This Essays Talks About How The Monetary Policy Is Used By Federal Reserve In America.

1022 words - 4 pages

The monetary policy is an important policy because it controls the country economy. In America the monetary policy is control by the Federal Reserve. Using the tools of the monetary policy, the Federal Reserve can affect the volume of money and credit and their price interest rates in America. So therefore the Federal Reserve influences employment, output and the general level of prices.It is important that the Federal Reserve use the monetary policy in the United States of America because if they do not use this policy, America will not have a stable economy. When your country does not have a stable economy, you tend to find high levels of unemployment, low spending and little business activities and investment. For example, If America does not have a stable economy, foreigners would tend to think twice before investing in your country because America will not have stable prices. So therefore it is a must for the Federal Reserve to use the monetary policyThe Federal Reserve open market committee makes monetary policy. They basically carry out the monetary policy in America. The monetary policy has two basic goals: to promote "maximum" output and employment and to promote "stable" prices.In the long run, the level of output and employment in the economy depends on factors other than monetary policy. These include technology and people's preferences for saving, risk, and work effort. So, "maximum" employment and output means the levels consistent with these factors in the long run.One minor problem about the monetary policy is that it cannot affect either output or employment in the long run; but it can affect them in the short run. For example, when demand contracts and there's a recession, the Fed can stimulate the economy--temporarily--and help push it back toward its long-run level of output by lowering interest rates. Therefore, in the short run, the Fed and many other central banks are concerned with stabilizing the economy--that is, smoothing out the peaks and valleys in output and employment around their long-run growth paths. So therefore u can see that the feds could stimulate the economy out of recession but it is not wise to this all the time. For example attempts to expand the economy beyond its long-run growth path will press capacity constraints and lead to higher and higher inflation, without producing lower unemployment or higher output in the long run. In other words, not only are there no long-term gains from persistently pursuing expansionary policies, but there's also a price--higher inflation. So therefore the Federal Reserve has to think critically and deeply before making any changes in the economy because high inflation hinders economic growth.Stable levels of prices appears to be the condition most conducive to maximum sustained output and employment and to moderate long-term interest rate. Price "stability" is basically low inflation--that is, inflation that's so low that people don't worry about it when they make...

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