Writing Assignment Basic Macroeconomics Paper

Basic Macroeconomics Paper Name Institution Date       Part 1: Janet Yellen’s speech (Janet Yellen, Chairwoman of the Fed between February 2014-February 2018) 1. What are the tools that the Fed has traditionally used to conduct monetary policy? (150 words) The open market operations and Reserve Requirements are the main monetary policies. The open market operations are all transactions of purchase and sale of financial assets made by the Fed (central bank). This option focus on the balance of the shortages or surplus of money (liquidity) in the accounts that the banks maintain in the Federal Reserve Bank, where banks lend to each other through the federal funds rate, which influences the interest rates. Depending on the prevailing market conditions and circumstances, the Federal Open Market Committee (FOMC) lowers the target for the feral funds rate helps inject money or withdraw money through deposits. The Reserve Requirements are the proportion of customer deposits funds kept in the Reserve bank.  The reserves are necessary to control the supply of money by controlling the amount that banks can lend, and the money that they can generate. Discount rate changes can also be used to influence money supply.   2. Identify two new, unconventional strategies used by the Fed to conduct monetary policy in the most recent crisis that are discussed in article. (200 words) Under Janet Yellen, the Fed identified the large-scale asset purchases (LSAP) and explicit forward guidance as the two new unconventional strategies, which are potentially effective in monetary policies.  Under the LASP program (Quantitative Easing) there are the large scale purchases of government- backed securities in the secondary market, mostly the long-term Treasury securities and the Mortgage-backed securities (MBS). Lowering the term premium of the long-term interest rates, which would affect the bond market, where the purchases of the bonds affect risk pricing and the term premiums. The purchase would signal to the market participants about the Fed’s policy preference and economic outlook. The explicit forward guidance was adapted where interest rates were kept low so long as the unemployment rate was at least 6.5% and inflation below 2.5%. However, as the unemployment fell the central bank failed to r boost the interest rate. Raising the interest rate paid on excess reserve balances (the IOER rate) is another monetary policy that affects the supply of the reserve balances. Raising the IOER rate results in the banks increasing interest rates they charge, and there is an upward pressure on market interest rates no matter the level of reserves in the banking sector. 3. Using the market for reserves and the labor market model of short-run fluctuations, explain how an open market operation (OMO) in which the Fed sells bonds affects the economy. Explain how inflation and unemployment change and describe the mechanisms that bring about these changes. (200 words; supplemented with appropriate graphs) Market for reserves    Market federal            &n...