The Role of Monetary Policy in the Economy

Click on the links below and Read the articles. You can also use pdf. files with the articles posted in Content - Week 5 - Articles for Discussion week 5 area.

• How does monetary policy affect the U.S. economy?

https://www.frbsf.org/education/teacher-resources/us-monetary-policy-introduction/real-interest-rates-economy/

• Understanding the Role of Monetary Policy in the Economy by Christine Smith, (Tuesday, March 31, 2020)

https://www.stlouisfed.org/open-vault/2020/march/understanding-role-monetary-policy-economy

• Monetary Policy: Stabilizing Prices and Output by Koshy Mathai

https://www.imf.org/external/pubs/ft/fandd/basics/monpol.htm

In your initial response to the topic you have to answer all questions:

1. Discuss the effect of monetary policy on inflation. To what extent can monetary policy influence inflation?
2. How can adjusting interest rates make an impact on economy?
3. Discuss the effect of interest rates on employment in the short run and in the long run.
4. Describe the mechanism how changes in monetary policy affect output and prices in the economy.
5. Reflection - the students also should include a paragraph in the initial response in their own words, using macroeconomic terminology, reflecting on specifically what they learned from the assignment and how they think they could apply what they learned in the workplace or in everyday life.

1. If monetary policy begins to raise the aggregate demand then wages and prices will start to soot up at much quicker rates than normal. This can also affect through expectations on future inflations. For instance if business or people feel like inflation will be higher in the upcoming future they could potentially ask for higher pay increase which would ultimately raise inflation. Once inflation starts to see a decline that is when Monetary policy can influence inflation by stimulating the economy in attempt to get inflation back up to its target level.

2. There's two sides that adjusting interests rates impact the economy. First by increasing the Interests rates businesses and consumers will cut back on spending, If we aren't spending money earnings will obviously fall and stock prices will eventually drop. Second if interests rates decrease this is where businesses and consumers will start spending again and earning will start to increase as well with stock prices.

3. The effects of interests rates on employment can be determined by economic models. One Model that goes by the Keynesian Model for the short run government purchases will begin to increase so therefore so will the output and the real interest rate. In the long run the interest rates are normally higher but the output of all goods and services go back to its normal employment level.

4. Changes in monetary policy effects output and prices in the economy by either declining or rising of interest rates. If the rates decline it allows institutions to lower rates of lending such as loans to businesses in households. If they rise then the financial institutions have to get funds at higher interests rates which makes lending money to households and businesses interests rate go higher as well.

Reflection:

I learned a lot about monetary policy and how it can affect inflation and the economy. If they want to create more economic growth the monetary policy will increase market liquidity. If they want to prevent inflation they will just limit market liquidity. The sole purpose for monetary policy is to create stability within the economy.

respond with value added comments based on peers' reflection