Essay - Monetary Policy & Interest Rates Financial Activities in a Country...

Monetary Policy & Interest Rates

Financial activities in a country are governed by macroeconomic policies of a government implemented with the help of a centr*****l bank ***** most of the countries. Commercial banking system also makes an integral component of ***** financial ***** ***** a country along ***** savings banks, insurance companies, investment banks etc. Informal system of money transfer and ***** dealings also make a part ***** the financial system. Macroeconomic financial policies also sometimes called monetary policies deal with these aspects of an economy.

Monetary policies regulate the interest rates and ***** quantity ***** money. So, the monetary ***** help in establishing a relationship between money, financial markets and product markets. Central ***** of countries like the Fed in United States try to maintain conditions of full employment and stable prices by regulating money supply and levels of interest *****. "Three groups help determine the money supply: the central bank, private ********** ***** the general public. The central bank sets the ***** base while private banks and the general public interact to ***** the money multiplier which is ***** ratio ***** the money supply to ***** monetary base" (Abel & Bernanke, 1998).

The fed funds rate is what ***** pay to borrow money overnight. Interest rates affect the lending of money ***** ***** banks. As interests rates increase ***** give more loans and when interest rates fall banks control the amount money to be lent and ***** to increase their exchange reserves. If the purpose of the government or its central bank is to decrease the aggregate dem***** over a period ***** time *****n the nomin*****l interest rates in relation to the inflation ***** are increased. However if the purpose is to increase aggregate demand then reduction in nom*****al interest rates in relation ***** the expected rate of inflation is done. Lower real interest rates induce investments while higher real interest rates cause the decline in planned investments by ***** businesses or individuals. So, the reduction in real interest ***** cause increase in demand ***** investment goods resulting in the ***** in ***** ***** purchases.

***** Move

***** an unexpected move Fed Chairman Ben Bernanke, who has written extensively as an economics professor on the Great Depression that followed the 1929 stock market cr*****h, announced a dr*****matic cut in the Federal Reserve's d*****count rate by half percent to 5.75 percent. The surprising factor was ***** Bernanke has shown more caution as compared to Greenspan and has been a critic of investors or ***** estate speculators who made bad decisions but his decision to cut is ***** *****ly to favor ***** same people. However, the reports ***** unemployment and nation loosing ***** jobs, portraying the gloomy picture, might have pushed ***** Fed to make such a move. Also the conditions in ***** sub prime mortgage loans ***** a continued downturn in housing were getting worse causing a p*****nic in credit markets. These conditions particularly the news of unemployment made certain that *****re would be a rate cut but the