What are the basic objectives of monetary policy?  Comment on the cause-effect chain through which monetary policy is made effective. What are the major strengths of monetary policy?

Please respond to both students in separate paragraphs  with a minimum of 100 words each

Original Post

What are the basic objectives of monetary policy?  Comment on the cause-effect chain through which monetary policy is made effective. What are the major strengths of monetary policy?

Student Response

Latosha

Hello class,

What are the basic objectives of monetary policy?  Comment on the cause-effect chain through which monetary policy is made effective. What are the major strengths of monetary policy?

Monetary policy is how the Central Bank changes the size and rate of growth of the money supply. The object of monetary policy is to help promote goals of economic growth, full employment, and price stability by influencing interest rates, the supply of money and credit. The empirical evidence suggests that monetary policy is a cause of the economy’s deviations from its potential GDP, and as such, plays a crucial role in causing business cycles in the U.S.

Expansionary or easy money policy: The Fed takes steps to increase excess reserves, banks can make more loans increasing the money supply, which lowers the interest rate and increases investment which, in turn, increases GDP by a multiple amount of the change in investment

The major strengths of monetary policy are its speed and flexibility compared to fiscal policy, the Board of Governors is somewhat removed from political pressure, and its successfulrecord in preventing inflation and keeping prices stable. The Fed is given some credit for prosperity in the 1990s and early 2000s

Kale

Hello Everyone,

To best answer this question, I think it is important to first go over what the concept of money is. Money is described by the lesson as anything accepted as payment for a good or service. Over time, what we consider to be money has changed. There was time where money was different animals or tobacco, and today money is often bills and coins, or now cryptocurrency.

Money has three functions: exchange, unit of account, and a store of value. When money is used as a medium of exchange that means that it is used in exchange for a different product- typically a good or service, this often eliminates the concept of bartering. Money as a unit of account allows us to better understand the value of a good or service. It also can determine the worth of one currency in relation to another. For example, in the United States they use the U.S. dollar. In Mexico they would use the peso,and in many parts of Europe, they use euros. The value of the U.S. dollar would be different in each of those countries. At this point in time, the U.S. dollar is worth more than the Canadian dollar. When using money as a unit of account it allows us to determine value. Money as a store of value determines how the value of money changes over a period of time. If someone were to save a sum of money, that money could be worth more or less in the future. The change in value is due to inflation, and storing money does not ensure value.

The Monetary Policy is the Central Bank’s method of controlling how much money is readily available in the economy. The most important supply of money that the Central Bank’s manage is credit. There are a few objectives of the Monetary Policy: “to help promote goals of economic growth, full employment, and price stability by influencing interest rates, the supply of money and credit” (ECON102, 2016). Their main goal is to maintain stability in the economy, and avoid inflation.

The Federal Reserve plays an important role in Monetary Policy as it manages the nation’s money supply and has the ability to adjust interest rates and reserve requirements. By changing interest rates and discount rates, the banks are able to lend more money as well as borrow more money. This allows the economy to continue to have a steady flow of money supply.

The cause-and-effect chain that allows the Monetary Policy to be effective during a recession is changes in money supply that allow the Fed to buy from banks or the public to lower the discount rate. This creates an increase in reserves which increases the nation’s money supply. A lower interest rate comes with an increased money supply, and that in turn creates more aggregate demand and a higher real GDP.

The chain-and-effect that causes the Monetary Policy to be effective during a time of inflation is: “the goal is to slow down the increase in prices” (ECON102, 2016), the Fed will sell government securities to banks or the public, causing an increase in the discount rate. This causes banks to have to reduce how much they are lending which decreases the nation’s money supply, and increases interest rates. When the interest rate is higher, investment is lower. This causes a decrease in aggregate demand and helps to slow or stop inflation.

Some major strengths of the Monetary Policy are that it helps to stabilize the economy, and aims to reduce unemployment. The fact that they are able to have a bit of control during times of inflation and recession is also a bonus.

Thank you for reading this weeks post, I look forward to reading your comments!

Kale

 

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