Abstract
This paper focuses on Monetary Policy, which centers on connections between money, banks, and credit to lenders. In addition, this paper will cover the effect on macroeconomic factors such as GDP, unemployment, inflation, and interest rates. Additionally, an explanation on money creation and the implications of making money gives an insight on Money Supply and Macroeconomic Factors. With many combinations of monetary policy, the paper covers the optimal balance between economic growth, low inflation, and a reasonable rate of unemployment.
Money is any object that functions as a means of exchange that society accepts social and legal payment for goods and services and in settlement of debts. Ludwig von Mises (1953) looks at the nature and value of money, and its effect on determining monetary policy. Included is his regression theorem, which tries to explain why money demands are its own right, as moneys at first glance do not serve a consumable need. Mises explained that moneys only could come about after there was a demand for the money commodity in a barter economy (pg.259). The private sector exerts enormous demand, which it largely financed out of the liquidation of its holdings of short-term government paper, which forces banks to call the activation of its liquid reserves. "The treasury, in order to repay this short-term paper, had to fall back upon money creation by borrowing from the banking system" (Holtrop, 1972, pg. 287).
Banks create money in an effort to attract borrowers to take out loans. This allows the Feds to increase money creation for many sources of financing for budget deficits in all transition economies. In economics, the gains from money creation come from seigniorage and inflation tax (Korosteleva, 2007, pg. 33). "In advanced economies, seigniorage is usually not a tool for financing government expenditures, but rather a consequence of induced changes in monetary policy (the range usually being 0.51.5 percent of gross domestic product (GDP)" (Cukrowski, 2006, pg. 56). Seigniorage, which is the income that the government collects from printing money, and inflation tax are look upon as forms of implicit inequitable taxation of the economy (Korosteleva, 2007, pg.
In normal times, the monetary authority (usually a central bank or finance ministry) can stimulate the economy by lowering interest rate targets or increasing the monetary base. Either action should increase borrowing and lending, consumption, and fixed investment. When the relevant interest rate is already at or near zero, the monetary authority cannot lower it to stimulate the economy. The monetary authority can increase the overall quantity of money available to the economy, but traditional monetary policy tools do not inject new money directly into the economy. Rather, the new liquidity created must be injected into the real economy by way of financial intermediaries such as banks. In a liquidity trap environment, banks are unwilling to lend, so the central bank's newly-created liquidity is trapped behind unwilling lenders.
M. Friedman and J.M. Keynes were the most influential economists of the 20th century. Since Friedman spent much of his intellectual energy attacking the legacy of Keynes it is natural to consider them opposites. Their differences were certainly thoughtful and so was what they shared. The interesting part was that they neither won nor neither lost. Today's policy conventions are a mixture of their two approaches. Yet both have won in the most important sense. Over the past two decades a world of fiat money has supplied diffident inflation and supported stable growth.
Something that almost every person in America has in their wallet is money, whether it be 20 dollars or a one dollar bill. We all use money every day to eat, survive, and get around. The money supply in America can effect a single person to a large firm like the Apple Corporation. In this paper I am going to discuss the purpose money, how the government has the chance to influence the amount of money in our economy, and the monetary policy affects the Apple Corporation.
When an economy is in a recession the government has to act differently in order to increase demand and help businesses survive. The money supply method of the monetary policy is a good idea in theory but because of the current economic crisis, banks don’t feel secure enough to lend out there money as the return isn’t guaranteed.
Monetary policy is said to be expansionary when it increases the total supply of money in the economy more rapidly than usual. But it can also be termed as contractionary if it expands the overall money supply in a slower rate or shrink it. The price at which money can be borrowed at is usually referred to as the economy’s interest rates. The main aims of monetary policies are: control inflation, control economic growth, unemployment and the exchange rates.
In Ackley's view, monetary policy is viewed as being a cautious effort by monetary authorities (C. B. N) to control or regulate the stock of money or credit conditions for the tenacity of achieving certain economic objective. One objective of monetary policy is the realization of the high rate of or full employment, this doesn’t suggest that there is zero unemployment since there is always an amount of friction due to voluntary or seasonal unemployment (Ackley, 1978).
“The last influence is that people choose to hold money as a store of value instead of other assets, such as corporate bonds and stocks, for two reasons: its liquidity and the lack of risk. This leads to the Asset Demand for money”
The idea of the money growth rule is contingent upon the relationship between the money supply and inflation. Therefore, the question arises whether there even is a relationship between money supply and inflation. As stated earlier, one can see a relation between money and inflation. Presented above is series data that displays this relationship between money supply and the inflation rate over the previous decades. The problem is that there are fluctuations within the data and therefore a broader definition of the money supply must be utilized. Based on the research of Dr. Terry J. Fitzgerald, an economist at the Cleveland Federal Reserve Bank, if one defines money supply as M2, when examining the data over a multiple year progression, a pattern begins to present itself. Further, by graphing the difference between adjusted money growth and inflation, the link becomes evident. These graphs show the weight that changes to the money supply can have upon an economy’s inflation rate.
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.
Money creation is the process by which the money supply of a country is increased. There are several ways that a government, in coordination with the country's commercial banks, can increase or decrease the money supply of a country. If a country follows a fractional-reserve banking regime, as virtually all countries do, not all of the money in circulation needs to be backed by other currencies, physical assets such as gold, or government assets.
Macro-Economic Factors that Affect a Business There are macro-economic factors which affect a business and there implications need to be considered when planning ahead. The interest rate is the basically the cost of borrowing, the price of money. If money is borrowed it is the percentage over and above the original loan that has to be paid back. The interest rate is a vital tool of economic management for the government. Adjusting the interest rate is a key part of the government’s monetary policy.
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).
... are made throughout simulation to increase money and decrease money in the system to control the monetary policies. The simulation shows how controlling the money supply has an impact on the economy. Creating the right balance between GDP and inflation is critical for the economy.
the empirical relations based on the VAR test conducted for the period 1990 to 2009 show that, Money supply and inflation are weakly positively correlated, Money supply and interest rates are very weakly and negatively correlated, Money supply and real GDP are strongly positively correlated, Money supply and nominal GDP are very strongly negatively correlated. Furthermore, the response of inflation to shocks in money supply is very weakly positive or has no effect since it is constant through out. This indicates that the relationship between money supply and inflation is not too significant.
In the long run, both the goal of money supply growth and interest rates is perfectly compatible but in the short run, central banks face trade-off between money growth and price stability because shift in demand for money will affect interest rate if the money supply is fixed (Wright & Quadrini, 2009). Therefore, explicit inflation targeting (keeping increases in price level within the certain range) leads to lower employment and output in short run. Likewise, monetary aggregate targeting can boost employment and economic growth but can result in higher inflation. Further, time lag which is long lags between policy implementation and real-world effects made it difficult for policy makers to determine what degree of policy is