Countercyclical Monetary Policy

This is a class discussion post. You will respond to this post, and answer the classmate’s response (below the bullet points) separately.

Discuss how changes in the Federal Reserve’s monetary policy affect at least 1 of the 4 components of GDP (consumption, investment, government spending, net exports).

Have the Federal Reserve’s countercyclical monetary policies been effective in moderating business cycle swings? Justify your response.

Reply to these two classmate’s statements below whether you agree or disagree. State why and explain. or your faculty member. Be constructive and professional. You will respond in 100 words each statement.

1)The federal reserve can raise interest rates and it can end its quantitative easing policy as a reaction to Inflation. By raising the interests investments like bonds, exchange traded funds and bond mutual funds are affected as well .When inflation is high let’s say at 7%. Consumers start having difficulty buying products at stores due to rising high prices of goods and services. Therefore The Federal reserve lowers its fedral fund rate. This is the rate at which banks can borrow from each other so that they can continue to offer loans to businesses and individuals.

By the Fed ending the policy of quantitative easing, this is a monetary policy that allows the central bank to purchase long term securities from open markets.

These changes increase the amount of money in the money supply. thereby encouraging lending and investments and has an overall effect of lower interest rates.

Reference

WITZ, J. (2002). SURVEY OF CURRENT BUSINESS. 102(4), 58.

2)Good afternoon class,

The overall quantity of money circulating in the United States is often referred to as money stock. When looking at the overall money supply in the United States, we reference currency, demand deposits, as well as other monetary assets. Currency, by definition, has been clearly stated. Demand deposits are bank account balances that depositors can access by check. Credit cards are not a part of the money circulating in the United States. Rather credit cards are a type of deferred payment. When an individual uses credit, he/she is simply deferring the inevitable payment (with interest, of course) (Mankiw, 2015).

To recap these points using an example, a penny is considered a medium of exchange because it serves as a unit of account and a store of value. A Mexican peso would not be considered a medium of exchange in the U.S. economy because prices are not listed in pesos. However, the peso could serve as a store of value. A Rembrandt painting is not considered money because prices are not listed in painting units. However, the painting could serve as a store of value (Mankiw, 2015). Class, what else are you learning this week about the money stock?