U.S. Monetary Policy

By injection or withdrawing base money from the system the Fed has immense influence over the economy. If the Fed puts more cash in - which it usually does by buying U.S. government debt from a select group of commercial banks. These banks then find themselves with more reserves than they are legally required to hold. They can then choose (although they don't have to) to lend out the excess, expanding credit and driving down interest rates. Furthermore, most of the money they lend out ends up being deposited back in the banking system, allowing a second wave of lending, a third and so on. The result is the Fed's injection of base money supposedly has a multiplier effect, expanding credit throughout the economy. The rise in credit and the fall in interest rates in turn, stimulate

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not to accommodating inflation could be made credible to the public. Tie the Fed's hands with monetary targets or with a gold standard - and what will automatically follow are stable prices and a minimal chance of recession (Lucas, 1981). Further to the left, both Keynesians and Post-Keynesians have argued that fiscal variables can be used to stabilize the economy and monetary policy should fall in line with whatever appropriate fiscal measures are dictated and by the Congressional and Executive branches. This usually means the redirection of monetary policy from fighting inflation to promoting growth. This argument has become particularly prominent in the past few years as the American economy has suffered through a recession (Sinai, 1992). This policy option would again take much of the discretionary power of the Fed away and transfer it to the controllers of fiscal policy. My policy prescription for the Federal Reserve follows from the dictates of the gold standard. I would raise the issue of whether it is pure coincident that the great inflation of the 1970s had followed the abrogation of the gold-exchange standard culminating in 1971? For the century preceding World War I, prices and interest rates had been remarkab
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Approximate Word count = 1450
Approximate Pages = 6 (250 words per page)

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