1.Discuss notion of Federal Reserve Transparency. Under what circumstances would transparency be a good thing? Under what circumstances might it hurt the economy?

Federal Reserve transparency is the notion that the Fed should not hide information about economic shocks and expected Federal Reserve Policy from the general public. The reasoning behind the concept is that the private sector would be able to make better decisions based on current and relevant information. On the downside, if the Fed's transparency is not completely accurate, it could be a disadvantage because they could end up doing something different than they projected.

In the words of William Poole, President of the Fed, St. Louis,

"...the FOMC cannot provide accurate information to the market as to the probable course of the target fed funds rate, in terms of a specific path measured in basis points. The future path will be conditional on future information that cannot itself be predicted. Attempts to provide specific forward-looking guidance will prove inaccurate and even misleading to the market. Moreover, the Fed could create a credibility problem for itself if forward guidance is too specific. If the market acts on the guidance, and the Fed subsequently responds to new information in a way that departs from the guidance, then the market will naturally feel that it has been misled. But if the Fed fails to respond to new information that seems to demand a response, in the interest of doing what it said it was going to do, then failure to respond may also damage credibility."

For further information related to this topic visit the Federal Reserve Bank of San Francisco's website for an insightful article. The link is "http://www.frbsf.org/publications/economics/letter/2005/el2005-22.html"

2.Define Monetary Policy and discuss the tools used to carry it out.

Monetary Policy is the deliberate manipulation of the money supply in order to influence economic activity. The Fed has three tools it uses to change the money supply. The reserve ratio is the percentage of deposits that must be held on reserve. The discount rate is the rate the Fed charges to loan to member banks. The final tool is called open market operations. This is the one referred to in the article. In order to increase the federal funds rate, the Fed will engage in tight money policy and reduce the interest rate. So, when they say the federal funds rate is going down by a ¼ point, they will sell securities in the open market, taking money out of the economy and replacing it with securities, and this places the upward pressure on interest rates.

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