Wednesday, July 8, 2009

Knowing what monetary policy to use

PROBLEMS in the Conduct of Monetary Policy, Include knowing what monetary policy to use, to use monetary policy effectively, you must know the potential level of income. Otherwise you won't know whether to use expansionary or concretionary monetary policy. Let's consider an example: mid 1991 the economy seemed to be coming out of a recession. The fed had to figure out whether to use expansionary monetary policy to speed up and guarantee the recovery, or use concretionary monetary policy and make sure inflation didn't start up again. Initially the fed tried to fight inflation, only to discover that the economy wasn't coming out of the recession. In early 1992, the fed switched from contractionary to expansionary monetary policy. It continued that policy through 1994, when fears of inflation caused it to start tightening the money supply slightly. In early 2000 the fed was again trying to decide whether to follow expansionary or contractionary policy. It decided to contract the money supply but quickly changed its stance when the economy slowed in stood ready to return to a more contractionary monetary policy stance at the first sign of inflationary pressure. As these examples show, monetary policy in an art. the need for expansionary or contractionary policy can change quickly.

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