Essay PreviewMore ↓
In the “Monetary Policy” simulation you are appointed the new chairman of The Fed by the President of the United States. Your first order of business is to implement an appropriate monetary policy. The simulation begins in 2004 and carries through to 2010 and each year you must decide what the spread between DR (Discount Rate) and FFR (Federal Funds Rate) will be, what the RRR (Required Reserve Ratio) of the banks will be as well as monitoring the OMO (Open Market Operations).
The Discount Rate (DR) is the rate charged by the Fed for borrowing money, while the FFR is the rate charged for money borrowed by other banks. According to the simulation, if the rate of the DR is lower than that of the FFR, banks are more inclined to borrow from The Fed. When this happens, the supply of money in the system is increased whereas when banks borrow from other banks the supply of money is unchanged. “An increase in the discount rate discourages commercial banks from obtaining additional reserves through borrowing from Federal Reserve Banks. So the Fed may raise the discount rate when it wants to restrict the money supply,” (McConnell & Brue, p. 11).
The Required Reserve Ratio is the actual money, or cash money, that banks are required to have on hand. If the RRR is low it allows the banks to lend more, therefore putting more money into the economy. In reverse, if the RRR is high, the banks are limited on the amount of loans they can approve and therefore limit the amount of money put into the system. For example, Bank A’s actual reserves are $10,000 and the checkable deposits are $50,000.
How to Cite this Page
"The Fed's Macroeconomic Impact On Business Operations." 123HelpMe.com. 23 Jul 2019
Need Writing Help?
Get feedback on grammar, clarity, concision and logic instantly.Check your paper »
- Macroeconomic Impact on Business Operations "Job Weak, Unemployment Soars, More Cuts coming, and Bankruptcies Jump 40%." These are typical headlines we see in the newspaper, internet, and journals. We also hear these in news, radio stations and office chats. These are valuable information that economists use to analyze economic situation of the country. These can also be information that individual use to guard their spending.... [tags: Macroeconomics economics economy business]
1738 words (5 pages)
- Macroeconomic Impact on Business Operations This paper will discuss the objective of monetary policy and its influence on the performance of the economy as it relates to such factors as inflation, economic output, and employment. Monetary policy affects all kinds of economic and financial decisions people make in this country, whether to get a loan to buy a new house or car or to start up a company, whether to expand a business and whether to put savings in a bank, in bonds, or in the stock market.... [tags: Economics Macroeconomics Business]
1832 words (5.2 pages)
- Abstract This paper focuses on Monetary Policy, which centers on connections between money, banks, and credit to lenders. In addition, this paper will cover the effect on macroeconomic factors such as GDP, unemployment, inflation, and interest rates. Additionally, an explanation on money creation and the implications of making money gives an insight on Money Supply and Macroeconomic Factors. With many combinations of monetary policy, the paper covers the optimal balance between economic growth, low inflation, and a reasonable rate of unemployment.... [tags: Business Economics ]
1483 words (4.2 pages)
- Mediums of exchange have been used by people for many years. As time evolved so did the creation and use of money. Different countries have their unique dominations; however, how money is created is essentially the same. Often, money is thought to be created when it is printed by a central bank or the government. This is only partially true as money can be created in two ways; it can be printed or it can be created through loans from commercial banks. With the creation of money, policies have to be implemented to monitor and control the supply.... [tags: Economics Business Economy]
1853 words (5.3 pages)
- Macroeconomic Impact on Business Operations Introduction The monetary policy consists of three tools used by the Federal Reserve, also known as the Fed, to control the money supply; open-market operations, reserve ratio, and the discount rate. These tools influence the money supply and in turn affect macroeconomic factors such as the gross domestic product (GDP), the unemployment rate, the inflation rate, and the interest rate. gMost economists believe that monetary policy influences economic activity and prices by affecting the availability and cost of money and credit to producers and consumers.h (Meulendyke, 1998, p.... [tags: Economics]
1937 words (5.5 pages)
- Macroeconomic Impact on Business Operations Money supply is the availability of money in the hands of the public (economy) that can be used to purchase goods, services and securities. In macroeconomics, the price of money is equivalent to the rate of interest. There's an inverse relationship between money supply and interest rates. As money supply increases, interest will decrease. On the other hand, interest will increases as money supply decreases. It is very important to understand that the economy works at market equilibrium.... [tags: Economics]
1602 words (4.6 pages)
- Some say money is the root of all evil. Those who have it do not know what to do with it and those who want it dream of having it. The creation of money has always been somewhat confusing. The Federal Reserve uses various tools to control the money supply. Theses tools influence the money supply and in turn affect macroeconomic factors. To better understand the purpose and structure of the Federal Reserve we writing expectations, all instances first have to understand how money is created and which combinations of monetary policy best achieves a balance between economic growth, low inflation, and a reasonable rate of unemployment.... [tags: Economics]
1993 words (5.7 pages)
- In this paper, I will identify the three monetary tools used by the Federal Reserve. In addition, I will explain how these monetary tools influence the money supply and in turn affect macroeconomic factors. Next, I will explain how money is created. Lastly, I will recommend monetary policy combinations that best achieve a balance between economic growth, low inflation, and a reasonable rate of unemployment. Tools Used by the Federal Reserve to Control the Money Supply The three monetary tools used by the Federal Reserve to alter the reserves of commercial banks are: Open-market operations, reserve ratio, and the discount rate (McConnell-Brue, 2004, chpt.... [tags: Economics]
1624 words (4.6 pages)
- There are three main tools the Federal Reserve can utilize to control the US money supply. These three major tools are: reserve requirements, discount rate, and open market operations. The US economy, which is influenced by national interest rates, inflation variability, and unemployment rates, these areas also have an effect on the overall economic growth of the country, are all significantly influenced by the monetary policies in operation by the Federal Reserve. In addition to these factors influenced by the Federal Reserve, the Central Bank can also offset and influence the US economy with the process of money creation.... [tags: Business Economics Economy]
1898 words (5.4 pages)
- In the following text, readers will form an understanding of what monetary policy is and the effect monetary policy has on macroeconomic facts such as gross discount products (GDP), unemployment, inflation, and interest rates. The text will also explain how money is created and give a combination of monetary policy that will best achieve a balance between economic growth, low inflation, and a reasonable rate of unemployment. Monetary policy is the process governments and central banks use to manipulate the quantity of money in the economy to achieve certain macroeconomic and political objectives.... [tags: Macroeconomics Monetary Policy]
1739 words (5 pages)
The Open Market Operations (OMO), as explained in the simulation, is t-bills and bonds that can be bought and sold to increase the money supply in the economy. These bonds can be bought from or sold to the general public or commercial banks. “Open-market operations are the Fed’s most important instrument for influencing the money supply,” (McConnell & Brue, p. 3). “The Fed's control over the money supply stems from its ability to change the composition of its balance sheet. For example, the Fed may decide to purchase additional government bonds on the open market from bondholders or private banks,” (CliffsNotes, ¶ 11).
Each of these factors is used by The Fed to either increase or decrease the supply of money in the economy which, in turn, affects the GDP, inflation and unemployment rate. The more accessible money in the economy, the more likely the rate of inflation will increase. However, when more money is available and people are able to spend, this will also lower the unemployment rate due to the fact that workers are needed to meet the demand of consumer buying. In the same respect, if money is less accessible and people are not spending, the unemployment rate will increase and inflation and the GDP will decrease.
The creation of money most often comes from the banks through loans that they provide to the public and other banks. The Fed requires that each financial institution retain a certain amount of actual cash for reserves, and “has the authority to establish and vary the reserve ratio within limits legislated by Congress,” (McConnell & Brue, p. 4). However, the actual creation of “new” money comes from the Treasury. “The U.S. Bureau of Engraving creates the Federal Reserve Notes and the U.S. Mint creates the coins,” (McConnell & Brue, p. 1). The way the banks “create” money is by loaning it to individuals to put back into the economy since “currency held by a bank, you will recall, is not part of the economy’s money supply,” (McConnell & Brue, p. 4).
The “Monetary Policy” simulation provided the user an opportunity to play with the figures for the Required Reserve Ratio, Federal Funds Rate and Open-market Operations and see how they affected the macroeconomic factors of GDP, inflation and unemployment rate. However, my experience was that there was no set system for increasing GDP, lowering inflation and keeping unemployment at a manageable rate. It became apparent rather quickly that most often, when GDP increased so did inflation. It was noticeable early on that keeping the GDP at a promising level and sustaining the unemployment rate within an acceptable range was fairly easy. However, the most difficult task proved to be keeping the inflation rate from getting out of control. Ideally, lowering the rate of unemployment was achieved by flooding the market with money which also increased the GDP but caused the inflation rates to increase as well. “Inflation is a rise in the general level of prices. When inflation occurs, each dollar of income will buy fewer goods and services than before. Inflation reduces the ‘purchasing power’ of money,” (McConnell & Brue, p. 18).
Towards the end of the simulation, I realized that if I increased the spread between the DR and FFR, usually around a -1 to -1.5, but sold in the Open-market operations it helped to increase the GDP, level out the inflation and lower the unemployment rate. Occasionally when adjusting those two factors did not work the way I wanted or expected, a slight adjustment to the RRR would produce the desired affect.
In conclusion, it is easy to see how the tools used by the Federal Reserve to control the money supply can affect the macroeconomic factors of GDP, inflation and the unemployment rate but are not as easily predicted. The more one examines the trends of these macroeconomic factors the more their correlation to the money supply becomes more prevalent. However, it is quite apparent that one unexpected occurrence could cause a serious blow to our country’s economic stability and cause the Fed to scramble to regain control. There is no set formula or indisputable equation to the success or failure of this country’s economy for, if there were, there would be no poverty, no unemployment and no National Deficit.
CliffsNotes.com. Supply of Money. Retrieved October 22, 2007, from http://www.cliffsnotes.com/WileyCDA/CliffsReviewTopic/topicArticleId-9789,articleId-9747.html
FED101. Money. Retrieved October 22, 2007 from
McConnell, B. and Brue, S. (2004). Economics: Principles, Problems, and Policies. New York: McGraw Hill.