Eco 360 / Monetary Policy Essay

2058 words - 8 pages

Monetary policy is one of the tools that a national Government uses to influence its economy. Using its monetary authority to control the supply and availability of money, a government attempts to influence the overall level of economic activity in line with its political objectives. Usually this goal is "macroeconomic stability" - low unemployment, low inflation, economic growth, and a balance of external payments. Monetary policy is usually administered by a Government appointed "Central Bank", the Bank of Canada and the Federal Reserve Bank in the United States. According to the Encarta the definition of monetary policy is the following economic principles and programs adopted by a government that manage the growth of its money supply, the availability of credit, and interest rates. In the United States, the Federal Reserve Board determines monetary policy.The U.S. monetary policy affects many financial decisions for people and, since it is the biggest economy in the world, it also impacts other economies in other countries. The object of the system is to influence factors like inflation, economic output, and employment by affecting demand (the public's willingness to spend on goods and services). The system is conducted by the Federal Reserve System and it influences demand mainly by raising and lowering short-term interest rates. How is the Federal Reserve Structured? The Federal Reserve (the nation's central bank), called the fed for short, was established by congress in 1913 and consists of the Board of Governors in Washington, D.C., and twelve Federal Reserve District Banks. Although the fed is accountable to congress and structured by law, it is totally separate from the departments that manage the country's spending decisions. The governors are appointed by the president for terms of 14 years. The appointments are staggered so no one single president could load the board with his own people. Each reserve president is appointed every five years by the Board of Directors. Along with these measures, the fed is independent because it meets its operating expenses primarily from interest earnings on its portfolio of securities. Although the system works independently from congress, it still conforms to laws and comes under review and audit from the government. Fed officials report regularly to congress and meet with administration officials to discuss their programs. Also, eight times a year the Board of Governors, the President of The Bank of New York, and four other bank presidents meet in Washington to discuss the appropriate discount rate and other subjects.What are the goals of the monetary policy? One goal of the fed is to affect the economic production and employment, both of which depend on many other factors. But they can be influenced by monetary policy; when demand weakens, the fed lowers interest rates, which in turn stimulates the economy. But continuous stimulus will push the economy's inflation higher and higher, so the fed...

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