1. Identify at least three problems facing the FED in achieving its goals of monetary policy and give your recommendations on how to deal with each of the problems you list.
Inflation presents a problem for the FED achieving it’s goal of price stability. Inflation is unavoidable as far as the natural progression of an economy is concerned. Supply and demand also affect inflation. While the FED cannot control supply and demand of a product, I would suggest that they try to control price stability by creating regulations of what a company can charge related to the supply and value of a product. A high unemployment rate negatively affects the FED’s goal of a high employment rate. The employment rate is directly related to the production of the economy and therefore also related to supply and demand. The FED could look into putting regulations into place regarding employment policies when the economy is on a downturn to help keep employment rates up. Finally, another goal of the FED is steady economic growth and recessions could interfere with that. To counter economic lag created by recessions, the FED could work with other governmental organizations to provide incentives for businesses to create jobs and keep the economy and production going.
2. Identify and explain at least three ways that the Federal Reserve affects the banking system through open market operations (OMO).
Open market operations affect the volume and growth of bank deposits, the value of bank stock, and the volume of lending and interest rates attached to bank borrowing and loans. As far as volume and growth of bank deposits, the federal reserve can easily control how much funding the bank has at any given time. They can quickly decrease the supply of paper money by electronically debiting it and replacing it with a different financial instrument such as government bonds, foreign currency or gold. They can control the value of bank stock by controlling
References: Board of Governors of the Federal Reserve System. (2010, January). Retrieved February 8, 2010, from http://www.federalreserve.gov Monetary Policy. (nd) Retrieved February 8, 2010, from http://www.finpipe.com/monpol.htm