International Economics and Monetary Policy

International Economics and Monetary Policy

Introduction

Monetary policy refers to the procedures undertaken by the government or authority of controlling money to effectively control the money flow in the economy. It is to mention here that money does not only include cash, it also includes the credit available and the collateral that could be used as security or credit. Federal Reserve Board it the main player in controlling monetary flow in the economy. Generally, it is also known as the Fed, and Fed poses the authority to allow or reject for contraction or expansion of money flow in the circulation (Mishkin, 2007).

The main goal and objective of the Fed is to control the economy by controlling the supply of money. It is also to mention that the money which is circulated today does not represents the volume of reserves of silver and gold kept by the Treasury Department of the U.S. in addition to this 'Federal Reserve Note' on paper currency refers to the disappearance of the dependence on such precious metals, while by changing it with 'Silver Certificate' in history. Therefore, in current condition value and supply of money which is in circulation does not depend on silver and gold.

The Impact If The Fed Chose To Raise Or Lower The Federal Funds Rate

The goal of the monetary policy is to appreciate the people to spend more money rather than saving them. And this goal is attained by bringing decreased interest rates and more money available to people. And in inflationary period goals are perfectly reversed to attain the objectives of the monetary policy: in which government policy is brought in to increase the interest rates, and this makes people to save money and make profit as they find less themselves less beneficial in spending and borrowing.

If the discount rate is increased by the Fed that results in decreased borrowings from customers of banks as the cost of borrowing money is high to them. On the other hand if discount rate is decreased by the Fed than the bankers offers low interest rates to the customers and results in increased borrowings from customer (Grey, 2002).

Expansionary Monetary policy is used for the purpose of increase in money supply that can be done by combining following three things:

Securities are purchased in open market, which is called Open Market Operations.

Federal Discount Rate gets lesser.

Reserve Requirement gets lesser

The combination of ...