Feral Reserve System
ECO499
Money and Banking
23/07/2010
The Feral reserve system faces many challenges in order to provide a healthy economic structure. One of those challenges is for example determining the best solution to solve a crisis that could have different degrees of seriousness. In other words, the FED struggles on how to set the targets that would best affect positively on policy goals. To illustrate this point, we can address the following issue: inflation. As inflation rises, every dollar will buy a smaller percentage of a good. For example, if the inflation rate is 2%, then a $1 pack of gum will cost $1.02 in a year. I was taught in my previous finance class that most countries' central banks would try to sustain an inflation rate of 2-3%. …show more content…
The plan was to use "codes of fair competition" to steady prices for products made by different companies in similar industries. The codes didn't work well for many reasons. Organizing product lines was difficult, the disparate cost structures of the big firms compared to small firms, and the difficulty of setting prices that everyone would consider to be fair were all problems faced. Even when agreements were made, opportunities for evading the codes were …show more content…
Quantitative easing is often suggested as a solution to a liquidity trap, in other words a liquidity trap is a situation in which prevailing interest rates are low and savings rates are high, making monetary policy ineffective. In a liquidity trap, consumers choose to avoid bonds and keep their funds in savings because of the prevailing belief that interest rates will soon raise. Because bonds have an inverse relationship to interest rates, many consumers do not want to hold an asset with a price that is expected to decline. . If short-term rates have been cut to 0%, then short-term rates cannot fall any more. Therefore, if deflation is still a problem, one solution is to try and increase the money supply and get out of the deflationary cycle. Some economists argue that quantitative easing can work in cases of deflationary trap. In particular, it is important to change inflationary expectations from deflation to positive
Money and Banking
23/07/2010
The Feral reserve system faces many challenges in order to provide a healthy economic structure. One of those challenges is for example determining the best solution to solve a crisis that could have different degrees of seriousness. In other words, the FED struggles on how to set the targets that would best affect positively on policy goals. To illustrate this point, we can address the following issue: inflation. As inflation rises, every dollar will buy a smaller percentage of a good. For example, if the inflation rate is 2%, then a $1 pack of gum will cost $1.02 in a year. I was taught in my previous finance class that most countries' central banks would try to sustain an inflation rate of 2-3%. …show more content…
The plan was to use "codes of fair competition" to steady prices for products made by different companies in similar industries. The codes didn't work well for many reasons. Organizing product lines was difficult, the disparate cost structures of the big firms compared to small firms, and the difficulty of setting prices that everyone would consider to be fair were all problems faced. Even when agreements were made, opportunities for evading the codes were …show more content…
Quantitative easing is often suggested as a solution to a liquidity trap, in other words a liquidity trap is a situation in which prevailing interest rates are low and savings rates are high, making monetary policy ineffective. In a liquidity trap, consumers choose to avoid bonds and keep their funds in savings because of the prevailing belief that interest rates will soon raise. Because bonds have an inverse relationship to interest rates, many consumers do not want to hold an asset with a price that is expected to decline. . If short-term rates have been cut to 0%, then short-term rates cannot fall any more. Therefore, if deflation is still a problem, one solution is to try and increase the money supply and get out of the deflationary cycle. Some economists argue that quantitative easing can work in cases of deflationary trap. In particular, it is important to change inflationary expectations from deflation to positive