Monetary policy is a regulatory policy by which the central bank or monetary authority of a country controls the supply of money, availability of bank credit and cost of money, that is, the rate of Interest.
Monetary policy / monetary management is regarded as an important tool of economic management in India. RBI controls the supply of money and bank credit. The Central bank has the duty to see that legitimate credit requirements are met and at the same credit is not used for unproductive and speculative purposes. RBI rightly calls its credit policy as one of controlled expansion.
Contractionary Monetary Policies and Expansionary Monetary Policies involve changing the amount of the money supply in a country. Expansionary Monetary Policy is simply a policy which expands the supply of money, whereas Contractionary Monetary Policy contracts the supply of a country's currency.
EXPANSIONARY MONETARY POLICY
In the United States, when the Federal Open Market Committee wishes to amplify the money supply, it can do a amalgamation of three things:
1. Purchase securities on the open market, known as Open Market Operations
2. Lower the Federal Discount Rate
3. Lower Reserve Requirements
The interest rate is affected directly by these factors. When the Federal Bank buys securities on the open market, it causes the price of those securities to increase. The Federal Discount Rate is an interest rate, so lowering it is essentially lowering interest rates. If the Federal Bank instead decides to lower reserve requirements, this will cause Banks to have an increase in the amount of money they can invest. This causes the price of investments such as bonds to rise, so interest rates must fall. No matter what tool the Fed uses to expand the money s...
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...lly and fewer domestic goods sold abroad, the balance of trade falls. As well, higher interest rates cause the cost of financing capital projects to be more, so capital investment will be less.
Therefore, Contractionary Monetary Policy:
1. Contractionary monetary policy causes a fall in bond prices and a rise in interest rates.
2. Increased interest rates lead to inferior levels of capital investment.
3. The higher interest rates make domestic bonds more attractive, so the demand for domestic bonds rises and the demand for foreign bonds decreases.
4. The demand for domestic currency increases and the demand for foreign currency decreases, causing a rise in the exchange rate. (The value of the domestic currency is now higher relative to foreign currencies)
5. A higher exchange rate causes exports to decrease, imports to increase and the balance of trade to decrease.
Keynesianism and monetarism are both ways to stabilize the economy and promote growth when need. In keynesianism, government uses fiscal policy which is a list of policies that government spending and taxing can be used to improve the performance of an economy. The government produces stabilization by taxing and spending yearly plans. Taxing can occur when inflation is high and lowering taxes tends to occur during a high percentage of unemployment. By lowering taxes, it increases disposable income or the party of income that goes to financial responsibilities. When people have more money, they are able to spend more which in return goes into jump starting the economy. Monetary Policy is another policy used in Keynesianism which is a list of protocol designed to regulate the economy by setting the amount of money that is in circulation and controlled interest levels. The Federal Reserve system also known as the central banking system in the U.S. which holds control of this policy. Monetary policy has three tools used my the Federal Reserve to enforce this policy. Reserve Requirement is the first tool that determines the lowest amount of money a bank must possess and is not able to lend out. The second way to enforce monetary policy is by using the discount rate or the interest rank a bank will charge. The f...
..., restrictive monetary policy is used to slow the GDP growth rate and reduce the inflation rate. All in all, both monetary policies are used and to alter inflation and GDP growth rate and then to support economic activity.
Open market operations are performed under the direction of the Federal Open Market Committee (FOMC) and is the trading of securities with primary dealers. The discount rate is the interest rate that the Federal Reserve sets for lending to other banks, and the reserve requirement is the minimum amount of money a bank must have in the vault for deposit withdrawls. Of these three tools, the Federal Reserve primarily used the open market operations because it is the most flexible monetary policy tool and it allows the FED to influence the federal funds rate, which is the rate that banks borrow from each other. Open market operations are the quickest, most effective way to influence the economy. A simple breakdows is this; the FED buys securities from banks which injects money into the banks allowing them to loan more out. The injection of money lowers the interest rates, making it easier to obtain credit which increases spending and the economic activity grows. On the reverse, if the FED sells the securities back to the banks, I takes the money out of the system which raises interest rates, reducing economic activity. The direct discount rate often followed by other interest rates, therefore, if drastic changes to the direct discount rate were made, it would mean that interest rates would follow, which could negatively
It may also need to increase its reserves by selling bonds, which would also lower the money supply (Brue, 2004, p. 274). Finally, the last tool the Fed can use is to adjust the discount rate. The discount rate is the interest rate at which the Federal Reserve charges commercial banks for a loan (Brue, 2004, p. 274).
So when the dollar is depreciating, the exchange rate becomes smaller. Exchange rate (foreign exchange rate, forex rate or FX rate) is the number of units of a given currency that can be purchased for one unit of another currency. The United States capital markets are becoming more attractive to foreign investors. Since the dollar is falling, it makes foreigner’s investment in the United States more affordable. Therefore, foreigners take this opportunity to invest in the United States.
The Federal Reserve is the central bank of the United States of America. The Federal Reserve has the ability to directly influence the economy. The purpose of the Federal Reserve is to create and maintain a stable monetary and financial policy, when this goal is achieved Americans are more likely to trust the government with their money. If Americans trust the government with their money, then the people will deposit their money into banks, which the banks will then lend out boosting the economy. Since the Federal Reserve is associated with the government, many citizens believe that monetary policy will emulate the current president’s views and opinions. While what the president does will affect the economy and consequently the Federal
...gional Federal Reserve Bank. Monetary policy regarding open market operations is established by the FOMC. Policy regarding reserve requirements and the discount rate is determined by the Federal Reserve Bank. Another role in which the Federal Reserve plays a major part is in the supervision and regulation of the U.S. banking system. The examination of institutions for safety and solidity - banking supervision - is shared with the Office of the Comptroller of the Currency, which supervises national banks, and the Federal Deposit Insurance Corporation, which supervises state banks that are not members of the Federal Reserve System. The implementation of the Federal Reserve in 1913 was truly a great assett to financial and American well being. Without the Federal Reserve, we would have no agency to control monetary policy and push the economy towards full employement.
In short term or short run, monetary policy affects the economy by influencing interest rates. In long term or long run, changes in the money supply affect the price level, though with an uncertain lag. Short run and long run causes one of the major arguments with the Federal Reserve. There are strong arguments on both sides that say we should be doing short run over long run and long run over short run. There is no correct answer to this problem though. If we go for short run it hurts the economy in long term and if we it for long run are economy is bad until we get to the long term effects. The long term effects also lead to uncertainty and this is another major issue with long term. One of the Federal Reserve’s major monetary tools is Open-Market Operations. This tool is when the Fed constantly buys and sells U.S. government securities. These securities in turn influence the level of reserves in the banking system. The decisions affect the amount of credit and the price of credit. The word open market means that The Federal Reserve does not control which securities dealers it will do business with on a particular
In the study of macroeconomics there are several sub factors that affect the economy either favorably or adversely. One dynamic of macroeconomics is monetary policy. Monetary policy consists of deliberate changes in the money supply to influence interest rates and thus the level of spending in the economy. “The goal of a monetary policy is to achieve and maintain price level stability, full employment and economic growth.” (McConnell & Brue, 2004).
Monetary policy is the mechanism of a country’s monetary authority (usually the central bank) taking up measures to regulate the supply of money and the rates of interest. It involves controlling money in the economy to promote economic growth and stability by creating relatively stable prices and low unemployment. A monetary policy mainly deals with the supply of money, availability of money, cost of money and the rate of interest to attain a set of objectives aiming towards growth and stability of the economy. Here are some of the monetary policy tools:
The term Monetary policy refers to the method through which a country’s monetary authority, such as the Federal Reserve or the Bank of England control money supply for the aim of promoting economic stability and growth and is primarily achieved by the targeting of various interest rates. Monetary policy may be either contractionary or expansionary whereby a contractionary policy reduces the money supply, reduces the rate at which money is supplied or sets about an increase in interest rates. Expansionary policies on the other hand increase the supply of money or lower the interest rates. Interest rates may also be referred to as tight if their aim is to reduce inflation; neutral, if their aim is neither inflation reduction nor growth stimulation; or, accommodative, if aimed at stimulating growth. Monetary policies have a great impact on the economic stability of a country and if not well formulated, may lead to economic calamities (Reinhart & Rogoff, 2013). The current monetary policy of the United States Federal Reserve while being accommodative and expansionary so as to stimulate growth after the 2008 recession, will lead to an economic pitfall if maintained in its current state. This paper will examine this current policy, its strengths and weaknesses as well as recommendations that will ensure economic stability.
According to federalreserveeducation.org, the term "monetary policy" refers to what the Federal Reserve, the nation 's central bank, does to influence the amount of money and credit in the U.S. economy, (n d). The tools used are diverse but the main ones are:
Monetary Policy involves using interest rates or changes to money supply to influence the levels of consumer spending and Aggregate Demand.
To put it simply, the exchange rate is a price. As with any other market, price is determined by supply and demand. Whenever they are not equivalent, the exchange rate would change. However, the reality comes to be far more complicated.
The foreign exchange markets allow the conversion of currencies, where it helps the firms to conduct trade more efficiently across the national boundaries. In addition, firms can shop for low cost financing in capital markets all over the world and then use the foreign exchange market to convert the foreign currency that they got into whatever currency they require. With the foreign exchange nowadays, anyone can go to other country by converting their domestic currency into the foreign currency. The foreign exchange will follow the rate of exchange according to the country's rate. But still, the foreign exchange market is actually dealing with fluctuation where sometimes it has upward and downward movement.