The goal of the monetary policy of the Federal Reserve in the United States is to try to achieve close to full employment and achieve high rates of economic growth. They can do this by manipulating the supply of money in the economy and altering interest rates on overnight loans. The Federal Reserve is an important aspect to our economy as they are in charge of our overlooking our economy. This was set in place by the Federal Reserve Act of 1913. The chair of the Fed is seen as the second most powerful person in America, behind the President. The promise by him and the rest of the Fed to maintain a growing economy is clear, but there are three problems that we face in trying to manipulate the economy. These problems are demand deficient unemployment, inflation, and stagflation.
A healthy economy would have the aggregate supply of labor meeting the aggregate demand of labor at the full sustainable capacity line of the economy. This can be shown through the following graph:
If there is demand deficient unemployment in the economy, it means there are extra resources such as labor and capital in the economy that aren’t being used. In the generic labor market, there is an excess supply of workers, and in an ideal economy wages will fall with an excess supply of workers. With a decrease in wages, aggregate supply will fall in the macro picture shown above.
With this in mind, the Fed has to be careful when manipulating the economy. The Federal Reserve Board is made up of 7 members, and one of them serves as the chairperson. They are all appointed by the president and confirmed by the senate. They serve 14 year non-renewable terms. This is so they can’t be affected by outside sources. The chairperson serves a 4 year renewable term. The headquarters of the Fed is in Washington, D.C. The Federal Reserve System is divided in 12 geographic districts, each having their own district bank and president. The monetary policy, however, is decided by the Federal Open Market Committee (FOMC). The FOMC is chaired by the Fed chair, and made up of the 7 members of the Fed, the President of the New York District Bank, and 4 other District Bank Presidents serving on a...