Current and Post Monetary Policy

Monetary policies can either be expansionary or contractionary. In expansionary policy, the Federal Reserve Bank increases the money supply with the intention of avoiding issues such as an increase in unemployment and also enhances the spending and consumptions of the consumers. On the other hand, contractionary monetary policies are the opposite of the expansionary policy where the Federal Reserve tries to reduce the money in the circulation in order to curb issues such as an increase in inflation in order to attain a stable economy (2014 Article Iv Consultation and Second Review Under the Staff-Monitored Program - Staff Report ; Press Releases ; and Statement by the Executive Director for Sudan, 12). Application of these monetary policies in the United States has various impacts on the economy.

Impacts of Monetary Policies on Economy Monetary Policy and Interest Rates Changing the rate of interest affects the ability of the public to demand for goods and services since it alters their borrowing costs and the availability as well of the bank loans. This indubitably leads to a higher aggregate spending on the goods and services which are produced in the United States. Monetary Policy and Inflation Wages and the prices will rise if the monetary policy is used to stimulate the aggregate demand leading to a demand push and capital markets beyond their long-run capacities. In essence, if the monetary policy persistently seeks to shorten the real rates will lead to higher inflation and higher nominal rates as well with no permanent increase in the output and decrease in employment.

This is to say that despite the existence of the tradeoff between the higher inflation and the lower unemployment rates in the short run, the tradeoffs will in the long run disappears. Consequently, the monetary policy affects the inflation directly in that with the expectations of the individuals pertaining to future inflation. House of Representatives, One Hundred Fourteenth Congress, Second Session, February 10, 2016, 43). Furthermore, the impact of the monetary policies on the economy as well depends on the people and the firms which are operating outside of the Federal Reserve actions which imply that inflation in the future will be experienced. If the people, for instance, believe that by tightening the policy will determine the inflation, then the federal reserve will have t come up with policies which will always ensure that there is low or no inflation at all with the lowers rates of unemployment in order for the economy to improve.