The FEDs Expansionary and Contractionary Monetary...

During these hard times, people are facing one of toughest job markets in our nation’s history. Even though the media says economic recovery is imminent, many are still wondering when they will see the light at the end of the tunnel. The Federal Reserve Bank or FED is already being asked to prepare an â€Å"exit strategy† due to the concern that the expansionary monetary policy they used will quickly turn the recession into high inflation. This â€Å"exit strategy† can also be described as contractionary monetary policy and is going to be used to counteract the inflation sure to follow the economy’s recovery. Critics of this plan argue about when it should be implemented because it could make a recession worse or the inflation just as bad as the†¦show more content†¦The discount rate is also lowered allowing the banks to worry less about debt and loan to people with lower credit scores. This encourages people to make loans because of the lower int erest rates which increase investment and consumer spending; this makes the economy expand ending recessions. Eventually all the increase in demand translates directly into higher prices or inflation. These prices can soar out of control which can be a problem for people without cost of living adjustments or (COLA’s) added to their income. To keep prices stable the money supply must be decreased which means reserve requirements and the discount rate must be raised. Consequently, banks will have less money to loan and will loan to fewer people decreasing demand. The Federal Reserve will also sell bonds for currency that will be taken out of circulation to decrease demand. The change will mean that people will have less disposable income resulting in less demand and lower prices. Timing is crucial when deciding which policy to use, when the fed used expansionary monetary policy many were worried that there was too much liquidity put into the system. The main critics say that th e fed should use contractionary monetary policy to soak up excess liquidity, but the chairman of the fed says he wants to see signs of a recovery first. No one canShow MoreRelatedThe Great Depression Was The Single Most Devastating Economic Catastrophe Essay1809 Words   |  8 PagesThe Great Depression was the single most devastating economic catastrophe that had resounding effects and consequences on people all over the world. Did the various expansionary monetary policies employed by the Fed help the US pull out of the Great Depression during the Hoover administration? What was done differently after Roosevelt became president? Many economists and historians have argued that the misguided monetary policies during the Hoover administration including the mistiming of interestRead MoreQuestions and Answers on US Economy and Fiscal Budget1366 Words   |  6 Pagesservices. As the citizens of the state and policy makers dwell much on decisions made that concern revenue and expenditu re, it is very crucial to find out how the government uses the revenue it collects. In the financial year 2011, the federal government spent 24% that is part of Gross Domestic Product for the country: it is estimated to be $3.6 trillion in figures. As the level expenditure for 2011(which is a share of the GDP) increases because of the economic downtown, the planning of the budget isRead MoreExercises for Microeconomics17876 Words   |  72 PagesEXERCISES FOR MICROECONOMICS TOPIC 1 Economics: An Introduction (Chapters 1 2 in the Textbook) EXPLAIN THE FOLLOWINGTERMS ââ€"Ž Average benefit ââ€"Ž Average cost ââ€"Ž Economic surplus ââ€"Ž Economics ââ€"Ž Microeconomics ââ€"Ž Macroeconomics ââ€"Ž Marginal benefit ââ€"Ž Marginal cost ââ€"Ž Normative economics ââ€"Ž Positive economics ââ€"Ž Rational person ââ€"Ž Sunk cost ââ€"Ž Opportunity cost ââ€"Ž Absolute advantage ââ€"Ž Comparative advantage ââ€"Ž Attainable point ââ€"Ž Unattainable point ââ€"Ž Efficient point ââ€"Ž Inefficient