Monetary Policy (Research Paper Sample)

Monetary Policy
Essay
Economics
Number of Pages: 2
Monetary Policy: How it achieves price stability during recession
Monetary policy is an essential tool which is used to achieve macroeconomic agendas and objectives. It involves any decisions the government can make with respect to money supply and rates of interest. This policy is usually formulated and implemented by a country’s Central Bank. However in the United States, it is the Federal Reserve that implements this policy. The policy has many objectives, including that of stabilizing piece levels in the economy, which is a key factor for any economy to thrive. Stabilizing the prices means, the general level of prices do not fluctuate much over a given period. This is achieved through a monetary equilibrium, where the money demanded is always equal to the money supplied (Supriya "Importance of Monetary Policy”).
During recession, which is a fall in aggregate demand, a demand shock can be handled by the Central Bank and the Federal Reserve through intervention by expanding the supply of money and/or lowering the interest rate. This is all in the hope of increasing the aggregate demand, which will rectify the recession back to normal forces of demand and supply. These two banks can use a variety of instruments to achieve price stability.
In Open market operations, one of the tools generally used by most governments, the government buys securities, which it had initially sold, from the public to increase the money supply. This move stabilizes the price levels in the economy, making interest rates to fall ensuring borrowing loans become friendly to the general public. Demand increases due to increased money, supply will reduce as suppliers intend to increase prices and thus stability of prices will be attained.
A supply shock in recession can be handled by increasing the money supply through increasing the interest rates. This will make money to be readily available to producers and suppliers to increase production and hence supply. The discount rate is the rate at which the Central Banks and Federal Reserve usually loan to banks when they cannot reach their minimum required reserves. It is a general rule for banks to keep reserve requirements with the Central Bank or Federal Reserve to reduce credit available to them. The discount is kept lower to increase money supply in the economy, which will then stabilize the prices in the economy.
Another instrument is the Cash Reserve Ratio which is kept by banks in the Central Bank and the Federal Reserve. This is reduced during recession to increase credit availability in the banks, thereby increasing money supply. With access to loans, there will be money circulating in the economy and thus prices will have to fall since people can now afford the prior high prices. This will stabilize the price levels of commodities (Shawn "Price Stability in Monetary Policy”).
With all the above instruments, the main objective is to expand money supply to curd recession, which is a state of reduced activity in the economy. It was Keynes who developed...