The Federal Reserve (Research Paper Sample)
1. Evaluate the role and the effectiveness of the Federal Reserve in stabilizing the current economy.
2. Determine which economic indicators the Federal Reserve should analyze so it can better stabilize this particular economy.
3. Describe which monetary policies the Federal Reserve might use to influence the money supply.
4. Explain the strengths and weaknesses of using monetary policy in comparison to fiscal policy when promoting economic activity and preserving price stability.
5. Analyze the effect of the Federal Reserve’s action you identified in #3 on the aggregate demand / supply model. Your assignment must follow these formatting requirements:
Include an abstract, introduction with a strong thesis statement and a conclusion.
The Federal Reserve
Monetary policies aim to stabilize prices and maintaining high employment, with changes in the interest rates affecting expenditure by households and businesses. Even as the Fed seeks to influence the aggregate demand, there are uncertainties about the effectiveness of the policy alternatives. As such, employment levels and inflation are the economic indicators that guide the Fed’s monetary policies. The monetary policies are implemented faster compared to fiscal policies that require Congressional input. The three tools of monetary policy are federal funds rate, open- market operation and setting reserve requirements for banks. The AD/ AS framework also demonstrates the effects of reducing the interest rate and increasing the money supply thou open market operations. Introduction
Policy makers are concerned with promoting employment promote maximum output and stabilizing prices. However, monetary and fiscal policies are not the only factors that affect the economic outlook and employment in the long run. The people’s work effort, preference for risk taking saving, and the levels of technology have affected economic output in the long run. Economies go through cyclical changes just like businesses affecting the output and employment. The monetary policy has a more profound impact in the short run, as the Fed is better placed to stabilize the U.S economy in order to achieve the intended output and employment levels in the long run.
 Evaluate the role and the effectiveness of the Federal Reserve in stabilizing the current economy.
Depository institutions trade through the Federal Reserve bank and the federal funds rate is established through the demand and supply of the trade balances. The Federal Reserve (Fed) uses the monetary policies to stabilize prices long term interest rates, and promote maximum employment (Labonte, 2015). However, the policy makers face a challenge since it may be difficult to achieve the goals in the short-term, where there is lack of information. Stable prices are singled out as being important to the success of the Fed as they influence productivity, sustainable output growth as well as the interest rates. Stable prices are important since the economy is unlikely to face inflationary pressures and there is better allocation of resources. The Fed mainly influences credit availability and the cost of money through monetary policies.
The monetary policy changes have a direct impact on the US economy as they affect the dollar exchange value. For instance, in cases where the interest rate has risen, then the yields denominated in US dollars are more favorable, and there is increased demand for the dollar in the foreign exchange markets. In such a case the rising dollar is associated with lower cost for the importers but the US exports become more expensive in the international markets. On the contrary, lower interest rates result in a lower dollar exchange value and the price of exports decline while the cost of imports rises.
The Fed has mostly eased the monetary policies since the 2008/2009 financial crisis with the aim of improving the economic outlook and employment levels (Labonte, 2015). The need to improve the aggregate demand is a concern since there is a need to improve the counter’s productive capacity. The economy then improves as a result of sustained growth and rise in unemployment. However, there have been challenges in reducing the unemployment because of uncertainties. Policy makers use estimates on prices, production and spending, but the lag effects means that not all that is necessary is captured. Additionally, the US dollar has risen in value compared to the other major currencies further making it harder for US exports to be competitive in the international market. ...
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