The Federal Reserve Bank's open market operations involve the purchase and sale of US Treasury securities. This policy tool is used to control bank reserves, interest rates, and the money supply. Open market operations are simple to undertake and are typically used as the primary monetary policy tool (Arnold, 2010). Contractionary open market operations are when the Fed sells government securities in the open market. Securities are purchased with banking reserves, which reduces the amount of reserves held by the banking sector. As a result, banks now have fewer reserves and are therefore forced to lend at higher interest rates reducing the money supply in an economy. On the other hand an expansionary open market operation requires the government to purchase the treasury securities increasing the amount of money available to lend from the bank.
Monetary policies affect aggregate demand of goods and services and Gross domestic product (GDP).The value of aggregate demand is used to measure economic stability. A fiscal policy is used to determine government spending and taxes. Therefore, an expansionary fiscal policy is passed to respond to economic recessions caused by an increase in government spending in sectors such as education, unemployment benefits and infrastructure.
According to Mishkin (2007), contractionary fiscal policy corrects growth that has been fueled by inflation. It reduces government spending. Expansion funded by debt affects consumer spending and employment positively. Expansionary monetary policy tightens the supply of money in an economy hence discouraging business growth, consumer spending exports, and eventually reduces aggregate demand.
Strategies recommended if I were president?
Economic growth means there is an increased market value of the products of an economy that is goods and services produced in the economy due to inflation. As the president I would recommend contractionary open market operations to reduce government spending and rapid inflation fueled by debt funded consumer spending. Furthermore, I would endorse a contractionary fiscal policy as an alternative way of restraining the economy by reducing government spending and increasing taxes.
References
Arnold, R. A. (2010). Macroeconomics. Mason, OH: Cengage Learning, South Western.
Mishkin, F. S. (2007). Monetary policy strategy. Cambridge, Mass. [u.a.: MIT Press.
