The monetary policy has two basic goals: to promote “maximum” sustainable output and employment and to promote “stable” prices (Federal Reserve Bank of San Franciso). Making these two goals possible is based off of more than just monetary. Technology is now included because technology can replace employment. If people decide to save, it can affect both employment and the goods that can be reduced. There are many other things that can affect the maximizing of sustainable output.
The cause-effect chain through is that policy can have an effect on banks and money supply. The monetary policy also has an effect the way consumers spending and the interest rates that are given by banks. It can also affect the way people invest.
The major strengths of monetary policy is that it stable prices. When inflation rises faster than expected, the Fed may sell government bonds to take money out of circulation or raise short-term interest rates (Federal Reserve Bank of San Franciso). Banks would be highly affected by this because banks would be lending money at longer rates. This can affect the credit available to consumers and consumers would spend less. So monetary spending prevents this by stabling prices. Another strength of monetary policy helps with the economy in keeping it stable and the conditions livable. The monetary policy also promotes growth in the economy. The monetary policy was created to regulate the way money is handled. The policy was also created to make sure inflation doesn’t rise above the minimum level.
Hall S. (2015). Strengths & Weaknesses of Monetary Policy. eHow. Retrieved
From:http://www.ehow.com/list_6750081_strengths-weaknesses-monetary-policy.html
Federal Reserve Bank of San Francisco. (2004, February 6). U.S. Monetary Policy: An
Introduction. Retrieved From:http://www.frbsf.org/us-monetary-policy-introduction/goals/
#2 student Delwyn 100 words response:
Monetary policy is how the Central Bank changes the size and rate of growth of the money supply. According to this week’s lesson the objective 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 supply of the nation’s money is supervised by the Board of Governors of the Federal Reserve through open-market operations; purchasing bonds, adjusting the reserve requirements and changing the discount rate. The two types of monetary policy are Expansionary monetary policy which increases the money supply in order to lower unemployment, boost private-sector borrowing and consumer spending, and stimulate economic growth and Contractionary monetary policy which slows the rate of growth in the money supply or decreases the money supply in order to control inflation.
The cause-effect chain for monetary policy will impact the banks and ultimately the consumers, with the implementation of the expansionary monetary policy to combat unemployment during a recession by increasing the supply of money which will lower the legal reserve ration, lower the discount rate, investment will increase and lower interest rates however this will cause a decline in the Federal fund rate and excess supply of money can cause inflation. When Contractionary monetary policy is implemented it slows the rate of growth in the money supply to regulate inflation however with the decrease in money supply it can cause the economic growth to slow down, increase unemployment and depress borrowing and spending by consumers and businesses. In other words the cause-effect of Contractionary is the opposite of Expansionary.
The major strengths of monetary policy are swiftness and flexibility combating a recession and inflation, the Board of Governors isn’t influenced by political pressure.
Reference:
ECON102, Lesson 6: The Money Supply and Monetary Policy
Investopedia, Monetary Policy.
