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Macro & Microeconomics
Pages 8 (2008 words)
It has the power to influence the price level of the economy and the overall economic growth. Monetary policy is a tool employed by the central banks of…
The purpose of this paper is to focus on the monetary policy of the Federal Reserve Bank of the U.S.A. particularly during and after the global financial crisis. This paper summarizes the article “Monetary Policy and the Federal Reserve: Current Policy and Conditions” published by the government think tank of the Congress. The article is authored by Marc Labonte. The article comprehensively discusses the main policies that had been taken by the Federal government during the sluggish phase of 2008-2013 to restore equilibrium in the recessionary economy.
The conventional monetary policy of the Federal Reserve was mainly based on targeting the federal funds rate. Labonte (2014) reports that the government had initially operated through setting an interest rate target that could meet the goals of stable prices, maximum employment and long-term growth. In other words this type of a monetary policy has also been termed as management of aggregate demand so as to eliminate fluctuations in the business cycle. The Federal Reserve had primarily operated through the open market mechanism historically in which the inter-bank lending rates were scrutinized (Labonte, “Monetary Policy and the Federal Reserve: Current Policy and Conditions”).
In such a type of monetary policy the interest rates are raised soon before the economy reaches the level of full employment. This helps in restoring equilibrium and ensures that the growth is sustainable. This vision is combined with the basic idea of creating a favourable level of employment in the country (Labonte, “Monetary Policy and the Federal Reserve: Current Policy and Conditions”).
In Open Market Operation (OMO), the central bank buys securities issued by the U.S. treasury. In case of purchasing the new securities the bank has to issue new currency to expand the reserve base. This is done in order to ...
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