edf40wrjww2CF_PaperMaster:Desc
The Federal Reserve, or “The Fed is best known for it’s making and carrying out the country’s monetary policy – that is, for influencing money and credit conditions in the economy to promote the goals of high employment, sustainable growth and stable prices,” (FED101, ¶ 1). A number of tools are used by the Federal Reserve to control the supply of money in the economy, which has a direct impact on macroeconomic factors such as Gross Domestic Product, inflation and the unemployment rate. Below is a brief description of a simulation based on how those macroeconomic factors are influenced by changes in the Fed’s tactics, how money is created and which combinations of the monetary policy help to achieve a balance between those factors.
In the “Monetary Policy” simulation you are appointed the new chairman of The Fed by the President of the United States. Your first order of business is to implement an appropriate monetary policy. The simulation begins in 2004 and carries through to 2010 and each year you must decide what the spread between DR (Discount Rate) and FFR (Federal Funds Rate) will be, what the RRR (Required Reserve Ratio) of the banks will be as well as monitoring the OMO (Open Market Operations).
The Discount Rate (DR) is the rate charged by the Fed for borrowing money, while the FFR is the rate charged for money borrowed by other banks. According to the simulation, if the rate of the DR is lower than that of the FFR, banks are more inclined to borrow from The Fed. When this happens, the supply of money in the system is increased whereas when banks borrow from other banks the supply of money is unchanged. “An increase in the discount rate discourages commercia ...