Q1: One of the most common monetary policy strategies employed by countries wishing to achieve price stability is inflation targeting, which involves five different elements. Despite the commonality of its usage, inflation targeting has numerous disadvantages as cited by critics (Mishkin & Eakins, 2012). Delayed signaling is one of the top reasons of why there is a disadvantage to using inflation targeting as a method of monetary policy. In other words, the time it takes for noticeable changes to take effect in the economy after inflation targeting has been implemented creates a delay that causes there to be a question about what truly caused the economic change (Mishkin & Eakins, 2012). Another disadvantage associated with using inflation …show more content…
The basis for such an argument is that those increased output fluctuations are a consequence of focusing on interest during times when it is above target. A counter argument could be made that monetary policy makers are extremely mindful of such situations and carefully select positive interest rates for this reason (Mishkin & Eakins, 2012). The fourth disadvantage that critics argue comes as a result of inflation targeting is that “it can lead to low growth in output and employment” (Mishkin & Eakins, 2012, p. 241). The rationale behind such an argument is that inflation reduction has been found to occur during the same time frames that there is low output in countries that adopt and employ inflation targeting. The counter-argument for that rationale is that those output levels eventually bounce back once the target has been achieved; therefore inflation targeting is harmless to the overall well being of the economy (Mishkin & Eakins, 2012). In conclusion, there can be many arguments presented as for why inflation targeting has its disadvantages. But, for each argument presented against inflation targeting, there can be an equally strong argument presented for …show more content…
Discount lending from the Fed involves granting loans to commercial banks at a discount, which usually produces little to no effect on interest rates (Mishkin & Eakins, 2012). However, this tool is still used in monetary policy as a means of controlling the flow of money and helping banks that are experiencing liquidity problems or problems meeting reserve requirements (Federal Discount Rate, 2007). Reserve requirements make up the third of the three tools of monetary policy used by the Fed. By increasing reserve requirements, the Fed is increasing the interest rate. Alternately, the Fed may choose to lower reserve requirements, which would also decrease interest rates (Mishkin & Eakins, 2012). In conclusion, the Fed may choose to use any combination of the three tools of monetary policy to persuade, influence, or change interest rates and the demand for reserves.
Some economists blame the Federal Reserve’s inaccurate monetary policy. The easy-monetary policy since 2001 was deviating from the Taylor rule. (Alex, 2013)
Monetary Policy is another policy used in Keynesianism which is a list of protocols designed to regulate the economy by setting the amount of money that is in circulation and controlled interest levels. The Federal Reserve system, also known as the central banking system in the U.S., which holds control of this policy. Monetary policy has three tools used by the Federal Reserve to enforce this policy. Reserve Requirement is the first tool that determines the lowest amount of money a bank must possess and is not able to lend out. The second way to enforce monetary policy is by using the discount rate or the interest rate a bank will charge.
In this section I will be discussing how inflation rates have increased over the past 40 years, and what effect this has had on monetary growth. Inflation rates are defined as the rate of change in price levels in our economy especially Canada. Surveys are conducted quarterly or monthly to determine and generate a Consumer Price Index. The CPI is conducted with a “basket of goods” to determine changes in consumer prices for Canadians. It is important to study and analyze the rate of inflation because it helps the government determine how the dollar value has changed over a period of time. Also to adjust pending contracts and initiate new pensions which have to take into account the effect of inflation. Less well-off people and elderly are more
The adaptive expectations theory assumes people form their expectations on future inflation on the basis of previous and present inflation rates and only gradually change their expectations as experience unfolds. In this theory, there is a short-run tradeoff between inflation and unemployment which does not exist in the long-run. Any attempt to reduce the unemployment rate blow the natural rate sets in motion forces which destabilize the Phillips Curve and shift it rightward.
Yes, it will increase inflation but create more job opportunities and unemployment will decrease if government intervention occurs. Yes in the long run this might be bad but people care about tomorrow more than they care about 3 or 4 years from now or even more. As Lord Keynes once said “in the long run we are all dead”.
In chapter nine ‘Why is there an employment/inflation trade-off?’ the authors critique the natural rate theory. They agree with the fact that wage setting is influenced by expectations of inflation but disagree that inflationary expectation affects ‘wage and price setting one for one’
In the study of macroeconomics there are several sub factors that affect the economy either favorably or adversely. One dynamic of macroeconomics is monetary policy. Monetary policy consists of deliberate changes in the money supply to influence interest rates and thus the level of spending in the economy. “The goal of a monetary policy is to achieve and maintain price level stability, full employment and economic growth.” (McConnell & Brue, 2004).
The problem with balancing an economy is that human judgment and evaluation of economic situations enter into the equation. Establishing a constant growth level in the money supply would eliminate the decision making process of the central banker. The problem with human intervention is the short-sided nature of many of the policies designed to aid the economy. Such interventions, which yields unintended negative consequences, is the result of the time inconsistency problem. This problem is understood through situations during which central bankers conduct monetary policy in a discretionary way and pursue expansionary policies that are attractive in the short-run, but lead to detrimental long-run outcomes. Friedman believes that by leaving money growth decisions to an individual, the results are poor long-run management and eventually high inflation rates, an obvious detriment to the economy.
The first major aspect of the monetary policy by the Federal Reserve is its interest rate policy. This interest rate policy is mainly determined by the figure for the federal funds rate, which is the rate at which commercial banks with balances held within the Federal Reserve can borrow from each other overnight in ord...
Reserve Requirements, it is the amount of funds that the financial institutions have to hold in their vault. No one has the right to change the Reserve requirement, yet the Board of
There are several factors affecting the money supply: spread between the discount rate and federal funds rate, required reserve ratio and open market operations. It is very important to understand that whenever the "DR charged by Fed is lower than the FFR charge by other banks; banks tend to borrow from the Fed.
Inflation and unemployment are two key elements when evaluating a whole economy, and it is also easy to get those figures from the National Bureau of Statistics when you want to evaluate them. However, the relationship between them is a controversial topic, which has been debated by economists for decades. From some famous economists such as Paul Samuelson, Milton Freidman, etc. to some infamous economists, this topic received a lot of attention. However, it is this debate that makes the thinking about it evolve. In this essay, the controversial topic will be discussed by viewing different economists’ opinions on the subject according to time sequencing.
Inflation is defined as an increase in the expected price level and has been the signal for an improving economy, but it has also weakened an economy due to the unemployment it usually produces which usually hurts the Middle class the most. A healthy rate of inflation means an expanding economy due to higher tax revenues for the government and higher wages for businesses that are booming due to the high demand of their products. But if inflation surpasses of what is expected than employer will have to reduce wages to meet these new prices. When the Federal Reserve creates inflation most argue that this is robbing people of the money that they have saved because they have to use it due to the rise in prices. Printing
...ies like this one have already been implemented mainly to reduce the overall budget deficit, rather than to reduce inflation.
It is difficult for government to achieve all the macroeconomics objectives at the same time. Conflicts between macroeconomics objectives means a policy irritating aggregate demand may reduce unemployment in the short term but launch a period of higher inflation and exacerbate the current account of the balance of payments which can also dividend into main objectives and additional objectives (N. T. Macdonald,