In the following text, readers will form an understanding of what monetary policy is and the effect monetary policy has on macroeconomic facts such as gross discount products (GDP), unemployment, inflation, and interest rates. The text will also explain how money is created and give a combination of monetary policy that will best achieve a balance between economic growth, low inflation, and a reasonable rate of unemployment.
Monetary policy is the process governments and central banks use to manipulate the quantity of money in the economy to achieve certain macroeconomic and political objectives. The objectives are economic growth, changes in the rate of inflation, higher level of employment, and adjustment of the exchange rate. Monetary policy is categorized into two types; concrationary and expansionary. Concrationary (tight) monetary policy aims to reduce the amount of money circulating through the economy, and reduce short-term economic growth in exchange for higher (hoped-for) long-term growth. Expansionary (lose) policy, on the other hand, aims to increase the money supply and increase short-term economic activity at the expense of long-term economic activity. (Nematnejad, Aaron, 2008)
The primary measure of the economy’s performance is the annual total output of goods and services, or as the process is called, the aggregate output. Aggregate output is labeled gross domestic product (GDP): the total market value of all final goods and services produced in a given year. (McConnell and Bure, 2004). The monetary value of all the finished goods and services produced within a country's borders in a specific time frame, though GDP is usually calculated on an annual basis. It includes all private and public consumption, government outlays, investments and exports less imports that occur within a defined territory.
GDP = C + G + I + NX
where:
"C" is equal to all private consumption, or consumer spending, in a nation's economy.
"G" is the sum of government spending.
The gross discount product is commonly used as an indicator of the economic health of a country, to gauge a country's standard of living. Critics of using the gross discount product as an economic measure say the statistic does not take into account the underground economy - transactions that for whatever reason, are not reported to the government. Others say that the gross discount product is not intended to gauge material well-being, but serves as a measure of a nation's productivity, which is unrelated.
Monetary Policy refers to what the government does to influence the amount of money and credit in the economy, what will happen if money and credit affects interest rates and the performance of the economy. This policy ensures the price stability and general trust in the currency.
gross domestic product – the total value of services and goods that were produced within the nation’s borders by the people in a course of one year, which excludes the income earned from abroad
"Monetary policy is a policy of influencing the economy through changes in the banking system's reserves that influence the money supply and credit availability in the economy" (Colander, 2004, p. 659). Monetary policy also refers to the actions undertaken by a central bank, such as the Federal Reserve, to influence the availability and cost of money and credit to help promote national economic goals. The Federal Reserve Act of 1913 gave the Federal Reserve responsibility for setting monetary policy. The Federal Reserve controls the three tools of monetary policy- open market operations, the discount rate, and reserve requirements.
Monetary policy is the control of monetary variables such as, interest rates and money supply, by governments in order to stimulate the economy. Monetary policy can also be utilised in order to control the length and severity of recessions.
Monetary policy is an extremely valuable guideline for our economy. Small changes in the money supply can affect the price level, interest rates and almost all aspects of the macroeconomic world. When looking at monetary policy, understanding the variables of each argument can help us determine a more extensive view of each policy.
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 Central Bank and influences money supply .
Monetary Policy involves using interest rates or changes to money supply to influence the levels of consumer spending and Aggregate Demand.
On the other hand monetary policy is the expansionary or contraction of the money supply in order to influence the cost and the availability of credit. The three major and two minor tools that the fed can use to conduct monetary policy are easy money policy, tight money policy, reserve requirement, open market operations, and the discount rate. With the easy money policy the Fed allows the money supply to grow and interest rates to fall. This stimulates the economy when the interest rates are low people buy on cred...
Monetary Policy is the changes in the quantity of money in circulation designed to alter interest rates and affect the level of overall spending. Fiscal policy is t...
Gross Domestic Product (GDP) is an Economic Barometer which has being widely used around global to determine whether the country’s economy is under recession or expanding. It is a great tool for the government in aiding on making critical economy decision whether to input more money or remain in constant.
The economy concept or theory related to the article is the Gross Domestic Product. Gross Domestic Product (GDP) measures the commercial value of the final goods and services that are produced in a country within a given period of time. It calculates all of total of the output such as goods and services that are produced only inside the border of one country. GDP includes only goods and services that are produced for a purpose which is to be sold in the market. However, it does not include items that are produced at home and also is used or consumed at home and never enter any economy market. It also does not included illicit and illegal goods and services such as illegal drugs and items in the market. For example, work
The term Monetary policy refers to the method through which a country’s monetary authority, such as the Federal Reserve or the Bank of England control money supply for the aim of promoting economic stability and growth and is primarily achieved by the targeting of various interest rates. Monetary policy may be either contractionary or expansionary whereby a contractionary policy reduces the money supply, reduces the rate at which money is supplied or sets about an increase in interest rates. Expansionary policies on the other hand increase the supply of money or lower the interest rates. Interest rates may also be referred to as tight if their aim is to reduce inflation; neutral, if their aim is neither inflation reduction nor growth stimulation; or, accommodative, if aimed at stimulating growth. Monetary policies have a great impact on the economic stability of a country and if not well formulated, may lead to economic calamities (Reinhart & Rogoff, 2013). The current monetary policy of the United States Federal Reserve while being accommodative and expansionary so as to stimulate growth after the 2008 recession, will lead to an economic pitfall if maintained in its current state. This paper will examine this current policy, its strengths and weaknesses as well as recommendations that will ensure economic stability.
Gross Domestic Product (GDP) is the market value of all final goods and services produced by factors of production within a country in a given period of time. It can be calculated using either the income, output, or expenditure method as illustrated on the circular flow of income diagram below.
In the study of macroeconomics there are several sub factors that affect the economy either favorably or adversely. One dynamic of macroeconomics is monetary policy. Monetary policy consists of deliberate changes in the money supply to influence interest rates and thus the level of spending in the economy. “The goal of a monetary policy is to achieve and maintain price level stability, full employment and economic growth.” (McConnell & Brue, 2004).
The Gross Domestic Product (GDP) is the total market value of in a country’s output. The GDP is the total market value of all final goods and services produced by factors in within given period of time that located in the country doesn’t matter they are citizens or foreign-owned companies. Hence, the GDP is the best way to measure the country economy.