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Open Market Operation Essay

1544 words - 7 pages

Part I.

1. The three monetary policy tools are: Open Market Operations, Discount Rate Changes and

Reserve Requirement Ratio. Interest rates affect monetary policies by raising or lowering a short-term interest rate called the federal funds rate. Monetary policy can also use expansionary activities; these activities can increase the total supply of money, purchase open market securities, lower the discount rate and decrease the reserve requirement. Central banks can use this activity to decrease unemployment through lower interest rates designed to increase business growth. Contractual activities are also used by the Fed, monetary policy reduces the amount of money or slows the growth ...view middle of the document...

Part II.

1. The changes in monetary policy has affected many different types of businesses, credit was tightened even though rates were low, so smaller businesses with bad were unable receive funds needed to keep their business going while larger companies were able to take advantage of the low rates. As far as monetary policy affecting my personal spending it hasn’t, I’m not in need of a mortgage and have had steady income during the crisis.

2. In my opinion, no the federal government did not do a good job of saving the economy. As the crisis hit more and more people were losing their jobs. Businesses began to go overseas to cut costs which added to the labor rates being as high as they are. Also government spending during the bailout period only put us is a deep hole of debt and ruined the U.S credit rating for lending with other nations.

Part II –

Question 1.

1. The monetary policy has affected the business spending with the use of expansionary; one of the major components was by increasing the total supply of money. The low interest rates have increased incentives for business to take on more risk. Because the cost of borrowing money is going down, business are more apt to look to expand their business since there is an increase spending. With these changes the banks are more willing to lend money, especially with the interest rates so low there is a large demand for people to be refinancing on there home.
Since the inflation rate is stable it is creating a more stable economy, which helps to lower the unemployment rate. The monetary policy has not really affected my personal spending. I am still pretty conservative when it comes to buying goods and services. I do not own a home nor do I have a car payment and do not have an interest to borrower money so the lower interest rates do not have an effect for me.

2. I feel that the Fed is doing a better job to save the economy then it has in previous years. It seems that though the economy is not where they would like to see it, with the lowering of the interest rates it is helping stimulate the economy which I feel is a key factor to turning the economy back in the correct direction. The other major component to helping the economy is control the inflation which as the economy gets better it is harder to control but they seem to have a good handle on it, at least for the time being. With the inflation rate being more stable the unemployment rate is slowly going down, which is a huge problem right now in the economy when people are not working they are not spending as much money so with there
changes it seems to have a correlation with this.

Part 2, Question 2
1. There are a couple of main things that the fed decided to doing in there most recent meeting. One of which is extend the maturity of the securities. What there plan is by the end of June 2012 they would have purchased $400 billion dollars in treasury securities that have a maturity life of 6 to 30...

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