Premium Essay

Monetary Policy and It's Effect on Macroeconomic Factors

In: Business and Management

Submitted By yamamar1
Words 1437
Pages 6
Running head: Monetary Policy and Its’ Effect on Macroeconomic Factors

Monetary Policy and Its’ Effect on Macroeconomic Factors Edward Thaxton University of Phoenix MMPBL/501 Forces Influencing Business in the 21st Century Dr. Sangeeta Bishop March 8, 2010

Abstract
This paper will illustrate the affects of The Fed, the creation of money and the monetary policy. The monetary policy has a direct impact upon aggregate demand, gross domestic product, unemployment, inflation, and interest rates. Monetary Policy and Its’ Effect on Macroeconomic Factors
In earlier times traders used gold for transactions, and realized that it was inconvenient so they began to make deposits with goldsmiths. The goldsmiths provided the depositor a receipt for the value of their deposit of gold and people began to use the receipts as payments. The goldsmiths backed their receipts fully with the gold that they held in their vaults. These receipts were used as the first kind of paper money. Today, gold is no longer used as bank reserves. This was the beginning of the fractional reserve system of banking, in which reserves in bank vaults are a fraction of the total money supply. The creation of checkable deposit money by banks, limited by the amount of currency reserves that the banks feel obligated to maintain, or are required by law, to keep. Banks that operate on the basis of fractional reserves are vulnerable to panics or runs (McConnell & Brue 2004). However, a bank panic is highly unlikely if the banker's reserve and lending policies are prudent. The reason that the banking industries are highly regulated is to…...

Similar Documents

Premium Essay

Monetary Policy

...Monetary policy is one of the tools that a national government uses to influence its economy. Using its monetary authority to control the supply and availability of money, a government attempts to influence the overall level of economic activity in line with its political objectives. The goal of this is "macroeconomic stability" which means low unemployment, low inflation, and economic growth. Monetary policy is usually directed by a government appointed "Central Bank". Expansionary monetary policy is an increase in the quantity of money in circulation, with corresponding reductions in interest rates. This policy is put in place in order to stimulate the economy and correct or prevent a contraction. It is also used to address the problem of unemployment. It is a policy used by monetary authorities to expand money supply and boost economic activity, mainly by keeping interest rates low to encourage borrowing by companies, individuals and banks. An important effect of expansionary monetary policy is control of interest rates. As the quantity of money increases, banks are willing to make loans at lower interest rates. Contractionary monetary policy is the opposite of expansionary monetary policy. It consists of selling U.S. Treasury securities through open market operations. In addition, it also involves raising the discount rate, and increasing reserve requirements. The resulting decrease in the money supply and increase in interest rates decreases aggregate expenditures and...

Words: 489 - Pages: 2

Premium Essay

Monetary Policy

...Monetary Policy ECON 201 Roger Capretta 5 October 2012 Governments use monetary policy as a tool to influence their economy. Usually, government will find a way to influence the economic activity in connection with their political objectives by using their monetary authority to control the availability and supply of cash flow throughout the economy. Their main goal is to achieve macroeconomic stability by enabling low unemployment, low inflation, economic growth and a balance of external payments. A Central Bank is usually appointed to administer an economy’s monetary policy. The main goal of monetary policy is to promote solid economic performance and higher living standard amongst the public within the economy. Low, stable, and predictable inflation is a great way to judge how an economy’s functioning. There are three objectives to monetary policy. They are price stability, maintenance of full employment and also economic activity and welfare of people within an economy. Price stability is directly related to the price level of goods or services. This price can directly affect the economic growth based upon if it is high or low. This can also lead to full employment. When good and services are selling, companies have the ability to hire more employees which raises the employment level. When money is flowing through an economy and people are working and not unemployed the economic activity is high which will lead to economic prosperity. The Federal Reserve plays...

Words: 1444 - Pages: 6

Premium Essay

Monetary Policy

...The Impact of Monetary Policy on Economic Growth and Inflation in Sri Lanka C.Amarasekara 1 Abstract Based on a vector autoregressive (VAR) framework and utilising both recursive and structural specifications, this study analyses the effects of interest rate, money growth and the movements in nominal exchange rate on real GDP growth and inflation in Sri Lanka for the period from 1978 to 2005. The results of the recursive VARs are broadly in line with the established empirical findings, especially when the interest rate is considered the monetary policy variable. Following a positive innovation in interest rate, GDP growth and inflation decrease while the exchange rate appreciates. When money growth and exchange rate are used as policy indicators, the impact on GDP growth contrasts with established findings. However, as expected, an exchange rate appreciation has an immediate impact on the reduction of inflation. Interest rate innovations are persistent, supporting the view that the monetary authority adjusts interest rates gradually, while innovations in money growth and exchange rate appreciation are not persistent. Several puzzling results emerge from the study: for most sub-samples, inflation does not decline following a contractionary policy shock; innovations to money growth raises the interest rate; when inflation does respond, it reacts to monetary innovations faster than GDP growth does; and exchange rate appreciations almost always lead to an increase in GDP growth.......

Words: 18533 - Pages: 75

Premium Essay

Monetary Policy

...RBI & Its Monetary Policies Table of Contents NO. | Particulars | 1. | Introduction of RBI | 2. | Monetary policy | 3. | Monetary policy objectives | 4. | Monetary policy functions | 5. | Operations of Monetary policy * Quantitative credit control * Selective or qualitative methods | 6. | Operating procedures of Monetary policy * Liquidity adjustment facility (LAF) * Market stabilization scheme | 7. | Monetary policy tools | 8. | Recent changes in Monetary policy | 9. | Evaluation of Monetary policy | 10. | Limitations | 11. | Conclusion | 12. | Bibliography | 13. | | 14. | | 15. | | 16. | | INTRODUCTION OF RBI The central bank of the country is the Reserve Bank of India (RBI). It was established in April 1935 with a share capital of Rs. 5 crores on the basis of the recommendations of the Hilton Young Commission Reserve Bank of India was nationalized in the year 1949. The general superintendence and direction of the Bank is entrusted to Central Board of Directors of 20 members, the Governor and four Deputy Governors, one Government official from the Ministry of Finance, ten nominated Directors by the Government to give representation to important elements in the economic life of the country, and four nominated Directors by the Central Government to represent the four local Boards with the headquarters at Mumbai, Kolkata, Chennai and New Delhi. Local Boards consist of five members each Central......

Words: 6452 - Pages: 26

Premium Essay

Monetary Policy

...Monetary Policy After the IT bubble which is ended in late 2001, the recovery in the US is quite slow and economists are worry about the possible coming decline in inflation. The US started to take the aggressive monetary policy. According to chart 1, we can figure out that the target federal funds rate decline during this period. In the meantime, the low interest rate trigged the investment. A good case in point is the housing market. From the chart 2, we noticed that the housing price rising quickly during the late 1990s. Prices grew at a 7 to 8 percent annual rate in 1998 and 1999, and in the 9 to 11 percent range from 2000 to 2003. On the other hand, the most rapid price gains were in 2004 and 2005, when the annual rate of house price appreciation was between 15 and 17 percent. All of this is the blasting fuse of the real estate bubble. So for this reason, many people blame the 2008 crisis for the monetary policy which is taken after the IT bubble. However, if we put two charts together, in chart 3, we can figure out some confliction between the federal funds rate and the housing price, especially during the 2004 and 2005. It seems like there is no relationship between the monetary policy and the crisis in 2008. All of this can be tell by the “Greenspan Conundrum”. The main point here is that comparing with the federal funds rate, the housing prices rely more on the long-term mortgage rate. During this year, the shot-term improved interest rate don’t generate higher......

Words: 2416 - Pages: 10

Premium Essay

Monetary Policy

...study investigates the effects of Monetary policy on some significant economic variables like exchange rate, gross domestic product and inflation using data from 1960-2010 to analyze the results. We have taken the data in percentage form. A great number of empirical studies on the relationships of monetary policy and inflation are available and most of these have analyzed the effectiveness of monetary policy in controlling inflation in Pakistan. In this paper we have presented the effectiveness of monetary policy it’s framework and data estimation through which we reached to the conclusion that monetary shocks do affect real variables like GDP, inflation and exchange rate. Pakistan has been estimated by a number of researchers and it has been recognized that monetary phenomenon are responsible for the high levels of inflation. Keywords: Monetary Policy, Inflation, Exchange rate, Economic Growth, Gross domestic product and Pakistan. Introduction This paper attempts to examine the long-run effects of Monetary Policy on several economic variables such as inflation, economic growth that is gross domestic product and exchange rate in Pakistan. For this purpose, analysis have been employed for the period 1960-2010. As monetary policy actions affect policy variables with a significant gap and with high degree of unpredictability and insecurity, it is key to predict the probable impact and degree of monetary policy actions on the real variables. Usually, policy makers and......

Words: 2772 - Pages: 12

Premium Essay

Current Macroeconomic Situation, Fiscal and Monetary Policies

...Current Macroeconomic Situation, Fiscal and Monetary Policies Current Macroeconomic Situation, Fiscal and Monetary Policies Introduction As the leading world economy, the United States and has been in a recession since 2008 and the leading outcome of this recession has been no other than unemployment. The newsflash among media and television about this recession has resulted in unemployment, and how to remedy this “current macroeconomic situation”. No one seems to have an immediate solution on how the economy will get better. The news and media do a lot of finger pointing and giving various unpleasant names to the situation such as calling it “the decade of depression”. Our inflation rate is about 2.3%, which is currently lower than the past rate that was 3.4%. As of July 2012, unemployment rate has been around 9.3%, compared to the prior average years back of about 5.6%. Research We all know that if there is unemployment, consumers do not spend as much money and businesses suffer, from that but honestly speaking, not many of us know what these unemployment figures mean or represent for sure. We can assume or estimating what it means without understanding since we were not aware of what it was before or one is not personally affected by the unemployment saga. So it gets to be a bit mind-boggling when some industries throw these percentages out there and expect us all to know what they mean and as a way to......

Words: 845 - Pages: 4

Premium Essay

Monetary Policy

...Monetary Policy in the United States: A Brave New World? Stephen D. Williamson This article is a reflection on monetary policy in the United States during Ben Bernanke’s two terms as Chairman of the Federal Open Market Committee, from 2006 to 2014. Inflation targeting, policy during the financial crisis, and post-crisis monetary policy (forward guidance and quantitative easing) are discussed and evaluated. (JEL E52, N12) Federal Reserve Bank of St. Louis Review, Second Quarter 2014, 96(2), pp. 111-21. en Bernanke chaired his last Federal Open Market Committee (FOMC) meeting in January 2014 and departed from the Board of Governors on February 3 after eight years as the head of the Federal Reserve System. So, the time is right to look back on the Bernanke era and ask how central banking has and has not changed since 2006. There is plenty in the macroeconomic record from 2006 to 2014 to keep economists and policy analysts busy for many years, so in this short piece we can only scratch the surface of what is interesting about the Bernanke era. I will focus on three issues: (i) inflation targeting, (ii) Fed lending and other interventions during the financial crisis, and (iii) post-crisis Fed policy, in particular experiments with forward guidance and quantitative easing (QE). B INFLATION TARGETING When Bernanke began his first term in 2006, I think the big change people expected was an inflation-targeting regime for U.S. monetary policy, similar to what exists in......

Words: 6247 - Pages: 25

Premium Essay

Fiscal and Monetary Policy

...important. Policy makers judge the economy by measuring these macroeconomic indicators. The performance of the economy is measured in terms of the achievement of its economic objectives. Policy makers develop fiscal and monetary policy to achieve these long term objectives of the economy. Fiscal Policy Fiscal policy is used to collect revenue for the government in terms of taxes. Main tools of fiscal policy are taxes and government spending. If government make any changes in tax structure and government spending it effect the aggregate demand and level of economic activity in the country. To stabilize the economy on a business cycle fiscal can be used. Fiscal policy is made under the law of a legislature. Making any changes in the fiscal policy tools it effects the level of activity and aggregate demand in the country, it also effect the savings and investment in the economy, and distribution of income. * Expansionary fiscal policy In expansionary fiscal policy government increases spending and decrease taxes. To correct the problem in business cycle transfer payments are increased. Expansionary fiscal policy is used to close the recessionary gap, to decrease unemployment and improve the economic condition during recession. * Restrictive fiscal policy In restrictive fiscal policy government increases taxes and decrease its spending and transfer payments to resolve the problem of inflationary gape in the business-cycle expansion. The goal of restrictive policy......

Words: 2178 - Pages: 9

Premium Essay

Monetary Policy

...Name: Suchak Sajni Sanjiv I.D Number: 630650 Lecturer: Z. Ouma Course: ECO1020 - Principles Of Macroeconomics Spring 2015 Discuss the suitability of monetary policy in stabilizing the economy. Monetary policy, to a great extent, is the management of expectations. Monetary policy rests on the relationship between the rates of interest in an economy, that is, the price at which money can be borrowed, and the total supply of money. Monetary policy uses a variety of tools to control one or both of these, to influence outcomes like economic growth, inflation, exchange rates with other currencies and unemployment. Where currency is under a monopoly of issuance, or where there is a regulated system of issuing currency through banks, which are tied to a central bank, the monetary authority has the ability to alter the money supply and thus influence the interest rate (to achieve policy goals). During the past two decades, maintenance of low inflation, price stability has become the principal focus of central banks around the world. At the same time, the view has emerged that monetary policy is better suited than fiscal policy for short-run stabilization purposes. Monetary decisions take into account a wider range of factors, such as: * Short-term interest rates; * Long-term interest rates; * Velocity of money through the economy; * Exchange rates; * Credit quality; * Bonds and equities (corporate ownership and debt); * Government...

Words: 2485 - Pages: 10

Premium Essay

Monetary Policy

...of the term paper Monetary Policy Reason of publishing 04 Types of Monetary Policy 05 Monetary Policy in Bangladesh 06 Tools & Strategy of Monetary Policy 06 Major tools used by Bangladesh Bank 07 Policy Target 12 Limitations of Monetary Policy 13 Findings of the study Chapter-03 03 Scope & Objective of Monetary Policy Chapter- 02 03 14 Conclusion 14 Bibliography 14 Chapter- 01 Introduction “Monetary policy is the process by which the monetary authority of a country controls the supply of money, often targeting a rate of interest for the purpose of promoting economic growth and stability. The official goals usually include relatively stable prices and low unemployment. Monetary theory provides insight into how to craft optimal monetary policy. It is referred to as either being expansionary or contractionary, where an expansionary policy increases the total supply of money in the economy more rapidly than usual, and contractionary policy expands the money supply more slowly than usual or even shrinks it. Expansionary policy is traditionally used to try to combat unemployment in a recession by loIring interest rates in the hope that easy credit will entice businesses into expanding. Contractionary policy is intended to slow inflation in hopes of avoiding the resulting distortions and deterioration of asset values. In this report I tried to show that how monetary policy is related to the......

Words: 3927 - Pages: 16

Premium Essay

The Effects of Fi Scal Spending Shocks on the Performance of Simple Monetary Policy Rules

...journal homepage: www.elsevier.com/locate/ecmod The effects of fiscal spending shocks on the performance of simple monetary policy rules Ali K. Malik ⁎ Karachi School for Business and Leadership (KSBL), Bahadurabad, National Stadium Road, Karachi 74800, Pakistan a r t i c l e i n f o Article history: Accepted 26 August 2012 JEL classification: E50 E52 E58 Keywords: Fiscal policy Monetary policy Inflation targeting Impulse response analysis Macroeconomic variables 1. Introduction a b s t r a c t We examine the effects of fiscal shocks on the performance of alternative monetary policy rules in a small dynamic general equilibrium framework. We explicitly consider the interaction between fiscal and monetary policy rules which may be present in the real world. We use a simple specification for the fiscal policy rule and various specifications for the (simple) monetary policy rule. Our analysis suggests that some form of flex- ible inflation targeting regime would perform well in response to fiscal shocks compared to other forms of policy regimes. © 2012 Elsevier B.V. All rights reserved. monetary policy has developed largely in isolation. The terminology ‘fiscal theory of the price level’ does however correspond to some ear- Monetary policy rules have come under extensive examination in the literature on monetary policy in the recent years. Simple mone- tary policy rules appear to be more robust across a wide range......

Words: 12497 - Pages: 50

Premium Essay

Monetary Policy

...Monetary Policy ECN 201(ITV) Principles of Macroeconomics S u m m a r y In our society today money has three functions. One paramount function is money as a medium of exchange that enables us to buy and sell goods and services. Money is also a unit of account. Society needs a quantifiable measure to account for the value of goods, services, and resources. The third function of money is the store of value; where the value of current services is transferred into the future. In the aftermath of the great depression, governments of the 1930’s realized that the collapsing money supply versus credit available greatly contributed to the depression. Monetary policy is one vital tool of the national government uses to influence its economy. The British economist John Maynard Keynes analyzed, that full employment is not an automatic result of flexible pricing and sliding pay scales of economic systems. Instead it is crucial that the government relies on fiscal and monetary policy to balance demand and supply for full employment. The Federal Reserve System (Fed) consists of the Board of Governors for the Federal Reserve and the twelve Federal Reserve Banks, which control the lending activity of the nation’s banks and thrifts. The Fed controls the money supply to determine the interest rates. Monetary policy encompasses all political and economic measures available to the Central Bank for achieving their objectives, such as providing price-level stability, economic......

Words: 1661 - Pages: 7

Premium Essay

Monetary Policy

...Fiscal and Monetary Policies essay Frank iula Mod3a 2-22-12 The Monetary and Fiscal Policies, although controlled by two different organizations, are the ways that our economy is kept under control. Both policies have their strengths and weaknesses, some situations favoring use of both policies, but most of the time, only one is necessary. Fiscal Policy can be explained in many ways, for example. Fiscal policy is the use of the government budget to affect an economy. When the government decides on the taxes that it collects, the transfer payments it gives out, or the goods and services that it purchases, it is engaging in fiscal policy. The primary economic impact of any change in the government budget is felt by particular groups make tax cut for families with children, for example, raises the disposable income of such families. Discussions of fiscal policy, however, usually focus on the effect of changes in the government budget on the overall economy on such macroeconomic variables as GNP and unemployment and inflation. Fiscal Policy also can be explained as the economic term which describes the behavior of governments in raising money to fund current spending and investment for collective social purposes and for transfer payments to citizens and residents of the territory for which the government is responsible. The money may be raised by taxation, by borrowing, by user charges on social assets or services,...

Words: 2795 - Pages: 12

Premium Essay

Monetary Policy

... 3 1. Introduction 4 2.1. Expansionary Monetary Policy 5 2.2. Contractionary Monetary Policy 6 2. Overview of the United States Monetary Policy 7 2.1 Overview of Recent United States Monetary Policy 8 3. Recent (2011) Direction of Monetary Policy 10 4. Market Reaction to Monetary Policy 12 5. Conclusion 15 6. Reference List 16 1.0 Introduction In macroeconomics, monetary policy is an importance tool to Central Bank and is a policy set by the members of Central Bank. It is an economic strategy chosen by government that authorizes Central Bank to regulate and influence the economic activity by controlling the monetary base flow into national economy. The goals of monetary policy are to promote growth of the economy, stability of prices and reduce unemployment rate. Monetary policy can be classified into two categories, namely expansionary monetary policy and contractionary monetary policy. Although, the objective for the two policies is the same, they adopt different approaches in reaching this objective. Expansionary monetary policy is used when a country is facing a recession in the economy business cycle, whereby it increases the money supply in economy system to meet its objectives. In contrast, where there is a peak in the economy business cycle, central bank will use contractionary monetary policy to reduce the money supply in economy system so as to retard the......

Words: 3702 - Pages: 15