Monetary Policy - Part 3 - Policy Essay Example
Expansionary monetary policy can be defined as monetary policy which aims at increasing the size of money supply in economy of particular country - Monetary Policy introduction. Generally, central banks or finance ministry control such monetary policy. The US practices expansionary monetary policy when the Federal Reserve uses tools to foster economic development of the country. Lowering the Federal Funds rates will result in increasing money supply. Consequently, mortgage rates will decline and consumer will be provided with opportunity to spend and to borrow, businesses will be able to grow and, finally, consumers will be allowed to consume even more. Expansionary monetary policy aims at increasing the total amount of money being circulated in country’s economy. (Walsh 1998)
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Contractionary monetary policy can be defined as monetary policy which aims at reducing the size of money supply in economy. Contractionary monetary policy is referred to when it is necessary to prevent inflation rates. It means that the Federal Funds rates will be raised to decrease money supply. As a result, mortgage rates will increase and customers will have fewer opportunities to spend and to borrow. Consequently, businesses will stop giving raises. Nevertheless, the primary purpose will be achieved: inflation is decreased. However, the goal is to decrease inflation without pushing economy into recession stage. Contractionary monetary policy aims at decreasing the total amount of money being circulated in country’s economy. (Walsh 1998)
I don’t think that monetary policy in the United States is being conducted independently because the Federal Reserve controls fully physical cash, narrow forms of money and reserves of the banks throughout the country. Moreover, the Federal Reserve directly controls the supply of all types of money. I am willing to say that monetary policy is controlled by the Federal Reserve and it may serve its own purposes, not national one. However, it is only assumptions. (Walsh 1998)
Walsh, Carl. E. (1998). Monetary Theory and Policy. New York: The MIT Press.