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Monetary Policies Roles and Definition


Monetary policy is a strategy that is implemented by a government to monitor and control the interest rates, and the money in circulation. Monetary policies have an impact on the economy of the United States by increasing and decreasing the aggregate demand and supply of money. This in turn influences the demand curve of products and services. The rate of interest also has an impact on inflation, employment, and demand.

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People purchase products when they get money as their purchasing power. Equity investments need a lot of plans to be carried out. This will therefore require time to reduce the rate of interest. In turn, this will cause the rise of the way the investments are utilized. The influence in the economy by a monetary policy cannot be realized immediately. It always takes some duration which can be approximately one year. Where money is easily available, investments are priced accordingly.

Credit is also an important factor to look into where investments are priced. The central bank uses monetary policies in influencing the economy of the U.S. Traditional monetary policies involved the use of gold. But modern ones concern the use of paper money. During the 1960s US was denied to make payments in golden terms. Therefore Federal Reserve is responsible for controlling money (Frank and Bernanke 103).

It was also its work to monitor the credit of the United States economy. This helps to keep the power to buy the dollar and exchange it for different currencies. This is a situation where large sums of money are being transmitted under very fast digital signals. Currently, it has been seen with the increase in employment in the United States will not improve the earnings of employers. This is because people work from abroad and this poses quite high competition. Those workers from other countries can easily take low payments hence inflation might decrease. The market of the U.S is greatly affected by the foreign environment.

Open market operations are all about either raising or lowering the aggregate supply of money through the necessary measures. Fed normally increases the supply of money through lending. The measures used could be purchasing or the sale of government securities. This is done to raise or lower the money in the bank. Reserve requirements policy is whereby the central bank instructs other banks to retain some money.

This is done so that the cash outflows are met. This capacity could always be altered by the central bank. The altering affects the aggregate demand and supply. However, this capacity of money may not be used. The reserve requirement has an inverse relationship with the money supply. This brings about a long-term shift.

Discount Rate is yet another monetary policy in which commercial banks are charged some rate by the Fed. That is when they borrow money from the central bank or other depository organizations. This is normally high to discourage them from borrowing reserves. When the discount rate is high the money supply goes down. While when the rate is lowered the money supply goes up. This is how the money supply is being monitored (Walsh 207).

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The president of the U.S is therefore advised to use discount rate monetary policy since it is done by just either increasing or decreasing the discount rate. This can be done so that the banks seek first other ways of getting finances other than borrowing from the Fed. Unlike fiscal policy, monetary policy is fast in affecting the economy. Fiscal policy uses expenses and revenues while monetary uses supply of funds. Fiscal policy targets specific groups while monetary one cuts across every sector in the government economy. Therefore monetary policy should be adopted in the U.S because of its speed and good timing in taking effect in the country’s economy. It does not take a length of time, once implemented, as a fiscal policy for the impact to be felt in the U.S economy.

Works cited

Frank, Robert, and Ben Bernanke. Principles of Macroeconomics. 4th ed. New York: McGraw-Hill Irwin, 2008, pp. 92-116.

Walsh, Carl. Monetary theory and policy. 2nd ed. Massachusetts: MIT Press, 2003, pp. 199-216.

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