Analysis of Monetary Policy

Paper Summary:

This paper examines why monetary policy is an important aspect of macroeconomic stability. The paper looks at why the tools, procedures and the body for enforcing these tools and procedures are very important aspects of any society. The paper then explains that monetary policy is a tool utilized by policy makers to correct inflationary or recessionary gaps. Next, the paper points out that the tools of monetary policy are used throughout an economy for other purposes; hence there are drawbacks to using it for macroeconomic stability. The paper also explores whether the marginal benefit from monetary policy exceeds the marginal cost of using the tools of monetary policy. In addition, the paper looks at how monetary policy also has 'spillover' effects for other markets, such as the financial markets or general business operation. In conclusion, the paper shows that lowering inflation or closing recessionary gaps have been the primary focus of the policies.

Outline:
Introduction
A description of Monetary Policy: A General Overview:
- Open Market Operations
- Required Reserve Ratio (RRR)
- Discount Rate (DR)
Macroeconomic stability and Monetary Policy: A Look at the 1970s and 1980s
Monetary Policy Efficiency: How the Change Did or Could Have Impacted Me

From the Paper:

"Monetary policy is used during inflationary or recessionary periods to correct the problem. Ideally during inflationary periods the Federal Bank and policymakers want to decrease the money supply and increase interest rates, so that borrowing/spending can be constrained. During recessionary periods, policymakers will try to do the opposite, that is increase the money supply, so that interest rates can rise and increase investment and spending, which will have a spill-over effect on employment (BOG: Federal Reserve System, 2006, p. 15)."

Sample of Sources Used:

• Board of Governors of the Federal Reserve System (2006). "Monetary Policy Report to Congress". Federal Reserve Board Publications. Retrieved January 26, 2007 from http://www.federalreserve.gov/boarddocs/hh/2006/july/fullreport.pdf
• Edwards, Cheryl (1997). "Open Market Operations in the 1990s". Federal Reserve Bulletin, November 1997. Retrieved Jan 26, 2007 from http://www.federalreserve.gov/pubs/bulletin/1997/199711lead.pdf
• Federal Reserve Bank (2004). "U.S. Monetary Policy: An Introduction". Federal Reserve Bank of San Francisco Publications. Retrieved January 25, 2007, from http://www.frbsf.org/publications/federalreserve/monetary/MonetaryPolicy.pdf
• Klee, E. and Weinbach, G. (2006). "Profits and Balance Sheet Developments in U.S. Commercial Banks in 2005". Federal Reserve Bulletin, June 2006. Retrieved Jan 26, 2007 from http://www.federalreserve.gov/pubs/bulletin/2006/bankprofits/0606bankprofit.pdf
• McConnell, C. and B., Stanley (2005). Macroeconomics 16th Edition. New York: McGraw-Hill.

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