Essay on Economy: The Role of Monetary Policy

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Monetary Policy
Does monetary policy cause more problems than solutions? The control of the amount of money in circulation is of general essence to the economy in various ways. The Federal Reserve System (the Fed) is approved to develop a monetary policy to control the rate of inflation, regulate the conduct of business and to control the economy through a steady economic growth by the government of the U.S.A. According to Taylor (2011), “Monetary policy is that involves altering the quantity of money and thus affecting the level of interest rates and the extent of borrowing” (p.310). Also, there are two different monetary policy which are expansionary monetary policy and contractionary monetary policy. The Fed normally applies three
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Basically, it involves the increase in the supply of money in circulation thereby resulting in the lowering of interest rates.
Also, according to Potter’s article, monetary policy also solves the problem of inflation (2013). Inflation refers to the depreciation in the value of a particular currency. In the U.S.A., the Fed is charged with the responsibility of developing monetary policy which ensures that the value of the US dollar in the international market keeps its perfect high. If the value falls, the cost of basic merchandise rises, making the standards of living to a very high level. The Fed normally adopts the contractionary monetary policy which is “a monetary policy that reduces the supply of money and loans; also called a ‘tight’ monetary policy” (Taylor, 2011, p.316). Basically, it involves the reduction of liquidity in the market. When the amount of money in circulation is reduced, the bank lending rates go high with the net effect of an improvement in value of the currency.
Also, Potter (2013) claims that contractionary monetary policies slow down the rate of inflation of monetary policies accepted by the Fed have argued that the move slows down production. Contractionary monetary policies have been blamed for recession if the limits are not well checked. When the amount of money in the circulation is reduced, the engine of the economy has limited capacity. As a result, the demand for goods…