The Government's Economic Policies Effect Good or Bad Economy Essay

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Introduction

Public policy is government decisions and actions designed to deal with problems and issues affecting the public (Madimutsa, 2008). The U.S. government policy areas include monetary policy, immigration, intellectual property, national defense, and welfare. This paper will review the impact of monetary policy on the U.S. economy.

Monetary Policy

Monetary policy is classified as the procedure by which the Federal Reserve uses monetary policy tools to regulate the money supply, exchange rate, and interest rates (the price of money) to stabilize the economy (Labonte, 2020). The interest rate is classified as the cost of borrowing and the reward for saving. The money supply can be defined as the total sum of money that is available in the economy. The exchange rate is the cost of the domestic currency concerning other currencies. The Fed uses various monetary tools, but over the years, they have relied on open market operations and the discount rate (Labonte, 2020). Open market functions indicate the selling and buying of government securities in an open market to influence short-term interest rates.

Monetary policy can either be an expansionary policy or contractionary policy. Expansionary monetary policy is a policy aimed at increasing the level of money supply within an economy. It is traditionally used to reduce unemployment during the recession because it lowers interest rates and increases aggregate demand. With a low-interest rate, entrepreneurs can expand their existing businesses or begin new enterprises. This helps in creating more jobs in different sectors of the economy.

Additionally, the expansionary policy causes demand-pull inflation and reduces net exports. The contractionary monetary policy reduces the money supply and increases interest rates within an economy. When the Fed implements this policy, it intends to stabilize the economy and reduce aggregate demand to reduce inflation. Contractionary monetary policy also causes deflation and an increase in net exports.

Goals of Monetary Policy

The Feds have two goals that guide its monetary policy: maximum employment and price stability (McGraw-Hill Education, n.d.) All economies suffer from the effects of deflation and inflation.

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Extreme inflation harmful to the economy because it reduces real wages. That is, each dollar earned by a worker has low purchasing power. Low and stable inflation encourages people to save more and businesses to invest more. Deflation, on the other hand, leads to an increase in real wages. Therefore, the monetary policy helps to maintain…

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…Third, fighting inflation with monetary tools can worsen it. During periods of inflation, the Fed adopts a contractionary monetary policy and increases interest rates. Businesses that borrow at this high-interest rate will transfer part of the costs to consumers by increasing the prices of their goods and services.

Recommendation

Past performance shows that monetary policy influences the economy. All through the 2007-2008 financial crisis, the Federal Reserve dropped its target for the federal funds rate to zero percent (Labonte, 2020). The Fed's also created special forms of loans to banks and other financial institutions. These actions were successful as the recession ended in 2009. However, the economy is still recovering slowly. In the future, Congress should enact laws to protect the Fed from Short-term short-term political pressures to meet their long-term objectives. That is price stability and maximum employment.

Conclusion

Monetary policy can be classified as the procedure by which the Federal Reserve uses monitory tools such as open market operations and the discount rate to stabilize the economy. Their goal is to maintain price stability and maximum employment. The Fed's actions during the 2007-2009 financial crisis are evidence that monetary policy influences the economy. They were….....

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