Analyze the benefits versus the risks of monetary policy as described in your textbook.

Question

What will be an ideal response?

Answer 1

Monetary policy focuses on the level of money in circulation and on deposit within the economy and posits that increasing or decreasing the money supply can be used as a tool for motivating or slowing down our economic system. In times when investment and spending are low, an injection of money can act as a “booster shot” for economic stability. In periods when the economy is seen as “overheating,” reducing the supply of money may also act to stabilize the economy. In short, monetary policy focuses on maintaining a stable and balanced level of money for investment, consumer spending, and savings.
The Federal Reserve System acts as the chief bank of the United States and is the most important player in the implementation of monetary policy. But this is NOT a federal bureaucracy but a federal corporation, which is owned and managed by the banks themselves. Even so, it has great regulatory power without any executive oversight (other than the president’s nomination of the chairman of the Fed). The primary tool of the Federal Reserve is buying and selling Treasury securities. To loosen the money supply, securities are bought in order to inject more money into the system. To tighten the money supply, securities are sold, thus taking money off the market and lowering the overall money supply. The risks of inappropriately applied policy are those of inflation and unemployment, so these are constantly monitored in order to maintain stability. Criticisms come from those who believe the Fed is not truly independent, those who believe that the “moderate inflation” target of 2% annually only function well if wages keep pace, and those who question the Fed’s power given it is run essentially by private banks. Nonetheless, most Americans some sort of regulatory regime, especially given Historical examples of hyperinflation that have led to devastating consequences such as revolutions, starvation, and war, with the worst recent example being Germany and the former Austro-Hungarian Empire following World War I.