Monetary Policy And Monetary Policies Essay

1094 Words Oct 15th, 2016 5 Pages
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 policy accelerates economic growth while a contractionary policy restricts it. They are frequently utilized in accordance with the economic state; each with their pros and cons.
Expansionary Policy
An expansionary monetary policy is achieved when the central bank, or Federal Reserve (FED), increases the money supply in the economy as a means to close a recessionary gap. 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…

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