US Monetary Policy Essay

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U.S. MONETARY POLICY IN THE 1990s

Monetary Policy

Monetary policy refers to actions the Federal Reserve (Fed) takes to influence the amount of money and credit in the U.S. economy. Interest rates and the performance of the economy are affected by what happens to money and credit. The rapid increase in the supply of money and credit over time could result in inflation, a sustained increase in the general level of prices, which translates into a decline in the value or purchasing power of money. The goals of monetary policy are to promote maximum employment, stable prices, and moderate long-term interest rates. Effective monetary policy by the Fed can maintain stable prices thus supporting economic growth and employment ("Monetary Policy Basics, NDI).

Discussion

The low inflation rates of the 1990s were not unique, but were a marked change from the 1970s and 1980s. The 1950s and 1960s were also periods of low inflation, however, according to Gregory Mankiw (2001) the difference was in the 1990s held a much higher degree of inflation stability.

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A highly volatile inflation rate creates unnecessary risk for both debtors and creditors. Inflation stability coupled with a concurrent stability in both economic growth and unemployment led many to conclude the Fed was doing an amazing job. However, Mankiw asserts the Fed, and Fed Chairman Alan Greenspan, may have also been lucky.

The Fed's job is to respond to shocks in the economy in order to stabilize output, employment and inflation. A demand shock, such as a stock market crash, pushes output, employment, and inflation in the same direction and is relatively easily handled by lowering interest rates to increase the supply of money. Supply shocks, such as a jump in oil prices, are likely to be more complex, fueling inflation and threatening recession, leaving….....

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