Business Studies
Respond to the following in a minimum of 175 words:
• Discuss how changes in the Federal Reserve’s monetary policy affect at least 1 of the 4 components of GDP (consumption, investment, government spending, net exports).
• Have the Federal Reserve’s countercyclical monetary policies been effective in moderating business cycle swings? Justify your response.
ANSWER
The Monetary Policy in the US includes actions activated by the Federal Reserve towards the promotion of various factors of the market such as stable market prices, maximum employment and moderate interest rates among others. Monetary policy affects the components of GDP including consumption, investment, government spending and net exports. This essay examines the effect of the Federal Reserve Monetary Policy on investment.
Whenever an economy is growing too fast and with it inflation as well, the monetary policy comes in to moderate the rate of investment. This can be done by raising short term interest rate which comprises restrictive or tight monetary policy. A good example is during the housing bubble in the year 2007 where the mortgage market was expanding exponentially and the Federal Reserve came in to mitigate. Conversely, in a situation where an economy becomes sluggish, an accommodative policy lowers short term interest to put the economy back on track. The impact on investment as described could be direct or indirect. Direct interferes with the interest rates while indirect tries to suppose where inflation could be headed. The tools used by this policy in these controls have been effective in most cases with other time corrective measures taking too long to take effect. Such tools include open market operations, discount rates and reserve requirements.
Monetary policy changes can have an impact that is significant on every class and market. By staying up to date and staying aware of the interferences of the monetary policy, investors can choose when and when not to invest and position their investments to benefit from policy changes and boost returns.
References
Federal Reserve. Monetary Policy. Retrieved on 18th July 2020 from https://www.federalreserve.gov/monetarypolicy.htm#:~:text=Monetary%20policy%20in%20the%20United,the%20Federal%20Reserve%20to%20pursue.
