Assessment: Monetary Policy

General Instructions

1. Unless specified differently by your course instructor, save this assessment template to your computer with the following file naming format:

Course number_section number_Last name_First name_Submission number.

2. At the top of the template, insert the appropriate information: Your Name, Course Number and Section, and the Date.

3. Insert your answers in the appropriate space provided for the question. Your answers should

a.         follow current APA format with citations to your sources,

b.         include a list of references at the bottom of your last page, 

c.         be in Standard English with correct spelling, punctuation, grammar, and style,

d.         be double-spaced,

e.         be formatted in Times New Roman,12-point, black font, and

f.          respond to questions in a thorough manner, providing specific examples of concepts, topics, definitions, and other elements asked for in the questions.

4. Upload the completed assessment to the Dropbox.

5. Direct any questions about the assessment to your course instructor.

Assessment

This assessment addresses how the Federal Reserve uses monetary policy and its monetary policy tools to try to stabilize the economy while meeting its dual mandate of controlling inflation and maintaining low unemployment rates.

This assessment assesses your knowledge on the following Course Outcome:

Examine the roles of money, banking, and the Federal Reserve System, and how monetary policy is used to mitigate negative impacts on the national economy.

1. The economy of a hypothetical country, Treeland, has been stable for two or three years with very low unemployment. Wages have been gradually increasing during this time. Now stock market prices begin significant increases, causing peoples’ investments, such as their retirement accounts, to increase in value. People feel very good about the future. They predict that they will keep their jobs, get regular pay raises, and enjoy a comfortable lifestyle. With this positive feeling, people feel better about making purchases that perhaps they had been delaying. They now use their new-found sense of wealth to buy many things that they had been hesitant to purchase in the past.

Given this scenario, insert your answers below each of the following questions.

a. What kind of economic gap will start to occur in Treeland (inflationary or recessionary)?

(Enter response here.)

b. Which of these graphs, Figure 1 or Figure 2, depicts this economic gap? Explain why you chose this graph.

Figure 2: Graph of the economy showing demand shifted to the left.

(Enter response here.)

c. What part of Treeland’s Federal Reserve’s congressional mandate does this scenario trigger (price stability or maximum sustainable employment)?

(Enter response here.)

d. What kind of monetary policy might be helpful to stabilize the economy (expansionary or contractionary)?

(Enter response here.)

e. List the four monetary policy tools the Federal Reserve of Treeland has available to use in this scenario.

(Enter response here.)

f. Explain in detail how Treeland’s Federal Reserve would use each of these tools to maximize their effect in stabilizing the economy. Also explain the likely effect each monetary tool’s use would have on the money supply and the resulting impact on Treeland’s economy.

(Enter response here.)

2. The economy of a hypothetical country, Treeland, has been stable for two or three years with very low unemployment. Wages have been gradually increasing during this time. Now an aggressive policy of increasing tariffs on foreign goods imported into the country results in retaliatory tariffs from other countries on Treeland’s products and services. This causes great loss of business in Treeland and results in a significant portion of workers losing their jobs.

Given this scenario, insert your answers below each of the following questions.

a. What kind of economic gap will start to occur in Treeland (inflationary or recessionary)?

(Enter response here.)

b. Which of these graphs, Figure 1 or Figure 2, depicts this economic gap in Treeland? Explain why you chose this graph.

Figure 2: Graph of the economy showing demand shifted to the left.

(Enter response here.)

c. What part of Treeland’s Federal Reserve’s congressional mandate does this scenario trigger (price stability or maximum sustainable employment)?

(Enter response here.)

d. What kind of monetary policy might be helpful to stabilize Treeland’s economy (expansionary or contractionary)?

(Enter response here.)

e. List the four monetary policy tools the Federal Reserve of Treeland has available to use in this scenario.

(Enter response here.)

f. Explain in detail how the Federal Reserve would use each of these tools and the resulting impact on the economy.