Federal Reserve monetary policy tools and economic scenarios

Money Train

Scenario

Reserve requirements affect the amount of money in the banking system. My actions will increase the amount of money in the banking system. This means that banks can lend this money, which should increase the amount of economic activity. Under this scenario, increased growth will offset the negative impacts we are seeing. Reserve requirements are a good tool to use when the economy will benefit from increased investment. REDUCE RESERVE REQUIREMENTS

Scenario

BUY BONDS FROM BANKS. Open market operations affect the amount of money in the economy. My action will inject money into the banking system. It is important to increase economic growth to maintain a stable level of employment. In this situation, OMO are a useful means of injecting money into the economy. This lowers the value of the dollar, which should help boost exporters.

Scenario 1

In 150 to 200 words, explain your reasoning for the way you are planning on using Reserve Requirements. Be sure to address the following:

1. How Reserve Requirements affect the economy

2. How your action will affect economic growth

3. Why it is important to increase economic growth

4. Your rationale for the use of Reserve Requirements

At the end of the game, you will be provided with this information to give to your instructor.

Answer:

Reserve requirements affect the amount of money in the banking system. My actions will increase the amount of money in the banking system. This means that banks can lend this money, which should increase the amount of economic activity. Under this scenario, increased growth will offset the negative impacts we are seeing. Reserve requirements are a good tool to use when the economy will benefit from increased investment.

Scenario 2

In 150 to 200 words, explain your reasoning for the way you are planning on using the Discount Rate. Be sure to address the following:

1. How the Discount Rate can affect the economy

2. How your action will affect economic growth

3. Why it is important to slow economic growth

4. Your rationale for the use of the Discount Rate

At the end of the game, you will be provided with this information to give to your instructor.

Answer:

The discount rate impacts the cost of money. By increasing the cost of money, firms will undertake fewer investments. This will result in slowing the rate of economic growth. It is important to slow growth in order to head off inflation, which is a natural consequence of an overheated economy. In this situation, the discount rate will curtail investment, which is what has led to the economy overheating.

Scenario 3

In 150 to 200 words, explain your reasoning for the way you are planning on using Open Market Operations. Be sure to address the following:

1. How Open Market Operations affect the economy

2. How your action will affect economic growth

3. Why it is important to increase economic growth

4. Your rationale for the use of Open Market Operations

At the end of the game, you will be provided with this information to give to your instructor.

Answer:

Open market operations affect the amount of money in the economy. My action will inject money into the banking system. It is important to increase economic growth to maintain a stable level of employment. In this situation, OMO are a useful means of injecting money into the economy. This lowers the value of the dollar, which should help boost exporters.