Monetary Policy
Monetary policy is divided into two categories, contractionary monetary policy and expansionary monetary policy. Contractionary monetary policy is a policy that reduces the money supply and increases interest rate. It aims to slow down economic growth in order to prevent or slow down inflation. Expansionary monetary policy is a policy that lowers interest rate and increases money supply. It aims to stimulate economic growth and to pull the country out of recession. There are different tools of monetary policy such as Open Market Operations, Discount Rate and Reserve Requirements.
The Open Market Operations are one of the major tools in monetary policy. It involves buying and selling bonds to regulate money supply in the country’s economy. In term of expansionary monetary policy, the central bank increases the money supply by buying bonds from commercial banks, and then the funds are increased and the commercial banks can use as loans to public. When there are more cash in the bank, the interest rates will be decreased and this promotes economic growth. In term of contractionary monetary policy, the money supply reduces as the central bank sells bonds to the commercial banks, the short term interest rate of banks increases and therefore it slows down the economic growth.
Discount Rate is the interest rate that commercial banks pay to borrow funds from central bank (U.S. Department of State, n.d.). This works when the public deposit money into commercial banks; commercial banks also deposit money into the central bank. At the same time, the central bank lends money to commercial banks and commercial banks lend money to the public. When there is inflation, the contractionary monetary policy is applied. The c...
... middle of paper ...
... [6 March 2014]
Tutor2u, n.d., limitations of gdp when measuring living standards, available from http://www.tutor2u.net/economics/content/topics/livingstandards/limitations_of_gdp.htm [5 March 2014]
U.S. Department of State, n.d., Bank Reserves and the Discount Rate, available from http://economics.about.com/od/monetaryandfiscalpolicy/a/bank_reserves.htm [3 March 2014]
Weil, n.d., Fiscal Policy, available from http://www.econlib.org/library/Enc/FiscalPolicy.html [4 March 2014]
Workshop on Fiscal Policy IMF, 2009, The Effectiveness of Automatic Stabilizers, available from https://www.google.co.uk/url?sa=t&rct=j&q=&esrc=s&source=web&cd=16&cad=rja&ved=0CEkQFjAFOAo&url=http%3A%2F%2Fwww.imf.org%2Fexternal%2Fnp%2Fseminars%2Feng%2F2009%2Ffispol%2Fpdf%2Ffatas.ppt&ei=c_4VU-j6NI6AhAf0lYCQDw&usg=AFQjCNHGi-hdnMfsvPmWfdpw6j9cisYLkQ&bvm=bv.62286460,d.ZGU [4 March 2014]
The financial crisis of 2007–2008 is considered by many economists the worst financial crisis since the Great Depression of the 1930s. This crisis resulted in the threat of total collapse of large financial institutions, the bailout of banks by national governments, and downturns in stock markets around the world. The crisis led to a series of events including: the 2008–2012 global recessions and the European sovereign-debt crisis. The reasons of this financial crisis are argued by economists. The performance of the Federal Reserve becomes a focal point in this argument.
Monetary Policy is another policy used in Keynesianism which is a list of protocols designed to regulate the economy by setting the amount of money that is in circulation and controlled interest levels. The Federal Reserve system, also known as the central banking system in the U.S., which holds control of this policy. Monetary policy has three tools used by the Federal Reserve to enforce this policy. Reserve Requirement is the first tool that determines the lowest amount of money a bank must possess and is not able to lend out. The second way to enforce monetary policy is by using the discount rate or the interest rate a bank will charge.
The second tool the Federal Reserve uses is the adjustment of the reserve ratio. The reserve ratio is the ratio of the required reserves the commercial bank must keep to the bank’s own outstanding checkable-deposit liabilities (Brue, 2004, p. 254). By raising and lowering the ratio, the Fed can control how much the commercial banks can lend. For example, if the Fed lowers the reserve ratio, commercial banks will now have more excess reserves allowing them to lend more money to businesses or individuals. Vice-versa, by increasing the ratio, the Fed forces the banks to lend less money due to having smaller excess reserves. If the bank is deficient in the amount of reserves it has, the bank is forced to reduce checkable deposits and, subsequently, reduce the money supply. It may also need to increase its reserves by selling bonds, which would also lower the money supply (Brue, 2004, p. 274).
Over the past few years we have realized the impact that the Federal Government has on our economy, yet we never knew enough about the subject to understand why. While taking this Economics course it has brought so many things to our attention, especially since we see inflation, gas prices, unemployment and interest rates on the rise. It has given us a better understanding of the effect of the Government on the economy, the stock market, the interest rates, etc. Since the Federal Government has such control over our economy, we decided to tackle the subject of the Federal Reserve System and try to get a better understanding of the history, the structure, and the monetary policy of the power that it holds. The Federal Reserve System is the central banking authority of the United States.
6. Data Download Program, The Federal Reserve Board, 5 Aug 2009, web. 6Dec. 2009 www.federalreserve.gov/datadownload,
"Progress On Poverty, But 1.2 Billion Still Live On The Extremes." America 209.12 (2013): 8. MAS Ultra - School Edition. Web. 13 Nov. 2013.
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 is the mechanism of a country’s monetary authority (usually the central bank) taking up measures to regulate the supply of money and the rates of interest. It involves controlling money in the economy to promote economic growth and stability by creating relatively stable prices and low unemployment. A monetary policy mainly deals with the supply of money, availability of money, cost of money and the rate of interest to attain a set of objectives aiming towards growth and stability of the economy. Here are some of the monetary policy tools:
In 1962, Milton Friedman wrote the essay “Should There Be An Independent Central Bank?” Since then, half a century has passed. Nowadays, many countries in the world have their independent central banks. But the discussion about whether central banks should be independent does not end. This paper will try to 1) provide the arguments on both pros and cons whether central banks should be independent; 2) provides evidence about the relationship between central bank independence and inflation in developed countries, developing countries and transition countries.
The first major aspect of the monetary policy by the Federal Reserve is its interest rate policy. This interest rate policy is mainly determined by the figure for the federal funds rate, which is the rate at which commercial banks with balances held within the Federal Reserve can borrow from each other overnight in ord...
Standard of Living, in a purely material dimension is the average amount of GDP per person in a country (therefore determining access to goods and services). However the term has a much broader, non-material dimension involving issues of quality of life and are therefore much more difficult to quantify. There is no single measure of SoL, but a range of indicators, which can be used together to give a good idea of a countries’ SoL. Reasons for GDP figures alone giving an incomplete understanding of SoL in a country will be explained in this essay, along with problems faced when comparing levels of development between countries.
Author Unknown (1994). The Federal Reserve System: Purposes and Functions (5th ed.) Published by Library of Congress
Discount Rate, it is in fact, the interest rate charged to commercial banks and other depository institutions on loans they receive from their regional Federal Reserve Bank 's lending facility, (Board of Governors Federal Reserve System, n d). The financial institutions must borrow funds at this interest to the Federal Reserve System. Fed use this tool to control the supply of money something that will affect the inflation and the overall interest rates.
The Federal Reserve use several tools like discount rate, federal funds rate, required reserve ratio and open market operations to control the money supply. In the simulation, the effect of controlling the money supply on the economy was presented. Typically, releasing money into the system results in higher Real GDP and lower unemployment. On the other hand, it also raises inflation.
...two aspects, nominal and real, both measuring two different controls. Nominal measures what is considered a “price tag” of a loan, which includes the price of inflation. While real measures the cost of a loan without inflationary rates. From nominal and real rates there are also lowered and raised rates. When the interest rate is lowered consumer spending grows while savings decrease. Spending on items such as housing becomes one of the ways the AD rises. Though AD rises it pulls the economy out lack of spending, but puts the economy into the possibility of inflation. Differentiating from low rates, high rates stop inflation but creates the possibility of recession. High interest rates create a fall in demand for goods and services. This fall of AD puts a stop to spending, borrowing and much more, creating the incentive to save ultimately putting a haul to inflation.