The Effects of Monetary Policy on Macroeconomics, GDP, Unemployment, Inflation and Interest Rates

Introduction

Economics primarily focuses on how laws and government policies impact the economy. Much of this looks at taxes specifically and more generally the public finance, which includes the spending and borrowing the government does. The root word of economics is economy. Economy comes from the Greek oikos - home and nomos - managing. (Dkosopedia, 2006) Economy can be described as the current soundness of financial indicators such as jobs and job growth, economic productivity and output, and can also be measured by a vast range of other factors such as the trade deficit, national debt, GDP, and unemployment rates. In this paper, the effects of the monetary policy on macroeconomics, GDP, unemployment, inflation and interest rates will be discussed. Throughout the paper explanations of how money is created will be given along with discussing what monetary policies combination will achieve the goal of economic growth, low inflation, and a reasonable rate of unemployment, what combination of monetary policies will better accomplish this goal.

Monetary policy goals

One goal of the Federal Reserve, commonly known as the Fed, is to affect the economic production and employment, both of which depend on many other factors. They are influenced by monetary policy; when demand weakens, the fed lowers interest rates, which in turn stimulates the economy, by allowing the consumer to spend more and the industry to produce thus job retention is good. In contrast, continuous stimulus to increase salary or if demands falls, productivity will decrease, jobs are lost and this will push the economy's inflation higher. The Fed just tries to smooth out the bumps of natural business cycle. Inflation is an economy wide rise in prices which is bad because it makes it hard to tell if a business product price is going up because of higher demand or inflation. Inflation also adds premium to long-term interest rates. Much debate encircles whether zero inflation is a target. Some economist says that when inflation is low, interest rates are low so the fed does not have much room to boost the economy if it is necessary. When inflation is close to zero there is more risk of deflation. Deflation occurs when there is a nation wide fall in prices. On the surface, this may sound optimal for the consumer but this is just as bad as inflation. A prolonged deflation, like the great depression, can lead to significant declines in home and business values.