Monetary Policy Essay

Monetary Policies And Monetary Policy
Monetary Policies (Introduction)
The objective of monetary policy is to reserve the worth of the money by keeping inflation low,
stable and predictable that lets Canadians be more confident about the spending and investment
choices. It reassures long–term investment in Canada's economy as well as contributes to continuous
job creation and better the production. It helps improve living standard. Canada's monetary policy
outline consists of two key components working together and reinforcing each other: the inflation
–control target and the flexible exchange rate. The inflation–control target directs the decisions of
the Bank regarding the proper setting of the policy interest rate that maintains a stable price
environment throughout the medium term.
Influencing Short–Term Interest Rates As to reach the inflation target, the banks have to make
changes in the policy rate by raising or lowering it. If inflation is beyond target, the banks will have
to increase the policy rate, this inspires institutions to increase interest rates on the loan and
mortgages. Discouraging borrowing and spending which enables upward pressure on price. If
inflation is under the goal, banks will lower the policy rate which would then encourage financial
institutions to lower interest rates on the loans and mortgages. This information shows how much
banks are concerned about inflation going higher or lower in terms of the goal. The key policy
interest rates are when banks expect to be used in
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Monetary Policy Paper
{draw:rect} {draw:g} {draw:frame} Monetary Policy Paper Objective I choose to research and
write on the topic of monetary policy. My two main sources of information were
www.federalreserve.gov and www.frsbf.org. From my research I would define monetary policy as
the macroeconomic act of keeping the country financially stable. According to www.frsbf.org "The
object of monetary policy is to influence the performance of the economy as reflected in such factors
as inflation, economic output, and employment. It works by affecting demand across the
economy–that is, people's and firms' willingness to spend on goods and services". The information
that I located suggested that the main issues that monetary policy deals with are inflation...show more
content...
Others say that the apex bank would maintain status quo on both the short–term rates as well as cash
reserve ratio (CRR) and adopt a wait and watch stance. However, with the US Federal Reserve
slashing its rates by 0.75% last week, some bankers feel that the RBI might consider a 0.25–0.50%
cut in interest rates and a 0.25% reduction in the CRR margin.Following the Fed rate cut, the
possibility of huge capital inflows into India has increased and the RBI might take steps to narrow
the interest rate differential between the two countries, Indian Banks' Association's chief executive
H N Sinor said. "The RBI may send out a signal by reducing either the reverse repo or the repo rate
by 0.25–0.50% to moderate capital flows," Sinor said. The repo and reverse repo rates currently
stand at 7.75 % and 6% respectively. While a hike in key rates might temper capital inflows, a cut in
CRR would release some capital, which could be used by banks for increasing credit offtake and
thereby spurring growth, which has slowed down in some sectors including manufacturing, textiles
and consumer durables. "High interest rates have hit growth in certain sectors. Whether the RBI
does it this month–end or a little later remains to be seen," private sector Yes Bank chief Rana
Kapoor said. Dena Bank chairman P L Gairola feels that one could expect a

Essay about Fiscal and Monetary Policy
The difference between fiscal and monetary policy lies within the different tools wield, and aspects
of the economy they influence. Fiscal policy generally deals with different sorts of taxes to manage
earnings and spending in the population, and how the government benefits from these interactions.
Monetary policy, on the other hand, affects the base value and amount of money in circulation
directly, as opposed to simply leveling off amounts from the population to put into federal spending.
There are, primarily, two tools utilizing taxes that are used in fiscal policy to influence the economy.
The first of these– Revenue tools– are the taxes collected by the government, both directly and
indirectly. We experience direct taxes in the...show more content...
The tools of monetary policy have to do with the currency in circulation and its value. One of the
primary tools implemented by the government is open market purchases and sales– buying and
selling different shares to increase or decrease the amount of money in the monetary base. These are
usually permanent changes. In case there is a need for a temporary devaluation or increase in
monetary amount and value, the government implements repos– the temporary buying or selling of
government securities with the intention of the original owner buying back the share. When there is
a dearth of money in local banks, a central bank offers them a loan (the discount rate)– another
monetary policy tool– which bails them out.
Fiscal and Monetary policy both have their advantages and disadvantages. According to James
Tobin, two of the main goals of monetary policy is to ensure the stability of the value of money
(ideally, ensuring the rate of inflation is as close to zero as possible) and to provide jobs to the
entirety of the population. However, Tobin claims these often conflict. "Full employment means that
everyone... who is productive enough to be worth the prevailing real wage and wants a job at that
wage is employed. In these circumstances more

Monetary Policy Rules And Monetary Policies
Monetary policy rules are a fundamental part of the central bank models and are often refined to
maximize economic welfare, specific to that country. Monetary policy rules are a methodical
response of monetary policy events in the economy. Essentially, it can be thought of as a numeric
equation, which determines the appropriate level for the central bank's policy instrument to be a
function of one or more economic variables that describe the state of the economy. It is imperative
that economies model the reaction of their monetary authorities to changes in their respective
economic conditions; this equation is essentially a "reaction function." A reaction function utilizes
its instruments to stabilize inflation and output fluctuations in response to demand or supply shocks.
In a macroeconomic environment, the policy rules a Central bank develops is essential and thus
numerous monetary policy rules have been discussed throughout economic literature.
Monetary policy rules in Canada differ from the United States, as the Canadian monetary policy has
an inflation–control target and the flexible exchange rate. On the other hand, the US rate is the
interest rate that a bank charges another for borrowing money overnight. The rates determined
through the monetary policy rules determine many factors of the economy and globally as well.
II. Canada vs. United Sates: Output Gap & Inflation Comparisons (2000–2014)
The data for these graphs were retrieved through the International

Contractionary Monetary Policy
Monetary policy is the management of the quantity of a nation's money supply by the nation's central
bank. An expansionary monetary is one that increases the money supply. An increase in the money
supply will lower interest rates, which increases borrowing for spending. The increased spending
increases aggregate demand and the equilibrium level of output. Contractionary monetary policy
raises the interest through reductions in the money supply. The higher interest rate lowers spending,
which lowers equilibrium income.

Monetary Policy in the United States Essay
Monetary Policy, in the United States, is the process by which the Federal Reserve controls the
money supply to promote economic growth and stability. It is based on the relationship between
interest rates of the economy and the total supply of money. The Federal Reserve uses a variety of
monetary policy tools to control one or both of these. The Federal Reserve went into action in
response to the 2008 recession by rapidly reducing interest rates with the hopes of encouraging
economic growth. The federal funds target rate was decreased to between zero and .25 percent. The
results of the rate changes caused what is called "zero bound", this reduced the effectiveness of
monetary policy with the near non–existence of interest rates. In...show more content...
It changed its unemployment target to 7 percent, while keeping its targeted inflation rate at 2 percent .
On September 18, 2013 the Federal Reserve reaffirmed its view that a highly accommodative stance
of monetary policy will remain appropriate for a considerable time after the asset purchase program
ends and the economic recovery strengthens. In addition, the committee agreed to continue its
monthly $85 billion purchase of Treasury and mortgage–backed securities as long as the
unemployment rate remains above 6.5 percent. Inflation between one and two years ahead is
projected to be no more than a half percentage point above the Committee's 2 percent longer–run
goal and longer–term inflation expectations continue to be well anchored .
Bank Regulatory Reform
The regulatory reform process is currently moving from policymaking to the implementation phase.
The implications of regulatory reform for banks has never been greater, and the ability to navigate
the new environment will require strong processes that integrate regulatory compliance and changes
to the business model. Planning has never been more important as reaction to each regulation could
be very costly.
The Dodd–Frank Wall Street Reform and Consumer Protection Act were signed into federal law on
July 21, 2010 by President Obama. These laws were passed in response to the financial crisis of
2008 with intent

Monetary Policy Essay
Monetary Policy
Monetary policy has some basic goals: to promote "maximum" sustainable output and
employment and to promote "stable" prices. The term "monetary policy"
refers to the actions undertaken by a central bank, such as the Federal Reserve, to influence the
availability and cost of money and credit to help promote national economic goals. The Federal
Reserve Act of 1913 gave the Federal Reserve responsibility for setting monetary policy.
The Fed can not control inflation or influence output and employment directly; instead, it affects
them indirectly, mainly by raising or lowering a short–term interest rate called the "federal
funds" rate. The Federal Reserve has certain tools at its...show more content...
Using these tools, the Federal Reserve influences the demand for, and supply of, balances that
depository institutions hold at Federal Reserve Banks and in this way alters the federal funds rate.
The federal funds rate is the interest rate at which depository institutions lend balances at the Federal
Reserve to other depository institutions overnight. The point of implementing policy through raising
or lowering interest rates is to affect people's and firms' demand for goods and services. Changes in
the federal funds rate trigger a chain of events that affect other short–term interest rates, foreign
exchange rates, long–term interest rates, the amount of money and credit, and, ultimately, a range of
economic variables. This shows how policy actions affect real interest rates, which in turn affect
demand and ultimately output, employment, and inflation.
Monetary policy can be quickly altered and can affect money supply and investments very fast thus
making speed and flexibility one of its strength. Members of the Feds board are appointed a 14 year
term. This isolates them from lobbying so therefore no political pressure to contend with. The tight
monetary policy helped the economy succeed from 1980 thru to 1990 by bringing down the inflation
rate.
Monetary policy is not all strengths there are weaknesses also associated

The Two Types Of Monetary Policies
Monetary policies
Monetary policies are strategies used by the central bank, financial regulatory committee of currency
board to regulate the amount of money supply in the economy. There are two types of monetary
policies. These are expansionary monetary policies and contractionary monetary policies.
Expansionary monetary policies entails increasing money supply in the economy. Expansionary
monetary policies affect macroeconomic variables differently. It leads to reduction of
unemployment, increases consumer expenditure, leads to economic growth and development and
increase private sector borrowing. Increase in private sector borrowing increases the capacity to
invest and create more employment opportunities.
Contractionary monetary policies on the other hand aims at reducing the amount of money in supply
in the economy. Contractionary monetary policy slows economic growth and development,
unemployment increase, it reduces inflation and it can discourage investors from borrowing.
Contraction monetary policies are used in most instances to curb growth of inflation rate. This is
achieved by raising the interest rates. However, contraction monetary policies can lead to recession
in the economy.
Analysis and results
Aggregate demand and aggregate supply model
Aggregate demand and aggregate supply forms an economic model which incorporates the
macroeconomic variables and explains the behavior of the economy. Aggregate demand and
aggregate supply determines the

Monetary and Fiscal Policy Essay examples
Monetary and fiscal policy and their applications to the third world countries with a huge informal
sector
This essay seeks to explain what are monetary and fiscal policy and their roles and contribution to
the economy. This includes the role of the government in regulating the economical performance of a
country. It also explains the different features and tools of monetary and fiscal policy and their
performance when applied to the third world countries with a huge informal sector.
Monetary Policy
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...show more content...
This involves buying or selling financial instruments like bonds in exchange of money to be
deposited with the central bank. By selling the financial instruments, the central bank mops up the
cash in circulation. On the other hand, selling injects money thus increasing the supply of money
(Bernanke 2006).
Interest rates
By increasing or reducing the nominal interest rates, the money supply is either increased or reduced.
When the rate goes up, people are not able to borrow, thus the money does not enter into circulation.
But when the rates go down, people borrow in big numbers therefore increasing the money supply.
So the monetary authority just needs to adjust the interest rates either upwards or downwards, and
in–direct results will be reflected on the money on circulation. Discount window lending
This is the situation where the commercial banks and other lending institutions borrow from the
central bank at lower interest rates compared to how they will lend. This gives the institution a
chance to vary credit conditions depending on the central bank lending rates. If the central bank
raises its lending rates, then the other lending institutions will have to raise their rates too, thus
discouraging the public from borrowing. But if the central bank lowers its rate, then commercial
banks and other institutions will be forced to lower their rates too. This will encourage the

CHAPTER ONE 1.INTRODUCTION 1.1Background of the Study Governments make use of
different macroeconomic policy instruments such as fiscal and monetary policies to stabilize the
macro–economy and brig about growth to their respective countries. Yet there are debates on the
efficiency of each of these instruments. Some economists argue that fiscal and monetary policies are
ineffective in all countries while the other group argue that they are important policy tools, though
their effectiveness depends on conditions in the economy. Fiscal policy is one of the commonly used
instruments for achieving the goals of growth and stability in the economy through enforcing
monitoring mechanisms. The components of fiscal policy include: government expenditure, tax, and
public debt (Permechand 1983). The contradicting arguments about effectiveness of fiscal policy
amendments or government involvement still continue in these sections too. Public expenditure
refers to the expenditure incurred by the government for the maintenance of various public good and
to promote the welfare of the society as a whole. It is the main instrument used by governments
especially in developing countries to promote economic growth which is an essential component for
sustainable development (MOFED 2010). However, composition of government expenditure has
been attracting the attention of economists due to its effects on the level of growth (Sharma B.
2012). Economic growth is expected to bring about a better

Essay on 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...show more content...
Basically, it involves the increase in the supply of money in circulation thereby resulting in the
lowering of interest rates.
Also, according to Potter's article, monetary policy also solves the problem of inflation (2013).
Inflation refers to the depreciation in the value of a particular currency. In the U.S.A., the Fed is
charged with the responsibility of developing monetary policy which ensures that the value of the
US dollar in the international market keeps its perfect high. If the value falls, the cost of basic
merchandise rises, making the standards of living to a very high level. The Fed normally adopts the
contractionary monetary policy which is "a monetary policy that reduces the supply of money and
loans; also called a 'tight' monetary policy" (Taylor, 2011, p.316). Basically, it involves the reduction
of liquidity in the market. When the amount of money in circulation is reduced, the bank lending
rates go high with the net effect of an improvement in value of the currency.
Also, Potter (2013) claims that contractionary monetary policies slow down the rate of inflation of
monetary policies accepted by the Fed have argued that the move slows down production.
Contractionary monetary policies have been blamed for recession if the limits are not well checked.
When the amount of money in the circulation is reduced, the engine of the economy has limited
capacity. As a result, the demand for goods

According to the simulation, there are three key economic tools used by the Federal Reserve to
control the monetary policy. 1. Spread between the Discount Rate and the Federal Funds Rate 2.
Required Reserve Ratio 3. Open Market Operations
These economic tools influence the money supply in the following ways:
1.Difference in Discount Rate and Federal Funds Rate:
Banks are able to borrow from the Fed if the discount rate charged by the Fed is lower than the
federal funds rate charged by other banks. As the discount rate is decreased, banks shift their
source of borrowing from other banks to the Fed. As they do so, the total amount of money in the
system is increased. If the spread is positive, banks will always borrow from other...show more
content...
2.Inflation Rate:
While increasing the money supply is a good sign for the GDP, it is not the same for inflation. With
the increase, the nominal value of money stays the same, but the increase in money continues to
chase the same quantity of goods and servicesВ…thus the real value of money is decreased. The
result is prices go up.
3.Unemployment Rate:
The unemployment rate reacts to the GDP. When investment and spending increase, demand and
employment opportunities tend to go up due to labor requirements for production of goods and
services. This increase causes a decrease in the unemployment figures. When money is reduced in
the system, causing a decrease in the GDP, the employment opportunities and demand for workforce
will fall increasing the unemployment rates.
Monetary Policy
U.S. monetary policy affects all kinds of economic decisions people make in this country as well
as others. Whether it is to get a new loan for a brand new car, that new home for upstart family or
to begin a new entrepreneur company, loans are a part of everyday life. Loans are not the only
items driving the economic decisions, take for instance the money one puts in the bank or in bonds,
some may even look to invest in the stock market. Because the U.S. is the largest economy in the
world, its monetary policy can significantly affect financial endeavors in other countries.
The purpose of

Introduction
Fiscal and monetary policies focus on quickly returning the economy to sustainable, healthy growth.
Any type of fiscal relief package will boost consumer and business spending and can augment the
nation's long–term growth potential. Expansionary monetary policy can stimulate growth and
provide insurance against the possibility of deflation. This paper will present information on four
topics: (1) tools used by the Federal Reserve to control the money supply, (2) how these tools
influence the money supply and in turn affect macroeconomic factors? (3) how money is created?
(4) recommended monetary policy combinations that best achieve a balance between economic
growth, low inflation, and a reasonable...show more content...
Tools used by the Federal Reserve to control money supply?
On The Federal Reserve Web site"The major tool the Fed uses to affect the supply of reserves in the
banking system is open market operationsВ—that is, the Fed buys and sells government securities
on the open market. These operations are conducted by the Federal Reserve Bank of New York.
When the Fed wants the funds rate to rise, it does the reverse, that is, it sells government securities.
The Fed receives payment in reserves from banks, which lowers the supply of reserves in the banking
system, and the funds rate rises" (http://www.frbsf.org/publications/economics/letter/2004
/el2004–01.html#subhead2).
Another tool the Fed uses to affect the supply of reserves The Fed can't control inflation or influence
output and employment directly; instead, it affects them indirectly, mainly by raising or lowering a
short–term interest rate called the "federal funds" rate. Most often, it does this through open market
operations in the market for bank reserves, known as the federal funds market (http://www.frbsf.org
/publications/economics/letter/2004/el2004–01.html#subhead2).
The Fed can also use discount interest rate decreases as way of controlling money: The Fed can
lower the discount rate and lower the costs for banks holding low excess reserves which will lower
the excess reserve rate. If the Fed lowers the

Fiscal Policy vs. Monetary Policy Essay
Fiscal Policy vs. Monetary Policy
With America in recovery from the attacks on our freedom and our economy, many wonder if we
will return to phase one (expansion) and how long it will take to reach phase two (recession) again.
The Keynesian Theorists of America believe that the government should actively pursueMonetary
policies (enacted by the Federal Reserve Bank) and Fiscal policies (enacted by Congress) to reach
adjustments to price, employment, and growth levels. In our full market economy, we must use
these economic policies to control aggregate demand. When these policies are used to stimulate the
economy during a recession, it is said that the government is pursuing expansionary economic
policies....show more content...
Instead, the government uses Nondiscretionary Fiscal Policy (Automatic Stabilizers). This fiscal
policy is built into the structure of federal taxes and spending. Some examples of this are the
progressive income tax (the major source of federal revenue) and the welfare systems, which both
act to increase AD in recessions.
Monetary policy is under the control of the Federal Reserve System and is completely
discretionary. It is the changes in interest rates and money supply to expand or contract aggregate
demand. In a recession, the Fed will lower interest rates and increase the money supply. The Federal
Reserve System's control over the money supply is the key Mechanism of monetary policy. They
use 3 monetary policy tools– Reserve Requirements, Discount Rates/Interest Rates, and Open
Market Operations. The reserve requirement is the percentage of bank deposits a bank must hold
in reserves and cannot loan out. By raising or lowering the reserve requirements, the Fed controls
the amount of loanable funds. The interest rate is the amount the FED charges private banks, so
they can meet the reserve requirements. The prime rate is currently set at 5%. If the Interest rate is
low, the banks will borrow more money from the FED and the money supply will increase. Interest
rates have been above average for the past 20 years, but are currently considered low. Open Market
Operations is the most effective and most used

Monetary Policy Paper "Monetary Policy is the most significant function of the Fed; it is probably
the most–used policy in macroeconomics" (Colander, 2004, p. 661). This paper will discuss and
elaborate on "The Monetary Policy Report" submitted to the Congress on February 11, 2003 and
concepts of Macroeconomics by David Colander. The state of the economy, concerns of the Federal
Reserve, and the stated direction of recent monetary policy will also be discussed.
"Monetary policy is a policy of influencing the economy through changes in the banking system's
reserves that influence the money supply and credit availability in the economy" (Colander, 2004, p.
659). Monetary policy also refers to the actions undertaken by a central bank,...show more content...
Federal government consumption and investment the part of spending that is counted in GDP rose
more than 7 percent in real terms in 2002. (Government spending on items such as interest payments
and transfers are not counted in GDP because they do not constitute a direct purchase of final
production). Reflecting an unchanged stance of monetary policy over most of last year, short–term
market interest rates moved little until early November, when the FOMC lowered the target federal
funds rate 1/2 percentage point, and other short–term interest rates followed suit. The Federal
Reserves concerns are many; because of the economic diversity of our country. In November
2002, the fed reduced the targeted federal funds rate 50 basis points, to 1.25 percent. The policy
easing allowed the Committee to return to an assessment that the risks to its goals were balanced.
The Fed has inflation expectations well contained, and the additional monetary stimulus seemed to
offer worthwhile insurance against the threat of persistent economic weakness and substantial
declines in inflation from already low levels. Federal Reserve policymakers believe the most
probable outcome for this year to be a pickup in the pace of economic expansion. The central
tendency of the real GDP forecasts made by the members of the Board of Governors and the
Federal Reserve Bank presidents is 3.25 percent to 3.5 percent, measured as the change between the
final quarter of 2002 and

Monetary Policy in the United States
Abstract
The role of government in the American economy goes past just being a regulator for specific
industries. There are two main tools for achieving these objectives: fiscal policy and monetary
policy. The Federal Reserve sets the nation's monetary policy to promote the objectives of maximum
employment, stable prices, and moderate long–term interest rates.
Monetary Policy in the United States
Monetary policy is the government or central bank process of managing money supply to achieve
specific goals (wikipedia.org). The United States monetary policy affects all kinds of economic and
financial decisions people make in this country. Whether to buy a car, or build a house,...show more
content...
Monetary policy objective is to influence the performance of the economy, in inflation, exchange rate
with other currencies and unemployment. Monetary authority has the ability to alter the interest rate
and the money supply, with affecting the demand of the economy. TheFederal Reserve System
influences demand mainly by altering the (raising and lowering) short–term interest rates, to achieve
policy goals. These goals are listed in the 1977 amendment to the Federal Reserve Act. With inflation
increasingly devastating the economy, the central bank abruptly tightened monetary policy
beginning in 1979. This policy successfully slowed the growth of the money supply, but it helped
trigger sharp recessions in 1980 and 1981–1982. The inflation rate did come down, however, and by
the middle of the decade the Federal Reserve was again able to pursue a cautiously expansionary
policy. Interest rates, however, stayed relatively high, as the federal government had to borrow
heavily to finance its budget deficit. Rates slowly came down, too, as the deficit narrowed and
ultimately disappeared in the 1990s. The growing importance of monetary policy and the
diminishing role played by fiscal policy in economic stabilization efforts may reflect both political
and economic realities. Fighting inflation requires government to take unpopular actions

Monetary Policy
The tools used by the Federal Reserve to control the money supply
There are three tools that the Federal Reserve (The Fed) uses to control the money supply. The
first tool is the Spread between the Discount Rate (DR) and the Federal Funds Rate (FFR). This
spread determines if banks will be more inclined to borrow from the Fed or from other banks. The
Second tool the Fed uses to control the money supply is the Required Reserve Ratio (RRR). The
Fed mandates a percentage (ratio) of deposits that bank are required to hold in reserves and not
lend out. The Third tool the Fed uses to control the money supply is Open Market Operations
(OMO). OMO includes Treasury Bills (T–bills), bonds, securities, and other instruments sold to
...show more content...
When financial instruments, like T–bills or securities are sold this decreases the money supply
because the Fed accepts money in return for a promise to pay. The same is true in reverse. When
financial instruments are bought back by the Fed this increases the money supply because the Fed
pays out hard currency in exchange for accepting securities.
Monetary Policy
Monetary policy is the process by which governments and central banks manipulate the quantity of
money in the economy to achieve certain macroeconomic and political objectives. The targets are
usually: – economic growth, changes in the rate of inflation, higher level of employment, and
adjustment of the exchange rate. Monetary policy is categorized into two types: Contractionary and
expansionary. Contractionary (or "tight") monetary policy aims to reduce the amount of money
circulating through the economy, and reduce short–term economic growth in exchange for higher
(hoped–for) long–term growth. Expansionary ("loose") policy, on the other hand aims to increase the
money supply and increase short–term economic activity at the expense of long–term economic
activity (bestwaytoinvest, 2007). Macroeconomic factors There are many Macroeconomic indicators
that are affected by Monetary Policy. A few that will be focused on are Real Gross Domestic Product
(GDP), Inflation, Unemployment Rate, and Interest rates. In order to understand how these for

Monetary Policy
Monetary Policy at the Local and Federal Level & Impact in a Recession
Monetary policy, in the short run, has an impact toward the demand for goods and services. That is,
monetary policy has a distinct influence over inflation and other economic factors, not only at the
federal level, but at the state and citywide levels. Monetary policy will influence the financial
conditions facing firms and households in the environment, even at the micro level. Thus,
employees who produce goods and services are impacted, as is the demand for those goods and
services. When monetary policy imposes changes, the financial conditions that affect the economic
activity in specific sectors are influenced as well. The federal government, through fiscal policies
...show more content...
Of course, this is felt throughout the entire economy, at the state and local levels, and in
macroeconomics at the federal level. Individuals are dramatically impacted when stocks rise or fall.
The focus is on when stocks fall and there is a crippling impact on the individuals and their financial
worth. During a recession, the stock market has likely fallen, where one may notice the impact
throughout the local environment as individuals struggle to compensate for their losses. Therefore,
one is likely to see monetary policy in order to make adjustments and fix what is out of alignment in
the economic

Essay on Monetary Policy
Introduction
Monetary policy is among the many tools used by a national government to manipulate its financial
system. Monetary policy refers to the method used by the financial authority of any country to
control the supply and availability of money (Woelfel, 1994). It is often targeted at interest rates to
achieve lay down objectives directed towards economic growth and stability (Woelfel, 1994).
Monetary policy rests on the link between interest rates in an economy, that is, the relationship
between interest rates and the total money supply. It employs a variety of methods to control
outcomes like inflation, economic growth, currency exchange rates and unemployment.
Monetary policy can either be expansionary policy in which case...show more content...
One of these approaches is quantitative easing (QE). Quantitative easing is a technique used by
central banks to boost money supply in an economy when interest rates are close to or at zero thus
cannot be reduced further (Woelfel, 1994). To increase the supply of money under such conditions,
the central bank may be forced to buy government assets/securities like government bonds,
mortgage–backed securities or government debt from banks thus increase their surplus revenue
hence raise or stabilize prices of such securities and consequently reduce interest rates in the long
term.
With this insight in mind, the remaining part of this essay seeks to critically examine the methods of
implementing monetary policy when interest rates are close to or at zero.
Monetary Policy Options at the Zero Bound
Interest rates have the lowest bound at zero mark. When this limit is reached, serious problems
occur in designing appropriate monetary policy approaches since interest rates can never be set
below this mark. Countries like Japan, United States and Switzerland have faced this challenge in the
recent past thus calling for alternative approaches to monetary policy when the nominal interestrate
is close or at zero.
Conventional monetary policy methods are always channeled towards lowering interest rates to
stabilize inflation and other outputs. This is however impossible in situations whereby the interest
rates are already close to or zero calling for

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...show more content...
Usually this goal is "macroeconomic stability" – low unemployment, low inflation, economic
growth, and a balance of external payments. Monetary policy is usually administered by a
Government appointed "Central Bank", the Bank of Canada and the Federal Reserve Bank in the
United States." (Federal Reserve Bank of San Francisco, 2007).
Monetary policy effects the GDP inflation. "Between 1996 and 2000, real GDP in the United
States expanded briskly and the price level rose only slowly. The economy experienced neither
significant unemployment nor inflation. Some observes felt that the United States had entered a
"new ear" in which business cycle was dead. But that wishful thinking came to an end in March
2001, when the economy entered its ninth recession since 1950. Since 1970, real GDP has declined
in the United States in five periods: 1973–1975, 1980, 1981–1982, 1990–1991 and
2001." (McConnell & Brue, 2004).
Unemployment Rates
The unemployment rate is also affected by monetary policy. "Unemployment that is above the
natural rate involves great economic and social costs." (McConnell & Brue, 2004). GDP GAP and
OKun's Law. McConnell and Brue define this as "when the economy fails to create enough jobs for
all who are able and willing to work, potential production of goods and services

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