Monetary Policy Tools to Revive the US Economy
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Business Studies
The NBER has formally affirmed that the US financial system is in a recession.
By putting into action an effective monetary policy, the Federal Reserve and the US government could uphold stable prices, thus sustaining conditions for long-standing economic expansion as well as increased employment opportunities. This study will explain how open market operations, discount rate, and reserve requirements could be utilized in order to stimulate the American economy.
Open Market Operations
Open market operations (OMOs) refer to the buying and selling of securities by a central bank in the open market to execute monetary policy. OMOs could be utilized in adjusting the supply of reserve balances in order to uphold the federal funds rate just about the target instituted by the Federal Open Market Committee. Through open market purchases, the Federal Reserve and government could increase the seizure of longer-term securities so as to ease the strain on longer-term interest rates and therefore propping up financially viable activities and creating jobs.
Discount Rate
Secondly, the government and the Federal Reserve could also lessen the discount rates to stimulate the US economy. By reducing the rates of interest which member banks ought to pay for them to acquire a loan from the Fed, the institutions are more enthusiastic to borrow, making cash to be available for lending and at lesser rates of interest. This in turn motivates customers and industries to apply for loans and expend it, augmenting the aggregate demand.
Reserve Requirements
Finally, the government and Federal Reserve could also stimulate the financial system by trimming down the reserve requirement. Banks simply retain a petite fraction of their wealth as cash accessible for instantaneous withdrawal, investing the rest in the form of illiquid assets such as mortgages and loans. Consequently, boosting the reserves held by banks increases their lendable money and helps in lessening the payable interest rates. The low rates of interest encourage borrowing by customers and companies, increasing their purchasing power which boosts the economy.