University of Phoenix, Harrisburg
Monetary policies dictate how the government disperses money in the economy. In this paper I will discuss how money has a purpose and function in an economy. Next, I will discuss how a central bank manages a nation’s monetary system. I will outline the United States most recent monetary policy and its intended direction and give an example of one policy action that the Federal Reserve has taken to confirm that direction. Finally, I will discuss how monetary policy can affect production and employment in the economy.
Money functions in an economy three different ways. First, money can function as a medium of exchange ...view middle of the document...
In contrast, policymakers can decrease the money supply by increasing the amount of government bonds for sale decreasing the amount of money in circulation (Mankiw, 2007). Second, the government can set the reserve requirement for the banks in the economy. Increasing the reserve requirements, which is the minimum amount of money a bank must hold against deposits, decreases the amount of money a banks can loan to people and the amount of money supplied into the economy. On the other hand, government can decrease the reserve requirement increasing the amount of money banks can loan to people and the money supply into an economy. Third, the central bank can increase or decrease the interest rates on loans to banks this is called a discount rate. Policymakers can raise or lower the discount rate to deter banks from taking out loans from the central bank decreasing the amount of money banks will loan to people and the money supply in the economy. In contrast, the central bank could lower the discount rate on the loans enticing banks to take out loans increasing the money supply because banks are more willing to loan money to people. In all, the central bank or policymakers can use any combination of these three policies to increase or decrease the money supply in a nation’s economy.
Monetary policy in the United States has gone in the direction of strengthening financial markets and institutions by incorporating policy and transparency to the consumer to stimulate economic growth. “The Federal Reserve Act sets forth the goals of monetary policy, specifically "to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates." Financial stability is an important prerequisite for achieving those goals”(Federalreserve.gov, 2010). Simplifying monetary policies for the public ensuring a better understanding helps hold the Federal Reserve accountable to congress and the public when employing monetary policies less known to the public (Federalreserve.gov, 2010).
The FED has worked hard on helping the banking system in the United States from crashing by adopting new monetary policy. One policy put into place to help this situation is the Membership of State Banking Institutions in the Federal Reserve System. This policy “defines the requirements for membership of state-chartered banks in the...