Monetary policy - Assignment Example

Monetary policy QN1. Four Chapters in “In Fed we Trust” Ten items I never new of before reading the book Key Playersof the worst financial Crisisi. Three men were responsible in managing the Great Panic.ii. The key individuals were the Treasury Secretaries, Mr. Hank Paulson, The Federal Chairman, Mr. Ben Bernanke, and Tim Geithner.iii. Details of each key player’s characteristics, and there effects on incomes. iv. Their personalities had a noticeable effect on the impacts their decisions had on the monetary system.v. The negative effects of their moves on the psyche of the marketsvi.

Geithner and Paulson were more prone to Gaffs than Bernanke in the public eye.vii. The biggest issue on stage for the key players was in the ever-changing game plan on the way of handling the Great Panic.viii. The three persons acted to save Bear Stearns and ignored Lehman Brothers, which failed later.ix. The three made things right by adopting the tune of “whatever it takes.”x. They used different powers and tools to get everything back to normal.I would like the class to discuss what the major players of the Great Panic did to terminate the unhinging of the monetary system.2. The Role of the Federal Reservei.

That apart from the function of the Federal Reserve to control money supply, it also sets key interest rates.ii. In normal market circumstances, the Fed keeps inflation under control.iii. The Fed controls policies that help the U.S economy grow at sustainable and reasonable rates.iv. Fed’s functions are accomplished via targeted interest rates that indicate to the market, the future expectations.v. A critically significant concept of the Federal Reserve is that it works separately from the political process.vi. The Fed was developed about a century ago.vii. When it was established, Legislators wanted to ensure that it could act decisively and swiftly to stabilize a monetary system in times of panics.viii. Before the creation of the Fed, panics were common.ix. The 1930s economic catastrophe was hugely the blunder of the sluggish Federal Reserve.x. The Fed failed to deal with the Great Panic on its own.

The class should discuss the bleak contrast of the ability of the Fed to act versus that of the Congress and the Treasury.3. The extended powersi. The Fed acted as a primary responder to the Great Panic.ii. The powers of the Fed were expanded over the following years.iii. The Great Panic demanded much from the Fed than expected.iv. The Fed had to push the boundaries of its powers and become more creative to respond to the Panic.v. The key issue faced by the Fed was a fast decline in credit flow among monetary institutions.vi. The Fed increased fresh lending facilities to get the credit flowing once more.vii. Interest rates were cut to a sum of 5.25%.viii.

Lending facilities were created to help Fed fight the crisis.ix. Hundreds of billions were invested in markets to make credit flow.x. The Panic had been a threat to America since 1930s.The class should tackle what was done when the Fed continuously faced the seizing of credit markets.4. Pressure on decision makingi. Unusual actions were taken during the crisis.ii. Financial systems strained to cope with the frozen credit markets.iii. Bear Stearns was the first organization to be get a “bailout.” iv. Failure of the Bear Stearns dramatically increased the panic.v. Paulson and Bernanke had only ten days to save Bear.vi. Bear was put on sale by the Fed, within four days.vii. The only candidate who was ready to take in Bear was JP Morgan-Chase.viii. The Fed was forced into picking losers and winners.ix. Severally, Paulson, Bernanke, and Washington Mutual were overridden by the FDIC Chairperson.x. Lehman Brothers failed to find a buyer on many occasionsI request that the class discuss the outcomes of the Great Panic.QN.2A bubble is an unreasonable high prediction for on-going appreciation or a trade in assets with increased values.

It causes deflation and bankruptcyQN 3Traditional tools of monetary policy include changing the reserve ratio, utilizing of term auction facilities, altering discount ratios, and open-market operations. Non-traditional tool of Quantitative easing is a nontraditional financial tool, where the Federal provides financial accommodation by specifying the quantity of assets it will purchase. The Fed tightens or eases its financial conditions by raising or lowering short-term interest rates. The Fed’s ability to pay interest on bank reserves helps in putting upward pressure on market interest rates since banks do not lend to the public at rates below their earnings. QN.4FED “targets” the fed funds rate means, that the Fed uses reserves changes to affect the federal funds rate.

This is because Fed considers that this rate is closely related to economic activities than the T-bill rate, prime rates, discount rates, or mortgage rate.QN.5The yields curve is a plain illustration of the relationship between the interest rate paid by a bond and the time of maturity of the bond. A traditional yield curve is shaped by future path expectations of short-term interest rates as well as uncertainty concerning the path.QN 6The expression MV=PQ is significant to the economists in helping them to explain what might occur when policies of the Fed on progressively printing money is thrown out, and replaced by a economical scheme of dollar-in, dollar-out turn out.

QN 7The Fed balance sheet has changed in recent years in that, there were increases in the holdings of the treasury securities from 1961 to 2006, but decreased in 2007. From 2008, the holdings started increasing again.QN.8I do agree that the Fed has played itself out, and can do little else to affect the current economy. It can choose the policy of loosing or tightening their monetary policiesQn.9The Fed should embark on another round of quantitative easing to prove its efforts in strengthening the U.

S recoveryWork CitedFederal Reserve Bank of San Francisco, US Monetary Policy: An Introduction, 2004. Web. 13 Nov.2012..