Go online to find a news article that provides an example of expansionary moneta

Question

Go online to find a news article that provides an example of expansionary monetary policy and an example of contractionary monetary policy. You may use two different articles. What monetary policy did the Federal Reserve employ in response to the Great Recession? What is the current monetary policy of the Federal Reserve? Write a paragraph to summarize your findings and answer these questions. You must restrict your search to primary sources e.g. government sites or academic sites (.gov or .edu) or current events articles (published by reputable news outlets) and provide your own analysis. Steer clear of sites like balance.com/about.com, investopedia.com, amosweb.com, economicshelp.org, etc. Sites like these are terrible sources! Report your source in APA or MLA format.

Explanation / Answer

Monetary policy refers to the policy through which the central bank of a country controls the supply of money, availability of money and the cost of money(rate of interest) in order to attain the objectives of growth and stability in the economy. The central bank controls the money supply and its availability and rate of interest by controlling the issue of currency and flow of credit of commercial banks. To achieve these objectives   the central bank uses quantitative policy instruments and qualitative policy instruments.

The quantitative policy instruments includes Bank rate, Open market operation, Change in Minimum Reserve Ratio and Change in Liquidity Ratio.

The qualitative policy instruments are change in Margin requirement of loans, Rationing of credit and Direct action. All these are done with the desired objectives of attaining full employment, economic growth, price stability, exchange rate stability and reduction of economic inequality.

Expansionary monetary policy.

An expansionary monetary policy is followed during the times of deflationary situations. Under deflationary situations there is a tendency for the price to fall overtime. The reason for this situation is that the demand is less than supply. Unless the money supply is expanded to increase the demand and thereby the price level the economy will dip into unemployment and over production. In such situation of deflation, the central bank resorts to certain methods like liberalizing the process of note issue, reduction in the rate of interest and easy availability of credit. The central bank applies the liberalized process of note issue with a view to stimulate the flow of money in the economy. Thus the aggregate demand is likely to increase and prices rise. Again the central bank follows a cheap money policy. The central bank reduces the bank rate and accordingly the market rate of interest also fall. This fall in market rate of interest encourages the borrowing by the people. Lastly the central bank adopts a policy of easy availability of credit in order to stimulate aggregate demand. The central bank reduces the bank rate, the central bank buys securities from the open market, It reduces the minimum cash reserves ratio of commercial banks and the margin of loans also will reduce. All these expand the money supply in the economy and which boost up the aggregated demand and price level. The economy in turn recovers from the deflationary situation.

Contractionary monetary policy

This policy is resorted during times of inflation. The excess supply of money in the economy results in the greater demand for goods and services than their supply. This cause price to rise over time. This situation is controlled by the economy by resorting anti-inflationary measures. In this situation the central bank adopt certain policies to reduce the money supply. Such measure include –restraining from new currency issue, increasing the rate of interest by raising the bank rate, the central bank sells securities in the open market, rising the margin requirement and liquidity ratio of commercial banks, increasing the cash reserve ratio of commercial banks, it may resort to demonetization of currency also.

All these efforts will reduce the money supply in the economy and the economy will be ready to combat with inflation.

Great recession and Monetary policy of Federal Reserve

From 2008 and for the continuing years the FED was the forerunner in combating the crisis in the banking system and in the economy. The Fed resorted to a wide range of policy measures.

The Fed targeted to assist the financial institutions. The fed encouraged Congress to pass the Troubled Asset Relief program to provide relied to the financial sector. The fed start to buy the long term debt issued by the federal government. The Fed resorted to keep the rate of interest stay low. The fed also adopted the policy of quantitative easing (printing currency). This money was used to buy bonds, injecting extra money in the banking system. The Fed started to pay interest on excess reserve of the commercial banks.

With all these the Fed successfully avoided the catastrophic scenario. The mandate of Fed was to create the maximum level of employment consistent with stable prices nearly 2% inflation. During recession unemployment was high and inflation was below 2%. With the expansionary monetary policies the Fed was able to handle the problem of high unemployment and low prices.

The current monetary policy of the Federal Reserve

During the Great Recession the Fed lowered the fund rate from 0% to 0.25% . But after the couple of years, the Fed gradually increased its fund rate. In the first half of 2018 it continued to increase the fund rate. It decided to increase the fund rate from the 1.4% to 2%. This decision was to move the economy towards maximum employment and price stability. The fed expecting that the increase in fund rate will be consistent the expansion of economic activity and the target inflation of 2%.

The Fed has decided to continue the balance sheet normalization program. The Fed has decided to reduce its holding of treasury and agency securities. The Fed while increasing the funds rate and gradual reduction in its security holdings, it reduces the financial accommodation of commercial banks to achieve the desired objectives.

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