Monetary Policy and Its Effect on Macroeconomic Factors Essay Example

shareholders and affiliated banks. In essence, it establishes both an asset and a liability of equivalent magnitudes with a private bank.

The money "deposited" in the bank's Federal Reserve account has a net sum of zero, acting as a reserve for the private bank. This enables them to lend out additional funds to the public. Usually, the reserve rate is 10%. Hence, if the US Fed provides a $10,000 "deposit", it allows the private bank to loan out $90,000 (Hewitt, Sun, Nov 12, 2006).

Commercial banks generate money through loans and must maintain reserves in a Federal Reserve Bank. Factors such as unemployment, interest rates, inflation, and gross domestic product (GDP) influence monetary policy in the United States.
Additionally, lending institutions or banks create money by lending and lower interest rates result in increased money creation.

Both the Federal Reserve and private banks participate in lending. It might be surprising to learn that our currency is not created by the government but by private banks. The reasons for this occurrence are connected to the GDP, where the demand for goods and services results in lower unemployment rates and higher income levels.

Both the employee and the company's income rise, leading companies to borrow from banks to enhance their business and meet the growing demand. This expansion of companies results in a reduction in unemployment, injecting money into the system and creating more job opportunities. As long as individuals are employed, they will spend more on dining out and borrowing money for housing and vehicles, ultimately boosting the economy. The Federal Reserve indirectly impacts employment, inflation, and output by adjusting short-term

interest rates.

The Federal Reserve manages the federal funds market through open market operations for bank reserves. Banks must maintain a certain level of reserves to handle unexpected outflows, as well as replenish ATM machines and process overnight checks. By controlling the money supply via these reserves, the Fed can regulate inflation, growth, and unemployment. One tool it employs to adjust the available money in the economy is interest rates. Consequently, monetary policy plays a crucial role in the overall health of the US economy by directly impacting interest rates, employment, and inflation. The media closely monitors statements and speeches made by Federal Reserve officials because their decisions can influence interest rates and guide the economy toward non-inflationary growth.

Wall Street closely monitors any indications that worsening inflation may lead the Federal Reserve to tighten or ease monetary policy. This recognition of the importance of monetary policy is relatively recent and primarily arises from past failures rather than successes. To combat inflation, the Fed must slow down money growth by raising interest rates. This involves initially increasing rates to reduce inflation and eventually achieving lower rates. The Fed clarified that it had no specific target for interest rates as they could only decrease with successful control of inflation over time. Following the implementation of this new approach, interest rates reached unprecedented highs but eventually declined to lower levels.

The objectives of monetary policy include sustaining complete employment, preventing inflation or deflation, and fostering economic expansion. However, these objectives may clash with one another. A monetary policy that boosts full employment could quicken inflation, whereas a policy aimed at reducing inflation might raise unemployment rates and undermine economic growth.

It is anticipated that legislation would furnish instructions to monetary authorities regarding the prioritization of goals.

According to information from April 8, 2008, it is evident that there is no existing guidance. When considering the objectives of monetary policy, one may contemplate macroeconomic measures such as maintaining low unemployment rates, fostering economic growth, and ensuring stable pricing. Consequently, it is logical to conclude that the goals of monetary policy should encompass preserving full employment, promoting economic growth, and preventing inflation. This is because controlling inflation would result in a decrease in the federal funds rate which ultimately stimulates the economy.

Reference

1. http://www.webbooks.com/eLibrary/NC/B0/B62/054MB62.htmlhttp://www.kamron.com/economics/money%20facts.htmlhttp://www.safehaven.com/article/6284/how-is-money-created