Monetary Policy And Its Impact On The Economy

Along with moral suasion, persuasion to get consumers to buy, and open market operations, the buying and selling of government securities in financial markets, the easy money policy can only help supply-side economics in it's route to ending a recession and gaining economic stability. All of these policies combined, supply-side, easy money policy, open market operation, and moral persuasion, can all have an impact on important issues. Some of these issues are employment, international trade, and inflation.

Francisco, F. R. (2004, February 06). U.S. Monetary Policy: An Introduction. Retrieved from How does monetary policy affect the U.S. economy?: http

Chapter ten: What is the drastic consequence of poor monetary policy the author discusses at the start of the chapter? Do you agree with this argument? Explain. What is the relationship between governments who owe money, government polices to fight inflation, and monetary policy? Does this change your opinion of how monetary policy is used by the US Government?

Chapter ten: What is the drastic consequence of poor monetary policy the author discusses at the start of the chapter? Do you agree with this argument? Explain. What is the relationship between governments who owe money, government polices to fight inflation, and monetary policy? Does this change your opinion of how monetary policy is used by the US Government?

It is clear that the economic policy in general and the monetary policy in particular should be concerned with the overall economic well-being. In this paper we propose to discuss this core topic. We will provide an overall picture of the functioning mechanism. In this regard, the discussion will develop around the governmental policies and of FED, and their scope on the free market. The argumentation will refer to the notion of common good and will try to establish if the measures applied by FED have fulfilled their intended purpose given the recent international financial crises of 2007.

The first tool the Federal Reserve has for influencing the economy is through the federal funds rate. This allows a change in interest rates which means that banks may have to pay a higher or lower interest rate to the Federal Reserve for borrowing money. If the rate is increased it slows down the economy because the cost for money and credit is increased as well, but if the rate is decreased the economy is more likely to grow because money then becomes more available for investment and growth. The second tool used to influence the economy is through the purchasing or selling of federal debt. Selling federal debt tends to slow down the economy because people are less likely to invest. Buying federal debt tends to help the economy grow by allowing

United States Federal Reserve system, also known as Federal Reserve or simply “Fed” is the United States central banking system. The Federal Reserve took inception in 1913, after the adoption of the Federal Reserve Act. The United States Congress has mandated three macroeconomic objectives to the Federal Reserve. These are minimum levels of unemployment, prices stability and keeping in check the rates of interests. Over the years, the role of Federal Reserve has expanded. It now formulates the country’s monetary policies, conducts supervision and regulation of the banking institutions, maintenance of the financial

Most people don’t understand Economic growth or what takes place in the economy with regard to inflation, unemployment, or interest rates. These things are all regulated by the central bank called the Federal Reserve System. The tope covered in this paper is the monetary policy which is the policy that decides if unemployment, interest, and inflation decreases or increases. The Monetary policy decides what price a person pays for an item at the store, how much interest a person will get charged on a loan for a car. This is something most people consider, most just look for the best price point or look where their money can go the farthest.

The Fed can lower banks' reserves meaning banks would be required to carry less money on their books and can loan out more to businesses and consumers along with other banks. This approach increases the money supply in the economy. The Federal Open Market Committee meets eight times per year to place key interest rates and to choose whether to increase or decrease the money supply which the Fed does by buying and selling government securities. To comprehend how the Federal Reserve's procedure on interest rates affects you and your business, you should first understand what the Fed is trying to do. The objectives of the Fed’s monetary policy are to encourage sustainable growth in the U.S. economy, support high employment, and keep prices stable.

Monetary policy is a more effective lever to reduce unemployment and smooth the business cycle, due to its shorter implementation lag and ability to act in small multiples.

It widely recognized that the monetary policy within a country should be primarily concerned with the pursuit of price stability. However, it is still not clear how this objective can be achieved most effectively. This debate remains unsettled, but an increasing number of countries have adopted inflation targeting as their monetary policy framework. (Dr E J van der Merwe, 2002) This topic of Inflation targeting is a subject which immediately conjures different perceptions from different people. Many feel that low inflation should be a main aim of monetary policy, while others (such as trade union activists) believe that a higher growth rate to stimulate jobs should be the main concern.

How can monetary policy and fiscal policy greatly influence the US economy? Keynesian economics says, “A depressed economy is the result of inadequate spending .” According to Keynesian the government intervention can help a depressed economy through monetary policy and fiscal .The idea established by Keynes was that managing the economy is a government responsibility .

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.

Theories about how the economy works and what will happen in the economy where there is monetary policy or fiscal policy intervention are appropriate in assisting policy-makers understand the possible implications of decisions they make or are under consideration. However, they are rarely complete models and often outcomes cannot be predicted. Reintroduction of a theory suggests that new evidence in support of the theory has been reported.

In the past 20 years, the central banks in most developed countries had successfully managed to control the inflation rate. However, the financial crisis 2008 has highlighted the links between financial market and policy. (Ravn, 2011) The topic I am going to discuss is the relationship between monetary policy and the stock market. What factors have influenced interest rate and how the policymakers should react to the change in stock market have driven the increasing attentions lately. Taylor Rule (2003) will be the core theory used to discuss the model tested. The interpretation of simple Taylor rule is very straightforward. According to the equationi_t=c+β(π_t-π_t^* )+γ(y_t-y_t^* )+ε_t , the policy will be mainly affected by inflation gap and output gap. (Woodford, 2001) The reason why Taylor uses interest rate to represent monetary policy is that the central bank likes to adjust interest rate as a tool to maintain the balance in the market. While, there is a strong debate about the other variables, in particular, stock price volatility. After taking asset price volatility into account, the augmented Taylor rule equation will be reformulated as:i_t=c+β(π_t-π_t^* )+γ(y_t-y_t^* )+∑_(k=1)^n▒〖δ_k s_(t-k)+ε_t 〗. It will influence the monetary policy while the importance of asset price in the market is very controversial. Scholars including Bernanke and Gertler question the importance of asset price in determining the monetary policy and claim that the influence