Expansionary_Monetary_Policy

As the central bank to the United States, the Federal Reserve operates and maintains the financial system for the nation. One of their key duties includes “influencing the monetary and credit conditions in the economy in pursuit of maximum employment, stable prices, and moderate long-term interest rates (Federal Reserve Board, 2005). The influence of the Federal Reserve and its control of the nation's interest rates and supply of money determine the flexibility of the credit market. While people consistently look to invest in personal choice purchases, the ease in which people are able to use their credit purchasing power is dependent on the accessibility of credit. The continued facilitation of such transaction demands contribute to overall economic health. The goal for a successful economy is based on the ability to “achieve and maintain price-level stability full employment, and economic growth”(McConnell, Brue & Flynn, 2009). One of the ways the Federal Reserves seeks to maintain this balance in times of economic downturns or crisis is through the use of the expansionary monetary policy. The four tools used for monetary control are as follows: 1. Open market operations 2. Reserve Ratio 3. Discount Rate 4. Term Auction Facility The decision of the Federal Reserve to use such tools is an attempt to increase money supply and allows for people to continue their financial activities keeping the market flexible. The Federal Reserve Bank's open market operations consists of the buying and selling of government bonds to commercial banks and the public (McConnell, Brue & Flynn, 2009). The increase in the money supply when money is gained upon sales contribute to overall availability of monetary funds. The manipulation of the reserve ratio has a direct effect on commercial banks and their ability to lend (McConnell, Brue & Flynn, 2009). The amount of mandatory reserve needed for banks to lend money is based on the current ratio of money that can be loaned. If the proportional rate is high with the need for a high reserve banks are only able to loan out a smaller amount. These restrictions are loosened when the rate is lowered at the discretion of the Federal Reserve Board. This generates revenue to the banks. The use of discount rate as another tool in creating a favorable lending atmosphere. The commercial banks themselves benefit when the Federal Reserve acts as banker to commercial banks for short term loans. If commercial banks are able to obtain loans at a discount rates then these loans are regarded as an asset because of the increase in available funds. More specifically, “borrowing from the Federal Reserve Banks by commercial banks increases the reserves of the commercial banks and enhances their ability to extend credit”(McConnell, Brue & Flynn, 2009). Th last tool that can be utilized is the term auction facility. This tool was introduced in December 2007 in response to the mortgage debt crisis in which a high number of homeowners defaulted on mortgage loan due the higher mortgage rates and falling home prices (McConnell, Brue & Flynn, 2009). The auction serves to request from banks open bids for loan amounts and term rates. This allows for the Federal Reserve Bank to designate specific amounts of reserves to insure at interest rates that are typically lower than normal. The use of each tool is advantageous in different ways, yet it ultimately allows for commercial banks and the general public to participate in transaction demands. Businesses that experiences negative influences due to economic hardships are better able to conduct their daily activities. Similarly, as a business in the auto retail market, Big Drive is also subject to the negative influences currently looming over the auto industry. The loss of many dealerships across the country, the closing of manufacturing and assembly plants, the continued foreign car sales competition and the numerous recalls of defective car and parts has had an effect on automotive product and service sales. Surprisingly, the impact has not changed consumers perception and the loyalty is still there (Consumer Reports, 2010). The impact of credit crunch to lending qualifications and the slow down of consumer spending has reduced the sales of new cars. Fortunately, as every cloud has a silver lining, this has brought about an unexpected boon to Big Drive. The trend towards assets protection has realigned the purpose of consumer spending on auto care. The consistent sales figures shows a consumer confidence in Big Drive's products and services to maintain and upkeep of their current automotive investments.