In the United States, Monetary Policy involves the actions of a central bank that determine the size and rate of growth of the money supply for the country. This central bank is referred to as the Federal Reserve, or FED, and was founded by the Congress in 1913 as an independent financial institution. It was established on the premise of providing our nation with a more safe, flexible, and stable monetary system. When a policy is enacted it is for the purpose of influencing investment, consumption, and total aggregate expenditures, which in turn helps with the stabilization of unemployment rates and consumer prices.
Analysis of Monetary Policy
Generally, there are two forms of monetary policy, expansionary and contractionary. An expansionary …show more content…
By increasing the amount of money in an economy interest rates decrease and corporate investment and expansion are seen. This then lowers unemployment rates. Additionally, it can lead to an overall increase in wages and subsequent consumer spending thereby allowing for increased aggregate demand and economic growth. The downside of expansionary policy is that with this increase in aggregate demand there is a resulting increase in prices which can ultimately lead to the devaluation of money. If left unchecked, the devaluation of money creates an inflationary …show more content…
These include open market operations, changes in the reserve ratio, changes in interest rates paid on reserves, and changes in the discount rate. (Miller, 2015) Open market operations is a tool that involves the buying and selling of securities in the open marketplace. The reserve ratio tool, which is rarely used, is the minimum that each commercial bank must keep as cash in their vaults or as deposits with the Fed. The interest rate paid on these reserves is the rate paid by the FED to commercial banks in lieu of taxation. Lastly, the discount rate tool is the minimum interest rate set by the FED for short-term lending to commercial banks. All of these tools have an effect on the amount of funding in the banking system but the most commonly used is open market operations, which is used on a day-to-day basis. (Miller,
Analysis of Monetary Policy
Generally, there are two forms of monetary policy, expansionary and contractionary. An expansionary …show more content…
By increasing the amount of money in an economy interest rates decrease and corporate investment and expansion are seen. This then lowers unemployment rates. Additionally, it can lead to an overall increase in wages and subsequent consumer spending thereby allowing for increased aggregate demand and economic growth. The downside of expansionary policy is that with this increase in aggregate demand there is a resulting increase in prices which can ultimately lead to the devaluation of money. If left unchecked, the devaluation of money creates an inflationary …show more content…
These include open market operations, changes in the reserve ratio, changes in interest rates paid on reserves, and changes in the discount rate. (Miller, 2015) Open market operations is a tool that involves the buying and selling of securities in the open marketplace. The reserve ratio tool, which is rarely used, is the minimum that each commercial bank must keep as cash in their vaults or as deposits with the Fed. The interest rate paid on these reserves is the rate paid by the FED to commercial banks in lieu of taxation. Lastly, the discount rate tool is the minimum interest rate set by the FED for short-term lending to commercial banks. All of these tools have an effect on the amount of funding in the banking system but the most commonly used is open market operations, which is used on a day-to-day basis. (Miller,