Intro to MacroEcon - College level - 8 questions total - some paragraph-long answers and some graphs - Essay Example

Essentially the Fed tries to moderate the natural effects of the business cycle. It looks to cool rapid expansion to control prices and moderate the resulting downturn. When the economy is contracting or not expanding sufficiently they look to increase economic activity thereby helping the economy maintain full employment. The main tool the Fed has is to modify short term interest rates through open market activities. These actions are undertaken by the Federal Open Market Committee which sets the federal funds rate.

The Fed also makes loans through the discount window these loans increase the money supply. Loans taken through the discount window are taken at a rate below the federal funds rate. Though less often employed, the Fed can also modify the required reserve ratio. This is the amount of funds that banks are required to keep in their vaults compared to the amount loaned out. Increasing the reserve ratio has the effect of pulling money out of the system. Decreasing the reserve ratio has the effect of increasing the amount of money in the system. 3B) I agree with Bernanke’s remarks and logic on the state of the economy as well as the necessity of using unconventional monetary policy.

I do have concerns that longer term policy may be more difficult to back out of once implemented. The continued high unemployment rate as well as low levels of growth merit additional monetary measures like those employed by the Fed. Core inflation remains low so expansionary policies do not yet risk triggering excessive inflation. To fulfill its mandate the Fed should look to tools such as moderating medium term interest rates. While controversial it reinforces expectations of a low interest rate environment in the short term. 4A) The economy does not have sufficient private sector demand to sustain economic growth at the levels needed to recover to the