“Exploring the Role of the Federal Reserve Bank”
What is the FED’s job and how does the FED manage the money supply? How do banks create money? Let’s explore these questions as we talk about the role of the Federal Reserve Bank, also known as the FED.
Reply to these questions in your post:
If the FED decides to continue the process of raising interest rates, what is the likely response of firms and households to the increased cost of borrowing?
Thinking back to the discussion on the deficit and the debt, how might an increase in the interest rate affect a decision by the government to allow continued large deficits?
Please read the course materials for the week before answering the discussion question! In this discussion, you have to consider a struggling economic situation and provide supporting arguments based on the Federal Reserve and Monetary Policy. In this week’s discussion, you are to address the following issues:
The likely response of firms and households to the increased cost of borrowing if the FED decides to continue the process of raising interest rates
The effect of an increase in the interest rate on a decision by the government to allow continued large deficits
As you ponder the question of this discussion forum, keep in mind that the Federal Reserve can change the money supply by using 1) open market operations, 2) changing Reserve Requirements, and 3) Changing the Discount Rate. Let’s focus on Open Market Operations as they are the most frequently used tool of monetary policy. Open Market Operations are Open market purchases and Open market sales. Open Market Operations are the purchase or sale of U.S. government securities by the Fed. Open market purchases are the Fed’s purchase of government bonds from the private sector, this increases reserves in the banking system and increases the money supply. Open market sales are the Fed’s sale of government bonds to the private sector, this decreases reserves in the banking system and decreases the money supply.
Class: What is the link between fluctuations of dollar and changes in commodity prices?
Respond to a peer:
Reply to a peer and discuss if their reasoning about borrowing or allowing large deficits is similar to yours.
Hello Class and Professor,
The likely response of firms and households to the increased cost of borrowing if the FED decides to continue the process of raising interest rates: As covered in 28.4, this would be similar to contractionary monetary policy which basically raises interest rates and reduces borrowing in the economy. Firms would be respond with lower business investment in turn making it difficult to borrow money. Households/Consumers response is less ig item purchasing.
The effect of an increase in the interest rate on a decision by the government to allow continued large deficits: As for the effect of an increase in the interest rate, this is estimated to triple over 10 years. This will hurt public investments and ultimately add to the national debt.
What is the link between fluctuations of dollar and changes in commodity prices? The link between these two is commodity prices can effect inflation and supply and demand effects fluctuation. For example, a natural disaster such as a hurricane will have an impact on agricultural supply and demand which then becomes a commodity.
Thanks,
Thomas
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