Fed “Pressures” on the Economy

Introduction and Alignment

The case study for this workshop will cover various ways that the Federal Reserve can influence the economy. The Federal Reserve can use open-market operations to keep interest rates low and encourage business investment and individual consumption. The case also brings up certain questions related to Fed policy and whether or not negative externalities can arise from its actions.
Upon completion of this assignment, you should be able to:

• Demonstrate how money is measured in the U.S. economy.
• Describe the roles of money and the Federal Reserve in the U.S. economy.
• Incorporate biblical and ethical principles into economic theory and practice.

Resources

• Bible
• Website: International Standard Bible Encyclopedia (http://www.studylight.org/enc/isb/)
• Textbook: Economics for Managers
• Websites:
  • Money, Interest Rates, and Monetary Policy:http://www.federalreserve.gov/faqs/money-rates-policy.htm
  • Currency and Coin: http://www.federalreserve.gov/faqs/currency-coin.htm
  • Monetary Policy and Bank Lending: www.nber.org/chapters/c8334.pdf
  • Monetary Policy Rules and Macroeconomic Stability: Evidence and Some Theory: http://qje.oxfordjournals.org/content/115/1/147.short
  • The Federal Reserve in the 21st Century: http://www.newyorkfed.org/education/fed21/

Background Information

The Fed engages in open-market operations to influence the amount of reserves held by commercial banks, which, in turn, influences the federal funds rate, which is the rate banks charge each other for loans of reserves to meet their minimum reserve requirements. Banks are required to hold between 3 and 10 percent of their demand deposits as reserves, whether as cash in their vaults or as noninterest-bearing deposits with the Fed. They may also hold additional or excess reserves for clearing overnight checks or other purposes.

Instructions

1. Review the Case for Analysis: The Chairman’s Quandary on page 361 in the textbook, Economics for Managers.
2. Review the information available on the following websites:
   1. Money, Interest Rates, and Monetary Policy: http://www.federalreserve.gov/faqs/money-rates-policy.htm
   2. Currency and Coin: http://www.federalreserve.gov/faqs/currency-coin.htm
   3. Monetary Policy and Bank Lending: http://www.nber.org/chapters/c8334.pdf
   4. Monetary Policy Rules and Macroeconomic Stability: Evidence and Some Theory: http://qje.oxfordjournals.org/content/115/1/147.short
   5. The Federal Reserve in the 21st Century: http://www.newyorkfed.org/education/fed21/
3. Use these sites to answer the following questions:
   1. Summarize the recent policy of the Federal Reserve concerning the level of interest rates and the reasons for this policy. Do you agree with this policy? Why or why not?
   2. How does this policy affect the supply of and demand for products and services?
   3. What problems can arise when interest rates are kept very low for an extended period of time? Please include historical examples (including at least one biblical example) of the impact of low interest rates and their effect on the economy.
   4. Using the International standard Bible encyclopedia (http://www.studylight.org/enc/isb/), give an example of a currency used in the Bible and explain how the currency was used and how the supply of this currency may have affected the economy of the times.
4. You must incorporate a minimum of three sources in addition to the text in this assignment. Your three sources may include scholarly sources, credible newspapers, trade journals, or websites listed here. Be sure to use OCLS to find these sources.
5. Your entire assignment should be APA formatted.
6. When you have completed your assignment, save a copy for yourself and submit a copy to your instructor using the Dropbox by the end of the workshop.