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Effects of monetary and fiscal policy
Effects of monetary and fiscal policy
Effects of monetary and fiscal policy
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In the following text, readers will form an understanding of what monetary policy is and the effect monetary policy has on macroeconomic facts such as gross discount products (GDP), unemployment, inflation, and interest rates. The text will also explain how money is created and give a combination of monetary policy that will best achieve a balance between economic growth, low inflation, and a reasonable rate of unemployment.
Monetary policy is the process governments and central banks use to manipulate the quantity of money in the economy to achieve certain macroeconomic and political objectives. The objectives are economic growth, changes in the rate of inflation, higher level of employment, and adjustment of the exchange rate. Monetary policy is categorized into two types; concrationary and expansionary. Concrationary (tight) monetary policy aims to reduce the amount of money circulating through the economy, and reduce short-term economic growth in exchange for higher (hoped-for) long-term growth. Expansionary (lose) policy, on the other hand, aims to increase the money supply and increase short-term economic activity at the expense of long-term economic activity. (Nematnejad, Aaron, 2008)
The primary measure of the economy’s performance is the annual total output of goods and services, or as the process is called, the aggregate output. Aggregate output is labeled gross domestic product (GDP): the total market value of all final goods and services produced in a given year. (McConnell and Bure, 2004). The monetary value of all the finished goods and services produced within a country's borders in a specific time frame, though GDP is usually calculated on an annual basis. It includes all private and public consumption, government outlays, investments and exports less imports that occur within a defined territory.
GDP = C + G + I + NX
where:
"C" is equal to all private consumption, or consumer spending, in a nation's economy.
"G" is the sum of government spending.
The gross discount product is commonly used as an indicator of the economic health of a country, to gauge a country's standard of living. Critics of using the gross discount product as an economic measure say the statistic does not take into account the underground economy - transactions that for whatever reason, are not reported to the government. Others say that the gross discount product is not intended to gauge material well-being, but serves as a measure of a nation's productivity, which is unrelated.
Monetary Policy is another policy used in Keynesianism which is a list of protocols 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 by 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 rate a bank will charge.
..., 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.
In conclusion, the current macroeconomic situation in the United States is characterized by moderate growth because of better economic conditions that were brought by the events of 2013. The country has experienced moderate economic growth since the 2008 global recession but has shown real signs of momentum. While the country is not concerned about recession or inflation, the rate of unemployment is still a major challenge despite improved consumer and business confidence. As a result, the Federal Open Market Committee or Federal Reserve System needs to adopt fiscal and monetary policy initiatives that help address the unemployment issue and promote high economic growth.
Over the past few years we have realized the impact that the Federal Government has on our economy, yet we never knew enough about the subject to understand why. While taking this Economics course it has brought so many things to our attention, especially since we see inflation, gas prices, unemployment and interest rates on the rise. It has given us a better understanding of the effect of the Government on the economy, the stock market, the interest rates, etc. Since the Federal Government has such a control over our Economy, we decided to tackle the subject of the Federal Reserve System and try to get a better understanding of the history, the structure, and the monetary policy of the power that it holds.
Gross domestic product (GDP) is one of the best ways to measure how a country’s economy is doing. A main component in figuring the GDP is personal consumption expenditures. Personal consumption expenditures accounts for about two-thirds of domestic
Conducting the nation's monetary policy by influencing money and credit conditions in the economy in pursuit of full employment and stable prices.
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).
Gross Domestic Product (GDP) is the market value of all final goods and services produced by factors of production within a country in a given period of time. It can be calculated using either the income, output, or expenditure method as illustrated on the circular flow of income diagram below.
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:
Money supply is the availability of money in the hands of the public (economy) that can be used to purchase goods, services and securities. In macroeconomics, the price of money is equivalent to the rate of interest. There's an inverse relationship between money supply and interest rates. As money supply increases, interest will decrease. On the other hand, interest will increases as money supply decreases. It is very important to understand that the economy works at market equilibrium. There are several factors affecting money supply; and these contributing factors will be the main focus of this paper. Understanding the basic principle on money supply is imperative to have a good grasp on the macroeconomic impact of money supply on business operations.
Impact of monetary policy on the economy a regional Fed perspective on inflation, unemployment, and QE3 : Hearing before the Subcommittee on Domestic Monetary Policy and Technology of the Committee on Financial Services, U.S. House of Representatives, One. (2011). Washington: U.S. G.P.O.
GDP measures the total value of all goods and services produced within that territory during a specified period. GDP is used to measure a country’s wealth. Basic’s of life, food, etc. shelter and clothing is not likely available to most people in poorer countries. The.
(b) Provide an example of how a Central Bank could use monetary policy to achieve
The macroeconomic environment is a dynamic environment, which could not remain unchanged (Gajewsky 2015). There are many factors influence the global macroeconomic environment, such as interest rate, exchange rate, GDP,aggregate demand, monetary policy and other macroeconomic variable (Oxelheim and Wihlborg 2008). These factors are closely associated with commodity price.
The Gross Domestic Product (GDP) is the total market value of in a country’s output. The GDP is the total market value of all final goods and services produced by factors in within given period of time that located in the country doesn’t matter they are citizens or foreign-owned companies. Hence, the GDP is the best way to measure the country economy.