Monetary Policy Is Crucial to the Economy Term Paper

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Monetary policy is crucial to the economy and impacts all types of economic and financial decisions individuals make. For example, depending on the state of the economy, individuals may decide whether to obtain a loan to purchase a new car or house or to start their own company, whether to expand a business by investing in a new plant or equipment, and whether to put savings in a bank, in bonds, or in the stock market. Since the United States is the largest economy in the world, its monetary policy also has significant economic and financial effects on foreign countries.

This paper analyzes and examines various issues related to monetary policy. First, the state of the United States economy is discussed. Next, the issue of whether the Federal Reserve is more concerned about high inflation or the possibility of a recession or other issues is analyzed. Lastly, this paper outlines the stated direction of recent monetary policy and examines the policy actions the Federal Reserve has taken to confirm that direction.

THE STATE OF THE ECONOMY

Presently, the state of the economy in the United States and foreign countries is one of slowing growth and increased uncertainty. Since mid-2000, the economy has been plagued by a continuing decline in the stock market, the rise in bankruptcy filings, credit card debt, foreclosures, and unemployment. In addition, the United States government and the governments of other countries have not been immune from the economic slowdown, as evidenced by the fact that the United States has returned to having a deficit.

Numerous high-profile events have impacted the state of the economy in the United States, with the effects trickling down into other countries. First, the Dow Jones Industrial Average and Nasdaq began declining in mid-2000 and both indices are now down over 50% from their highs. The decline in the stock markets led to hundreds of thousands of individuals who worked for technology companies being laid off. Next, the September 11, 2001 terrorist attacks devastated the United States, both emotionally and financially as thousands of individuals lost their lives and thousands of others were either laid off or saw their work hours drastically reduced.

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Third, as a result of the September 11, 2001 terrorist attacks, tens of thousands of individuals who serve in the military were forced to go to Afghanistan to defend the United States. Fourth, energy shortages occurred in California and other regions of the United States, resulting in higher prices as well as rolling blackouts. Lastly, accounting scandals involving many high-profile and previously well-respected companies such as Arthur Anderson, Enron, Global Crossing, and WorldCom resulted in hundreds of thousands individuals losing their jobs and have shaken the nation's already waning confidence.

IS THE FEDERAL RESERVE MORE CONCERNED ABOUT HIGH INFLATION OR THE POSSIBLITY OF A RECESSION? OR, IS THE FEDERAL RESERVE MORE CONCERNED ABOUT OTHER ISSUES? IF SO, WHAT ARE THEY?

Throughout the history of the Federal Reserve Board, there has been an ongoing debate over whether the Federal Reserve is more concerned about high inflation or the possibility of a recession. While there is no clear, uniform answer to this question, it is clear that the Federal Reserve is concerned with the performance of the economy as reflected in such factors as inflation, economic output, and employment. Monetary policy affects demand across the economy, i.e., individual's and corporations' willingness to spend money on goods and services.

Fiscal policy tools that impact demand are government spending and taxes. Monetary policy is conducted by the Federal Reserve System which influences demand mainly by raising and lowering short-term interest rates.

There are two primary goals of monetary policy, i.e., to promote maximum….....

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