumers to take on credit loans. The money supply would be incremented by the Federal Reserve while assuming expansionary activities, in order to promote higher consumption in the economy, which is related and will affect the interest rates by lowering them. By incrementing the levels of consumption the security prices will also change, due the higher demand, factor that will ultimately promote and better the
In the spring of 1931, the Federal Reserve began to expand the monetary base, but the expansion was insufficient to offset the deflationary effects of the banking crises. In the spring of 1932, after Congress provided the Federal Reserve with the necessary authority, the Federal Reserve expanded the monetary base aggressively. The policy appeared effective initially, but after a few months the Federal Reserve changed course. A series of political and international shocks hit the economy, and the contraction resumed. Overall, the Fed’s efforts to end the deflation and resuscitate the financial system, while well intentioned and based on the best available information, appear to have been too little and too
This policy had public schools getting funded by the federal government. It improved our education system by providing enough money to have more resources for education. This policy improved education and more children were successful. This also had a huge impact on jobs because there would be less people working in jobs that involve hard labor. This improved many lives because of better paying jobs and more jobs with better working conditions.
The FOMC states that the inflation at the rate of 2 percent is most consistent over the longer run with the Federal Reserve’s statutory mandate. b. The Federal Reserve tried to reestablish stable prices to help with “The Great Recession.” However, in an attempt to lower inflation, it raised short term rates to the point that not only does inflation slow but the economy lapses into a recession. c. “We find that these policies are indeed effective in easing broad financial conditions – not just lowering government bond yields – when policy rates are stuck at the zero lower bound,” wrote John Rogers, Chiara Scotti and Jonathan Wright in a new working
This is done by lending reserves to banks when the banks need more for their own reserves. Typically, banks borrow from the Federal Reserve and pay an interest rate on the money that they borrowed which is defined as a discount rate. The Fed can use the discount rate to their advantage if they want to increase or decrease the supply of money in the economy. They increase the discount rate when they want banks to borrow less, which would deter the banks from seeking a loan and thus the money supply decreases. If the Fed wants to add more to the money supply, they would lower the discount rate.
The demand on labor from companies and factories was increased as increasing business. World Bank showed, ‘The GDP growth rate jumped to 11.1 percent from 1994 to 2000(World Bank, 2004:13).’ With the increased GDP, the Vietnamese solved the problems of food and clothing. The Vietnamese economy achieved its highest economic freedom score ever in the 2015 Index (The Heritage Foundation, 2015). However, there
Along these lines, unemployment may decrease, as this has different favorable circumstances, for example, lower government using on profits and less social issues. However, this phenomenon includes a number of different expenses. Firstly, if economic growth is unsustainable and is higher than the long run pattern rate, inflations are liable to be seen. An increase in economic growth could prompt an equalization of issued installments. In case the expanded customer expenditure causes further development, there will be an increase in the import sector.
This is primarily a tool at the disposal of the central bank of a country which uses different tools to manage the macro economic variables of a country to keep the economy stable or to stabilize it in situations of fluctuations. Monetary policy can be expansionary or contractionary depending on whether the money supply is being increased or decreased in the system so as to affect economic growth, inflation, exchange rates with other currencies and