Monetary policy by the US Federal Reserve is important for the US economy. Howev

Question

Monetary policy by the US Federal Reserve is important for the US economy. However, economists disagree about several aspects of Federal Reserve decision- making powers including the composition of the Federal Reserve committees, Federal Reserve goals, and the actual impact of Federal Reserve policy on the economy. Address the following questions for this week’s assignment: Provide a brief (one paragraph) overview of this week’s material. Should the Federal Reserve Board focus exclusively on the problem of inflation? What other goals are appropriate for Federal Reserve policy? What is the appropriate goal for the inflation rate? How should the Federal Reserve Board use its policy to achieve its goals? How effective is the Federal Reserve monetary policy in achieving its goals? Is the composition of the decision-making bodies of the Federal Reserve appropriate for a democracy?

Explanation / Answer

(a)since growth, inflation, and unemployment are inter linked to each other, and one variable have impact on other. So targeting just one variable will lead to sub optimal achievement on others variables. So, fed must target a composite set of targets formed by all the macro variables.

(b.)goals:
1. high growth rate through high investment rate
2. medium inflation rate
3. stable exchange rate and dollar value.

(c)The Federal Open Market Committee (FOMC) judges that inflation at the rate of 2 percent (as measured by the annual change in the price index for personal consumption expenditures, or PCE) is most consistent over the longer run with the Federal Reserve's mandate for price stability and maximum employment.

(d)Fed must change interest rate, target credit rationing, qualitative credit control method to impact money supply which in return impact interest rate, and inflation in economy.

(e)Except in liquidity crunch situation, fed monetary policy in effective in maintaining economy on stable growth path.

(f)yes, as congress decides the goals and targets for Fed.

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