Monetary Policy

Monetary Policy

Summary

The recent tax cuts and interest rate cuts have helped put the economy back on track. He says that the strong growth of the U.S. economy in recent months is neither an illusion nor an accident, but it reflects good monetary and fiscal policy over the past year. He says that there has been a key surge in consumer spending, and that the main reason for that surge was the enactment of the tax cut in early 2001. He also stated that the repeated reductions by the Fed in short-term interest rates supported the expansionary effect of the tax cut. Even though the interest rate reductions were not enough to prevent the recession that began in March of last year, the lower interest rates did stimulate consumer spending through a variety of channels.

Analysis

This article is also a good example of how the aggregate demand curve can be shifted by the determinant of monetary policy. Please refer again back to article #4, which explains the principle of the aggregate demand curve. By definition, Monetary Policy is a policy influencing the economy through changes in the banking system’s reserves that influence the money supply and credit availability in the economy. The purpose of monetary policy is to improve the economy by either increasing or decreasing the real income (or GDP) of the U.S. economy so that the economy is running at its potential. The Federal Reserve (The Fed) is responsible for conducting monetary policy for the United States Economy. There are three ways that the Fed conducts monetary policy: 1) Changing the reserve requirement. 2) Executing open market operations (buying and selling bonds). 3) Changing the discount rate.

This article talks about the Fed decreasing the discount rate to stimulate the economy. The discount rate is the rate of interest the Fed charges for loans it makes to banks. An increase in the discount or interest rates makes it more expensive for banks to borrow from the Fed. A discount rate decrease makes it less expensive for banks to borrow. This article is talking about how the Fed decreased the discount rate making it easier for banks to borrow, increasing the money supply. The decrease in the discount rate increases the money supply because it lowers the bank=s costs and allows it to borrow more money from the Fed.