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Expantionary Monetary Policy Essay

560 words - 3 pages

Expantionary monetary Policy The Federal Reserve adopts the monetary policies to boost the economy, and aid the country’s currency to rotate from the investors to the financial institutions and to borrowers. In the Expansionary Monetary Policy, this is achieved by the purchase securities on the open market, known as Open Market Operations, by lowering the federal discount rate, and lowering the Reserve requirements. This has a great effect, not only in the economy, but also on the banks and businesses operations.
In my opinion this is a great tool that makes our banking system more competitive in the international market. For instance the use of any of the tools mentioned before affects directly the interest rates charged to borrowers and the price of bonds. Moreover if the Reserve requirements are lowered, banks will have extra ...view middle of the document...

Furthermore, investors will start trusting the banking system again and will borrow more money. But unfortunately, when banks lend money at low interest rates they pay even lower rates to the people who want save. Consequently people will have an incentive to reinvest instead of saving their extra cash. On the other hand, the lower rates will aid any individual investor who is trying to obtain personal property or grow their small business can do so cheaper than before by borrowing money with lower interest rate payments. In other words, the expansionary monetary policy is a form of incentive that will encourage people to borrow more and spend more.
When consumers spent more money, small businesses enjoy more profits. The extra income could be utilized to update their equipment to improve their production and operations. They can also hire more employees and improve their training programs to attract more costumers and sell more. As a result unemployment rates decline and those people who now have a job also have money to put back into the market in the form of investments or purchases. In addition, more revenues for businesses are achieved and more jobs can be created. Nevertheless, when the US currency prices are lower, exports increase because it is cheaper for foreign nations to buy US products and in contrast imports decrease. When imports decrease there is less international expenditure and more money can stay in the national market allowing small firms to reinvestment.
I believe that the expansionary monetary policy can be deceiving for some. Inflation is a side effect that is usually taken negatively, but the above-mentioned points bring positive effects on the long run for the economy.

Resources
http://www.frbsf.org/publications/federalreserve/monetary/index.html
http://smallbusiness.chron.com/goals-expansionary-monetary-policy-3869.html
http://www.fas.org/sgp/crs/misc/RL30354.pdf

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