There is no easy way to balance the monetary policy in today’s world. To achieve a balance between economic growth, low inflation and a reasonable rate of unemployment can be daunting to even the most seasoned professional. This paper will look at the Monetary policy today, how money is created and how to balance, economic growth, inflation and unemployment.
Monetary Policy and its effects on the Economy
To fully understand how the monetary policy affects the economy in the United States one needs to understand how money is created, and what the impact of the monetary policy can have on macroeconomic factors such as the Gross Domestic Product, unemployment, inflation and interest rates. The term Macroeconomics refers to the economy as a whole such as business sectors or the government. People need only air, water and food to live. “But in contemporary society we also seek the many goods and services that provide for a comfortable or affluent standard of living.” McConnell Brue, Economics: Principles and Policies Ch 1. Money is created in the most simplest of terms, ‘borrowing’ and spending. Key items such as the Discount Rate, DR and the Federal Funds Rate are key to the creation of money in todays economy. Banks are inclined to borrow from the Fed if the DR charged by the Fed is lower than the FFR charged by other banks. As the DR lowers and the spread between the DR and FFR is increased, banks will borrow for the Federal Bank. As this happens money in the system is increased. (University of Phoenix website simulation, Monetary Policy.) With more borrowing, there is more credit for the banks to collect, thus creating money. As loans are repaid, the money is destroyed. The Federal Reserve plays a major role in how money is ‘created’. McConnell states, “All commercial banks and thrift institutions that provide checkable deposits must by law keep required reserves, an amount of funds equal to a specified to the banks own deposit liabilities.” The...