Monetary policy during war: Consider a discussion during FOMC meetings in which

Question

Monetary policy during war: Consider a discussion during FOMC meetings in which there is a weak economy and a war, with potential major damage to oil wells. Explain why this possible effect would have received much attention at the FOMC meetings. If this possibility was perceived to be highly likely at the time of the meetings, explain how it may have complicated the decision about monetary policy at that time. Given the conditions stated in this question, would you suggest that the Fed use a restrictive monetary policy, or a simulative monetary policy? Support your decision logically and acknowledge any adverse effects of your decision.

Explanation / Answer

Ans 1

Possible negative impact in the oil supply would affect very badly the industrial growth and may lead to economic slow down and recission and loss of employment etc.

Ans 2

To boost the industrial growth Central banks (Fed) may have to regulate the monetary policy rather than relying on demand and supply of money by reducing the interest rate .

Ans 3 Fed may have to go for a simulative monetary policy to boost the industrial growth , making available funds at a lower cost ( Borrowing funds at a reduced rate). But any such lowering of interest cost naturally come up with risk to inflation in economy. It is because easing of monetory policy would bring more money for people to spend causing the inflation.

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