Go to http://sffed-education.org/chairman. Use the Learn More button and review the tight (contractionary) and easy (expansionary) tools of the Fed as well as the use of each. Briefly examine the Economic Dictionary and the Policy in Depth features. Now
The Federal Reserve (Fed) is the central bank of the United States, and it has two main tools to influence economic activity – tight (contractionary) policies and easy (expansionary) policies. Tight policy involves efforts to reduce spending, slow down economic growth, and decrease inflation by raising interest rates or tightening credit conditions. This can be done in various ways such as increasing reserve requirements for banks, changing discount rates, conducting open market operations, or using forward guidance.
Easy policy involves efforts to boost spending, spur economic growth and increase inflation by reducing interest rates or easing credit conditions. This can be done through measures such as decreasing reserve requirements for banks, changing discount rate windows, selling securities in the open market operation process or providing more forward guidance from the Fed on future monetary policy moves.
One example of a contractionary policy was implemented by former Fed Chair Alan Greenspan in early 2000 as he tried to combat rising inflation due to strong consumer demand following the dot-com boom. He raised interest rates several times over three years before finally lowering them again once inflation had been tamed. An example of an expansionary policy was implemented by current Chair Jerome Powell when he decided to cut interest rates in response to concerns about slowing global growth due to trade war tensions with China and other countries.
Overall these tools allow the Federal Reserve great flexibility when it comes responding quickly and effectively either tightening money supply during periods of high inflation or loosening it during recessions when economic activity slows down substantially. By doing so they are able ensure that prices remain stable while helping support sustainable long-term economic growth throughout the US economy as whole.