Question

Question 1

A) What are the ultimate targets of monetary policy?

B) What are the intermediate targets of monetary policy?

C) List and explain the tools (instruments) of monetary policy. [What are they and how does the Federal Reserve (Fed) use them to influence its intermediate targets?]

Answer 1

a) The ultimate target of monetary policy is Full employment, stability in the economy and economic growth.  

b) The intermediate goals of the monetary policy are to maintain a stable interest rate, inflation and a stable exchange rate in the economy.

c) The Fed mainly has three tools to manage its objectives they are:

• An open market operation,
• Discount rates,
• Reserve rates.

The Fed uses these tools to various effect in the economy. For example, if the inflation is high in the economy the Fed will use a tight monetary policy like higher discount rate and higher reserve rates. moreover, they will sell bonds in the market.

If the inflation in the market is low, or the demand is low the Fed will buy bonds and release excess liquidity in the market. they will reduce the discount rate and lower the reserve requirement.