Question

While the Federal Reserve is an independent entity, it is still subject to the political process....

While the Federal Reserve is an independent entity, it is still subject to the political process. In an extreme case, the U.S. Congress could rewrite and pass laws that govern how the Federal Reserve does its job.
Identify a potential change (for example, targeting interest rates or targeting the balance of the money supply in the economy) you would make to how the Federal Reserve operates and explain why you would change it.

Homework Answers

Answer #1

One such issue is of controlling inflation. The fed quite often targets interest rates by raising discount rate. Now controlling inflation is OK but in the process growth rate is curtailed. This is because cost of raising credit and funds for investment and to some extent fnancing consumption rise. To avoid this situation I would like to set some guidelines regarding how the Federer reserve operates in this situation. I will like to mention expressly that under such situation growth rate should be preferred over inflation

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