Monetary Policy

explanatory Essay
1670 words
1670 words

Monetary Policy

Monetary Policy

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.

“Microeconomics and macroeconomics can be described in terms of small-scale vs. large-scale or in terms of partial vs. general equilibrium. Perhaps the most important distinction, however, is in terms of the role of equilibrium. While issues in microeconomics seldom challenge the notion of a naturally occurring equilibrium, the existence of business cycles and, especially, unemployment suggests too many observers that macroeconomics raises issues of a different character.” (McConnell & Brue, 2004).

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).

Monetary Policy

What is Monetary Policy?


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...l Reserve, 2008). The economy is an ever changing organism that acts and reacts according to the stimulus of various factors and the consumers.


Federal Reserve. (2008). FRB: Monetary Policy Report to the Congress.

Retrieved July 4, 2008, from

Federal Reserve Bank of San Francisco. (2007). U.S. Monetary Policy.

Retrieved July 3, 2008,from

McConnell, Campbell R., & Brue, Stanley L. (2004). Economics: Principles, Problems and

Policies 16e. [University of Phoenix Custom Edition e-text., : McGraw-Hill

Companies. Retrieved July 4, 2008, from University of Phoenix, MMPBL-501 Web site. University of Phoenix . ( 2008). Economics for Managerial Decision Making [Computer Software]. Retrieved July 3, 2008, from University of Phoenix, Simulation, MMPBL-501 Web site

In this essay, the author

  • Explains that monetary policy is one of the tools a national government uses to influence its economy.
  • Explains that the economy experienced neither significant unemployment nor inflation between 1996 and 2000, but that wishful thinking ended in march 2001. since 1970, real gdp has declined in five periods.
  • Explains that the u.s. economy has weakened considerably since the federal reserve board submitted its previous monetary policy report to the congress.
  • Cites university of phoenix's mmpbl-501 web site. economics for managerial decision making.
  • Explains that the economy is the backbone of society. there are many factors that operate in, and govern our society's economic structure.
  • Explains the effects of monetary policy on the unemployment rate, gdp gap, and okun’s law. economists disagree about the effectiveness of the policy, especially its effectiveness in the long run.
  • Explains that a monetary policy that persistently attempts to keep short-term real rates low will lead to higher inflation and higher nominal interest rates, with no permanent increases in the growth of output or decreases in unemployment.
  • Explains how changes in real interest rates affect the public's demand for goods and services by altering borrowing costs, availability of bank loans, wealth of households, and foreign exchange rates.
  • Explains that easy monetary policy may be inflationary if initial equilibrium is at or near full-employment.
  • Explains that money is created by single commercial banks, banking system, and the federal reserve bank system.
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