The Monetary Policy Is The Rule Of The Interest Rate And Money Supply Of A Country

Monetary Policy is the procedure by which the financial expert of a nation, similar to the national bank or cash board, controls the supply of money. Regularly focusing on a inflation rate or interest rate to guarantee value solidness and general trust in

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.

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

The Federal Reserve Act lays out the monetary policy that states that the Board of Governors and the Federal Open Market Committee should look for "to support effectively the aims of maximum employment, stable prices, and moderate long-term interest rates." The pre-requirement for highest sustainable growth and employment rates along with long term interest rates is price stability in the long run. Long run stable prices prevents merchandise, services, materials and labor from getting distorted by inflation and hence turn out to be good indicators to the proficient distribution of resources and consequently add to better and higher standards of living (Meyer, 2004). Moreover, price stability promotes saving and generates capital since the risk of inflation causing attrition of asset values is decreased and hence people are driven to save more and business tend to invest more.

The term monetary policy refers to what the Federal Reserve, the nation’s central bank, does to influence the amount of money and credit in the U.S economy. The main goals of this policy are to achieve or maintain full employment, as well as, a high rate of economic growth, and to stabilize prices and wages. By enforcing an effective monetary policy, the Federal Reserve System can maintain stable prices, thereby supporting conditions for long-term economic growth and maximum employment. Up until the early 20th century experts felt that monetary policy had little use in influencing the economy. After WWII inflationary trends caused governments to ratify measures that decreased inflation by restricting growth in the money supply.

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.

There are two ways the economy can be assisted in growing and sustaining itself. First through fiscal policy from the national governments help of changing taxes and spending, then Monetary policy, the managing of money. The two are supposed to work together to help create a better economy but, at times fall short. Leaders in the government for the most part have a top priority to stay in their position, with that in mind they tend to give the people the immediate satisfaction they want which is increased spending and reduced taxes. With this approach fiscal policy is considered expansionary, restrictive monetary policy is what is needed to stop inflation to counteract this.

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.

Monetary policy uses changes in the quantity of money to alter interest rates, which in turn affect the level of overall spending . “The object of monetary policy is to influence the nation’s economic performance, as measured by inflation”, the employment rate and the gross domestic product, an aggregate measure of economic output. Monetary policy is controlled by

The Federal Reserve went into action in response to the 2008 recession by rapidly reducing interest rates with the hopes of encouraging economic growth. The federal funds target rate was decreased to between zero and .25 percent. The results of the rate changes caused what is called “zero bound”, this reduced the effectiveness of monetary policy with the near non-existence of interest rates.

      Monetary policy is under the control of the Federal Reserve System and is completely discretionary. It is the changes in interest rates and money supply to expand or contract aggregate demand. In a recession, the Fed will lower interest rates and increase the money supply. The Federal Reserve System’s control over the money supply is the key Mechanism of monetary policy. They use 3 monetary policy tools- Reserve Requirements, Discount Rates/Interest Rates, and Open Market Operations. The reserve requirement is the percentage of bank deposits a bank must hold in reserves and cannot loan out. By raising or lowering the reserve requirements, the Fed controls the amount of loanable funds. The interest rate is the amount the FED charges private banks, so they can meet the reserve requirements. The prime rate is currently set at 5%. If the Interest rate is low, the banks will borrow more money from the FED and the money supply will increase. Interest rates have been above average for the past 20 years, but are currently considered low. Open Market Operations is the most effective and most used

Monetary policy, ‘The government’s policy relating to the money supply, bank interest rates, and borrowing’ (Collin: 130), is another tool available to the government to control inflation. Figure 4 shows, that by increasing the interest rate (r), from r1 to r2, the supply of money (ms) is reduced from Q1

Monetary policy is the mechanism of a country’s monetary authority (usually the central bank) taking up measures to regulate the supply of money and the rates of interest. It involves controlling money in the economy to promote economic

The Economy is the backbone to society. There are many factors that operate in, and govern our society’s economical structure. Factors such as scarcity and choice, opportunity cost, marginal analysis, microeconomics, macroeconomics, factors of production, production possibilities, law of increasing opportunity cost, economic systems, circular flow model, money, and economic costs and profits all contribute to what is known as the economy. These properties as well as a few others, work together to influence the economy. Microeconomics and Macroeconomics are two major components. Both of these are broken down into several different components that dictate societal norms and views.

Monetary policy involves manipulating the interest rate charged by the central bank for lending money to the banking system in an economy, which influences greatly a vast number of macroeconomic variables. In the UK, the government set the policy targets, but the Bank of England and the Monetary Policy Committee (MPC) are given authority and freedom to set interest rates, which is formally once every month. Contractionary monetary policy may be used to reduce price inflation by increasing the interest rate. Because banks have to pay more to borrow from the central bank they will increase the interest rates they charge their own customers for loans to recover the increased cost. Banks will also raise interest rates to encourage people to save more in bank deposit accounts so they can reduce their own borrowing from the central bank. As interest rates rise, consumers may save more and borrow less to spend on goods and services. Firms may also reduce the amount of money they borrow to invest in new equipment. A