Monetary Policy Every Economic Activity Term Paper

Pages: 7 (2822 words)  ·  Bibliography Sources: ≈ 4  ·  File: .docx  ·  Level: College Senior  ·  Topic: Economics

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The type of goods that one is talking about is automobiles and new homes here. This is expected to increase the spending by individuals who may be totally depending on the banks for their money. This has however to be combined with a positive outlook for the economy which will give the borrower the confidence of his being able to repay the loan. As we have already seen, when the real interests are negative, the inflation rates are high, and that is a negative sign for the economy. The people also realize that costs are increasing and they may not have enough confidence in themselves to beat the inflation rates. In which case, they may not go in for the loans and thus defeat the purpose of the lower interest rates. 11

Theoretically this is also a period when the shares and other similar investments look attractive as compared to bonds and other instruments for debt. This will have a result for people who find that the value of their shares have gone up and thus may be tempted to invest more in shares. When such investments take place, it will also provide funds for the industries to go in for new plant and machinery as the interest rates for such investment will be low. Then can also issue stock at high prices to pay for the costs of their new plant and machinery.

11. "How does monetary policy affect the economy?" Available at http://www.frbsf.org/publications/federalreserve/monetary/affect.html. Internet; Accessed 09 December, 2003

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Once the price of the dollar is reduced, it will also make the other foreign currencies available at a higher rate against the dollar. This will increase the prices of goods produced in those countries in the United States. This will reduce the demand for hose goods, and increase the exports from the United States as they will receive the goods from the United States at cheaper rates. This will raise the demand for such goods and in turn the factories concerned will have to produce more. This will in turn lead to demand for plant and machinery from them. This will again lead to increases in production and employment. This again will lead to another round for demand. This is a cycle that gives unending opportunities for growth. 12.

Term Paper on Monetary Policy Every Economic Activity Assignment

There are of course a lot of theories as to how the wages and prices are expected to rise faster through the stimulus of monetary policy. This is expected to push the labor and the capital markets beyond even the capacities they are planned to have. This is true only in the short-term and in the long run may have quite different results. It is said that a regular effort to keep costs at low levels continuously will end up in high inflation rates for the country and also high nominal rates of interest. The increase in output that may be seen in the short-term will not last for very long periods and the decreases in unemployment will also not be permanent. The efforts made by one country to inject vitality in their own system at the cost of others will be countered by them. Thus the effects of any monetary policy changes are at best short-term. The questions of output and employment cannot be decided by changes in monetary policy. 13

12. "How does monetary policy affect the economy?" Available at http://www.frbsf.org/publications/federalreserve/monetary/affect.html. Internet; Accessed 09 December, 2003

13. "How does monetary policy affect the economy?"

Thus we see that monetary policy agrees that it is possible to lower unemployment for a relatively small period by agreeing to suffer from the effects of high inflation, but at the end, the figures for the country will return to normal and the benefits will disappear. These changes when implemented regularly will also force people to think about the possibilities of inflation in the later times. When the Federal Reserve Board will make money availability easier, the people will know that in the end it will cause inflation. This will make the concerned people try for wage and price increases to counter the effects of inflation. This is in itself a major reason for inflation and will not really have any impact in terms of employment and output. Today the world is very well linked and any effect in one country is rapidly carried over to another country and the inflation may not be dependent only on the capacities within the country, but is related to the capacities in the entire world. 14

Thus even if some method succeeds in reducing the unemployment in the United States to very low levels, it may not lead to higher wages for them. This is expected because there are workers in other countries who are working for lower wages and they could easily do the job the U.S. worker is doing. The only reason why this does not happen totally is because, in a way, the economies of different countries are still isolated in their own countries. The consumption in different countries is still of mainly raw material and goods produced in their own country. This is especially important in areas like services and one of whom, health care constitutes about 14% of America's GDP. 15

14. "How does monetary policy affect the economy?" Available at http://www.frbsf.org/publications/federalreserve/monetary/affect.html. Internet; Accessed 09 December, 2003

15. "How does monetary policy affect the economy?"

Today even in segments of these are being done in foreign countries. Luckily the doctor seeing the patient has not been replaced by a computer, but many patients are traveling abroad and many records are being made abroad through medical transcription via the Internet. The other important effect in the international trade is the effect of foreign exchange rates. When an item is bought from a foreign country, the price for it will have to be met in the currency of that country, and when enough purchases are made, and then the price of that currency will have to rise, as less of it will be available. 16

The impact of monetary policy is not felt immediately, and there are also many types of effect that are felt. The changes on the producing sector of the economy or services are usually seen within a period of three months to two years. The effect from inflation comes sometimes even much later, even up to a period of three years. One has to understand that the effect of monetary policy is through a manipulation of human nature. A lot of the impact of the changes in monetary policy comes from the second guessing by the people of the intentions of the government and the institutions. If the people feel, the government is serious about keeping inflation under control, then that will help to keep inflation under control. If however, the people are not sure about the intentions of the government, then that impact will not be there. However in the present day world there are limits to what can be achieved in terms of the control of inflation without great losses in terms of employment and output.

16. "How does monetary policy affect the economy?" Available at http://www.frbsf.org/publications/federalreserve/monetary/affect.html. Internet; Accessed 09 December, 2003

References

How does monetary policy affect the economy?" Available at http://www.frbsf.org/publications/federalreserve/monetary/affect.html. Internet; Accessed 09 December, 2003

Sazton, Jin. "International Dimensions to U.S. Monetary Policy," Joint Economic Committee Study, August 2000 Available at http://www.house.gov/jec/fed/intern.htm. Internet; Accessed 09 December, 2003

The Goals of U.S. Monetary Policy" FRBSF Economic Letter, 99-04; January 29, 1999 Available at http://www.frbsf.org/econrsrch/wklyltr/wklyltr99/el99-04.html. Internet; Accessed 09 December, 2003

U.S. Monetary Policy: An Introduction" Available at http://www.frbsf.org/publications/federalreserve/monetary/Internet; Accessed 09 December, 2003 [END OF PREVIEW] . . . READ MORE

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