Imagine this scenario. Inflation is steady, but unemployment is on the rise. Many people are worried that further job loss could lead to bigger problems. Discuss an example of how the Federal Reserve may use a tool of monetary policy in this situation and explain the goals of using the tool.

Question

anonymous · Answer

It is a hotly debated issue. The foremost way this can be done by the Fed is through inflationary measures. Best summed up here... "Inflation, on the other hand, is best addressed through monetary policy, which is implemented primarily through the Federal Reserve Bank via manipulation of the money supply and of the prime interest rate. Raising the interest rate tends to have the effect of tightening the money supply and dampening spending (hence helping to control price increases/inflation). Lowering the interest rate tends to make money more freely available (e.g., through cheaper credit). Manipulation of the money supply and interest rates CAN, indirectly, help with job creation, but that is not its primary objective. Think of it as "indirect intervention" in the economy." http://answers.yahoo.com/question/index?qid=20070529202023AAdyROc