Interest Rates And Monetary Policy

Interest rates are manipulated by expanding or contracting the monetary base. This comprises of circulatory currency and reserves in

The aggregate demand curve shows the relationship between the aggregate price level and (the) aggregate:

Monetary policy consists of specific changes in the money supply to influence interest rates which in return adjusts the level of spending in the economy. The goal of the policy is to achieve and maintain price stability, full employment, and economic growth. The regulation of the money supply and interest rates are controlled by a central bank, such as the Federal Reserve Board in the U.S., in order to control inflation. Monetary policy is only one of the two ways the government can affect the economy. By altering the effective cost of money, the Federal Reserve can ultimately change the amount of money that is spent by consumers and businesses.

In economics, with the inflation is a rise in the actual general level of prices of goods and services in an economy from over a period of time. When the general price level rise, such as each of the units currency buys fewer goods and services. Consequently, inflation reflects a reduction in the purchasing power4 per unit of money. This therefore means that with the loss of real value in the medium of exchange and unit of account within the given and actual economy. With a chief measure for example and the price of inflation is within the given inflation rate, the annualised percentage change within a general price index over time in which is normally the consumer price index.

The last five years have shown that traditional monetary policies predicated on interest rate management by the Federal Reserve no longer deliver the economic growth they were once believed to. Keynesian economics has proved to not be as effective as once thought, which has led to the Federal Reserve choose alternative means to stimulate the economy and indirectly manage exchange rates (Hakkio, 1986). The uncertainty over interest rate polices has fortunately not led to increases in inflation, which has typically been the case in the past (Kopcke, 1988). The current economic conditions and the approaches the Federal Research are taking however are cause for concern, and from a personal standpoint many decisions are being evaluated more precisely.

Inflation is closely related to interest rates, which is the interest paid for a loan. Interest rates are set by the FOMC. When interest rates go down, people will borrow more and spend more money causing inflation. When interest rates are too low, inflation will also be lower than expected. In order to resolve these types of problems, the government applies certain policies and/or lowers taxes. The government might apply either monetary policy, which is used by the government to influence the inflation rate or interest rate ensure price stability and general trust in the currency by controlling the supply of money or a fiscal policy, which affects aggregate demand through spending and taxes. The changes in interest rates can also influence other parts of the economy. For example, when the FED increases interest rates, mortgage rates and credit card rates are expected to be higher. This is not good for the economy because the higher mortgage rate are the less people want to buy houses and the less money

Central banks using contractionary monetary policy have many tools to help reduce inflation. Most commonly it is selling securities and raising interest rates through open market operations. Avoiding a recession and lowering unemployment is undertaken by expansionary momentary policy, interest rates are lowered, securities from member banks are purchased and other ways are used to increase the liquidity. “The Fed uses three main instruments in regulating the money supply: open-market operations, the discount rate, and reserve requirements. The first is by far the most important. By buying or selling government securities (usually bonds), the Fed—or a central bank—affects the money supply and interest rates.”

Also, the consumer price index measurements can be used to forecast the future economic prices. Hence, the company will use the suitable environment to achieve its goal of maximizing profits and also minimizing the costs.

Over the past year we have gone through many changes politically, environmentally, and more. The main change occurring today is the Federal Reserve’s control on monetary policy which affects the interest rates and money supply all caused by the buying or selling of government bonds. The Federal Reserve needs to raise interest rates because they have “remained relatively slow by historical standards” (Binyamin Appelbaum, July 7, 2017). However, the inflation rate and rate of growth in GDP have been relatively low, restraining the Fed from raising the rates too high.

Changes in the economy are neither simple to understand nor entirely predictable. Virtually every metric that is used to evaluate the economic health of a nation can be influenced by a variation in another metric. For example, consider the price of gold. Typically, when the dollar shows a pattern of a record-setting decline, gold prices tend to soar.

Monetary policy is the action taken by the Federal Reserve to expand or contract the money supply and influence interest rates.

Interest rate is the percentage of the loan that is charged as interest. The interest rate is determined by 3 factors. The first is the rate that the Federal Reserve bank charges the banks. The second aspect that determine the interest rates is the demand and supply of bonds and treasury notes. Finally, the third aspect of the interest rate is determined by the bank. The bank sets the rate according to their needs.

If the economy suffers from inflation, the Government will like to check it. Then its Central Bank should adopt tight or contractionary monetary policy. To control inflation the Central Bank of a country can reduce money supply through open market operations by selling bonds or government securities in the open market and in return gets currency funds from those who buy the bonds. In this way liquidity in the banking system can be reduced.

Monetary Policy, in the United States, is the process by which the Federal Reserve controls the money supply to promote economic growth and stability. It is based on the relationship between interest rates of the economy and the total supply of money. The Federal Reserve uses a variety of monetary policy tools to control one or both of these.

Because the economy as a whole, AD and AS interact can influence level of price and level of output in the country. Change in AD will lead to change in real GDP, change in real GDP will lead to change in AS, change in AS will change price level. As shown in figure 2, when aggregate demand equal to aggregate supply, the output level Y and price level P will achieve an equilibrium. Change in AS and AD will lead to important effects on unemployment, inflation and price. In short rum, if price level below P, there are more demand than supply, firms will increase production and rise prices to earn more profit, so the excess demand will cause price level back up to the equilibrium level. If price level was above P, some goods and services will surplus, in order to sell more to earn a profit, firms will reduce their prices, or, firms will produce less to decrease loss. Finally, price level will come back to P, macroeconomic equilibrium achieved. (Colin and Susan, 2015)