Monetary Policy Essay

3707 Words Jul 27th, 2012 15 Pages
Cover Page 2
Table of Contents 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
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In this essay, I will focus on expansionary and contractionary monetary policy in my definition of monetary policy. This essay will discuss the recent direction of monetary policy in the United States with an overview of the monetary policy, the recent years of monetary policy and its direction in the short-run and long-run. Finally, it will discuss the impact of the policy and market reaction before ending with a conclusion.

2.1 Expansionary Monetary Policy
An expansionary monetary policy is when Central Bank increases the money supply to stimulate the economy. An example of such policy implementation in Japan whereby the nation is facing deflation (i.e. overall decrease in price level of goods and service) thus, inviting recession and increasing the country’s unemployment rate.
The Bank of Japan (BOJ) adopted, the approach of pursuing monetary easing by, changing the overnight rate to around 0 per cent to 0.1 per cent and injecting 55 trillion yen to purchase Japanese government bonds (BOJ, 2011, pp.1). Reduce the overnight rate will increase the money supply in banking system as it encourage banks to borrow money from Central Bank. Thus, other than a reduction in interest rates on loan and deposit accounts in bank, there will also be a lack of incentives for households to save, which therefore, encourages them to

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