Description Monetary policy is a tool that is employed by the central bank of a country. The function of this tool is to regulate the money supply in the consumer market. The factor to control the money supply is mostly the interest rate, targeting it to achieve economic growth and stability. The goal of regulating the monetary policy is to control the level of inflation and to reduce unemployment level in an economy. It promotes the economic stability by insuring that the economy increases employment rate, regulate long-term interest rates and stabilizes prices. The Federal Reserve of a country is responsible for regulating, monitoring and reenacting monetary policy discrepancies that determine the supply of money circulating within an economy. Any adjustments in monetary directly affects the capability of small and medium business to access loan and credit funding to reinvest in extending and the hiring of additional workers. In implementing a monetary policy, there are some impediments that are:
Market Transactions Market transactions are the process that involves the purchase and sale of bonds issued by government and treasury bills. It represents an opportunity to the Federal Reserve to implement monetary policy, influencing money supply in market. The money availability circulating in the market is directly affected by the regulation of the money that is available for investment and production by businesses and consumers. When treasury bills and government bonds are sold by the Federal Reserve, it greatly reduces the money supply, thus it results in reduction of the capability of medium and small business to secure loans and credit. Whereas, the money supply is increased when treasure bills and government bonds are bought by the Federal Reserve. This eventually gives increased opportunity for business investment, such as investment in inventory, equity or human capital. An increase in money supply also results in an increase in demand for business goods and services, hence increasing production and decreasing unemployment.
Interest Concerns When the Federal Reserve effectively adjusts the discount rate, it provides a chance to affect the interest rate and spending. When discount rates are decreased, it lowers the cost that banks absorb when borrowing money to meet reserve requirements, which is the amount that is defined by the Federal Reserve to the banks for having on hand to cover a percentage of deposits. This process force banks to lend money they have at hand and in turn borrow more money to meet reserve requirements, if necessary. Thus, it increases the money available for medium and small business and consumer investment through loans and credit at lower interest rates. Lower interest rates can trigger spending, investment and consumer consumption of small and medium business products and services.
Liquidity Another aspect of monetary policy that raises concerns is the factor that deals with the liquidity of banks. The Federal Reserve has defined reserve requirements that need to be met by banks. When these requirements are raised by the Federal Reserve, there is a sudden decrease of the supply of money in the market. This causes banks to decrease the availability of loans and credits that has impacts on the capability of medium and small business to expand production, limiting new investment and employment. In contrast the money supply is increased when the Federal Reserve reduces the reserve requirements. Eventually leading to increased investment, production and hiring initiatives by small and medium business. Thus by every element that is controlled in monetary supply has both positive and negative effects. Too much of anything causes problem. Therefore, what is good for the economy needs to be scrutinize very closely by the state bank and federal reserve.
Published on Jan 30, 2014
Published on Jan 30, 2014
Monetary policy is a tool that is employed by the central bank of a country. The function of this tool is to regulate the money supply in th...