EP2 - Monetary Policy Over Time

therobbdj's version from 2015-05-14 08:01


Question Answer
1948-1971Bretton Woods fixed exchange rate system - the US dollar was convertible into 1/35th of an ounce of gold. This allowed most other currencies across the world to be convertible into the dollar at a fixed exchange rate, maintaining stable currencies without inflation consequently allowing for increased investment and international trade and a minimised business cycle
1971-1976Bretton Woods system abolished - this caused inflation to rise (exacerbated by the Gulf Oil Crisis) as the dollar had no anchor. This also caused the dollar to decline in currency markets whilst creating a run on American gold reserves as consumers started buying up gold with their dollars
1976-1987Monetary targeting - the Fed attempted to control the money supply in the economy as doing so should help to control inflation (MV=PY). This was necessary as the government implemented expansionary fiscal policy, reducing marginal tax rates and regulatory costs within the economy
1987-1992Exchange rate targeting (upon Alan Greenspan becoming Chairman of the Fed in 1987) - this involves pegging the dollar against another nation's currency. Whilst resulting in the loss of independent monetary policy, it allows for stable trade to be maintained between the US and the 'pegged' country
1992-1997Inflation targeting (pre-independence) - this involves keeping the inflation rate in the economy within a desired range (in the US, this is 2%). This is the most common monetary policy objective today, and is achieved through a combination of conventional and unconventional monetary policy
1997-TodayInflation targeting (Independent MPC - UK) - in the UK, according to the Bank of England Act 1998, the Bank of England became independent of the government, meaning that interest rates could no longer be manipulated by the government in order to achieve pork-barrel politics (an example of this in the past is in 1972 where Richard Nixon did not want the Fed to tighten monetary policy and cause recession during his reelection campaign. Whilst he won a landslide victory, exchange rates were unstable following the campaign)

Recent badges