Economy: The Role of Monetary Policy

Monetary Policy
Does monetary policy cause more problems than solutions? The control of the amount of money in circulation is of general essence to the economy in various ways. The Federal Reserve System (the Fed) is approved to develop a monetary policy to control the rate of inflation, regulate the conduct of business and to control the economy through a steady economic growth by the government of the U.S.A. According to Taylor (2011), “Monetary policy is that involves altering the quantity of money and thus affecting the level of interest rates and the extent of borrowing” (p.310). Also, there are two different monetary policy which are expansionary monetary policy and contractionary monetary policy. The Fed normally applies three methods to influence any monetary policy. The three methods are reserve requirements, open market operations and the discount rate. Open market operations are the main approach taken by the Fed. However whether a monetary policy is more beneficial than disadvantageous to the economy is debatable. The monetary policy may cause problems, but it is generally a solution to many problems. Therefore, the monetary policy can solve the problem of recession, inflation, unemployment and stability of economy.
In Dudley’s article, monetary policy can be used to solve the problem of recession (2013). Recession is the example that only a small quantity of money is in circulation, so the Fed comes into increase liquidity. This helps to control the bank lending interest rates. This market operations approach focuses on the control of liquidity in the market. The control mechanism basically involves buying and selling of securities of the U.S. Treasury securities. In case of a recession, the Fed applies expansionary ...

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... to curb recession. Monetary policies also help in maximum utilization of labor force in the country through ensuring that unemployment rates are kept at a minimum. The use of the bank interest rates are meant ensure that the economy is stable and steady growth is registered. Even though monetary policies come with their own share of problems in their implementation, their objectives far outweigh the problems. Furthermore, most of the problems can be properly dealt with through other policy initiatives put in place.

Works Cited

Dudley, W.C. (2013). The Economic Outlook and the Role of Monetary Policy. Retrieved April 21 2014, from http://www.newyorkfed.org/newsevents/speeches/2013/dud130325.html
Potter, S. (2013). Recent Developments in Monetary Policy Implementation. Retrieved April 21, 2014 from http://www.newyorkfed.org/newsevents/speeches/2013/pot131202.html