Expansionary and Contractionary Monetary Policy?

¶ … expansionary and contractionary monetary policy? Is monetary policy conducted independently (without government interference) in the U.S. Explain.

When the Federal Reserve, the central bank that is a part of the federal government, wishes to stimulate the economy in an expansionary policy, it lowers interest rates, the discount rate, and buys more government bonds, all of which increase the amount of circulating money in the United States economy for consumers to spend. To contract the money supply, the Federal Reserve does the opposite. ("Outline of the U.S. Economy," 2005)

How do banks "create" money? How does the interest rate play a role?

By raising or lowering the discount and interest rates rate, the Fed can promote or discourage borrowing amongst banks and consumers. It can alter the amount of revenue available to banks for making loans, with the discount rate, and the desirability of taking loans with the interest rate, thus 'creating' circulating money in the economy. ("Outline of the U.S. Economy," 2005)

Identify two or three uses of money. Why is money a better medium of exchange than other commodities?

Money is a placeholder of value in the exchange of goods and commodities, and also a commodity in and of itself, as one can save money and earn interest over time. Unlike goods that usually depreciate in value, money can increases in value and decrease the time needed in commerce, as in a barter economy one must find someone who immediately has what one wants.

How do open market operations work through the fractional reserve banking system to impact the money supply and interest rates?

The fractional reserve banking system ensures that rampant speculation will not occur, as the money supply must be backed by a certain percentage of reserves held by banks, determined by the discount rate. This is intended to prevent the runs on banks as occurred after the 1928 'Great Crash' of the stock market.

What potential problems arise from government guarantees?

Government guarantees can encourage foolish or wasteful economic practices by providing a 'safety net' for foolish economic practices.

Why does the CPI overstate the inflation rate, and why this is a problem?