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What policy actions can the government understake to lower the inflation rate in this economy?

- the inflation rate in an economy is determed by discretionary monetary policy - private agents expect discretionary policy initially it should be undertake, and not understake... thanks! This is a question from an exam review for my macroeconomics final. So unfortunately it must be discretionary monetary policies.

Public Comments

1. Abolish the Federal Reserve System & stop printing fiat "dollars" out of thin air. No more dangerous inflation. Period.
2. Modern macroeconomic policy is the Federal Reserve Bank....Discretionary monetary policy is something out a science fiction movie..... The fed controls the money supply... The fed controls inflation....The Fed manipulates the economy by strict control over the money supply. The fed has 3 main goals when doing this. 1. Instill confidence in our financial system. 2. Keep inflation low. 3. Smooth out the business cycle. In time of slow growth stimulate the economy. In time of high growth slow the economy down. The fed has 3 main tools to effect the money supply. 1. Buying and selling bonds on the open market. Used most often but also the least powerful. 2. Changing the Fed Funds rate. This is the rate at which banks borrow funds from the fed. This has a profound effect on the interest rates charged to businesses and consumers. 3. Changing the Required Reserve Ratio. Usually locked in at 10% this is the most powerful tool, hence it is used the least. The fed is the begining and end of money supply manipulation. The fed controlls inflation and regulates the growth of the economy. Keynesian economics is good to use sometimes, however the Fed has final say so on the money supply. The money supply and the Fed is the primary way modern governments control the economy and inflation. Ah yes, now I see. I look like a fool. I was mistaken. Monetary policy is control over the money supply. Discretionary is a set of rules that govern how to make policy. Basically, it is using subjective judgment with regard to specific circumstance to make decisions. In other words, it is making decisions to affect the money supply based on the unique set of circumstance. To lower inflation the Fed will have to adopt a tightening of the money supply. Raising interest rates, buying bonds on the open market, and raising the Required Reserve Ratio. This will tighten the money supply and slow the growth of the economy. Right now according to the Consumer Price Index, inflation is a little high at 4.0%. By using a set of ridged rules, not descretionary rules this would require tightening of the money supply. However, exactly the opposite policy was adopted. This was in response to the risk of a financial meltdown. By using discretionary policy to make the decision, the Fed choose to cut rates to save a financial market meltdown and bail out Bear Stearns also. If the Fed had used some formal rules they would have raised interest rates and the financial system could have collapsed. To lower inflation right now the Fed could increase the Required Reserve Ratio, Increase the Fed Funds rate, or sell bonds on the open market operations.