Asset Validation

University of Phoenix Online

Economics for Managerial Decision Making /ECO 533

May 7, 2006

Part A.

The monetary policy of reducing interest rates is effective only if measures are taken to address inflation and unemployment. Therefore, in order for the population to have discretionary income, the prices of consumer goods need to be at reasonable levels otherwise discretionary income will be consumed in buying goods. A monetary policy that is marked by a decrease in demand of loans, even at a very low interest rate is not effective at all. During a recession, the government lowers fed funds, interest rates, or both to spark the economy. As interest rates are lowered, the amount of money in circulation increases; as a result, more individuals acquire loans in such times. However, if interest rates are very low and an economic spark did not occur, the monetary policy did not address other factors such as inflation and unemployment. If interest rates are low and unemployment is high, the number of consumers who take advantage of such rates will not substantially offset a slumping economy. Therefore, an interest rate reduction will have little or no effect unless it is complemented by policies addressing inflation and unemployment.

Date: 5/7/2006

To: Key Decision Maker

From: Learning team B

RE: Recommandiation

The Federal Reserve Board Chairman's focus should be to control inflation and promote economic growth, thus allowing consumers the opportunity to clearly see shifts in relative prices and strategically adjust their spending, savings, and investments. The successful management of these two factors will alleviate substantial fluctuations in the unemployment rate. Maintaining confidence in sustained pricing stability is crucial to fostering the most productive saving and investment decisions (Santomero, 2005). In order to implement a policy that is dedicated to sustaining consumer confidence, the government must demonstrate an anticipatory style of management. The Chairman of the Fed must analyze inflation forecasts and create monetary policy based on