The significance of monetary policies in an economy is eminent. Their objectives are usually distinct and focused on economic factors. For instance, these policies aim to lower the average rate of inflation. Monetary policies also tend to reduce the inflation rate. In addition, they minimize the gap observed in the real and gross domestic product, (GDP). There are two models that explain monetary policy issues. These include the monetarists as well as the Keynesians (Fuhrer 49). The concepts agree on the objectives of the fiscal policies. However, they tend to disagree on priorities and methodologies. The basic mission of a monetary policy is to sustain low levels of inflation. They also seek to attain full employment and elevated growth rates. The policies operate by manipulating the demand. This paper examines the role of monetary policies in influencing the aggregate economic conditions. It also analyses their potential in manipulating the GDP.
Principles of Macro Economics and Policy Choices
The central bank is charged with the responsibility of executing the fundamental monetary policies. This role is achieved through its ability to manipulate the supply of money within an economy. Some of the tools applicable in the implementation of this role are notable. These include open market processes, alterations within the discount period as well as alterations on a specific reserve ratio. Observably, these indications may make a given monetary policy to be either expansionary or contractionary. In addition, it is crucial to indicate that a policy options rely remarkably on the basic objectives of a specific central bank (Fuhrer 64).
The central bank utilizes expansionary fiscal policy. Particularly, this occurs whenever there is a consequential elevation in the level of financial supply. In such contexts, the government has the capacity to sell its bonds. It may also elevate the discount period and minimize the ratio of reserve. Particularly, this applies when the specific guideline targets the elevation of employment rates. Alternatively, it may also be applicable in cases where an increased demand is expected to result into a high rate of development and economical growth (Gavin & Mandal 2001). On the other hand, in case of money supply, contractionary fiscal policies become appropriate. There are notable measures to be considered when the central bank monetary guidelines target to minimize the inflation rate in an economy. For instance, it might elevate the reserve ratio, which most commercial institutions are mandated or expected to sustain. In effect, the quantities of money in circulation within an economy may be reduced to a significant level.
Monetary Theories and Policy Response
Different conceptual models have been applied in the explanation of the dynamics within particular economies. Some of the predominant models within this subject include the Keynesian as well as the monetarist models. Notably, these models have been widely applied by many policy makers. As postulated by the Keynesian economics, whenever Fed elevates the rate of money supply, interest rates potentially fall. However, the ventures as well as the rates of consumptions are observed to significantly rise (Poole 4). The postulation is that individuals normally depict a speculative justification for the demand of money. Generally, people normally hoard the cash when they forecast that the prices of bonds might be lowered. The ultimate outcome is that the cash demand curve becomes more flat. In addition, the money velocity is also rendered unstable. A sensitive money demand on interest rate changes has the effect of making the money demand curve flatter. This can be shown through the I-S curve diagram below.
This means that changes in the money supply are ineffective in transforming the rates of interests. Thus, it can be noted that the Keynesians have the view that the government should intervene in the economy through the use of policies that are either expansionary or contractionary (Gavin & Mandal 2001). However, this depends on the needs of the general public within an economy. Thus in case of inflation, the contractionary policies can be used. When the government intends to attain full employment and high economic growth, expansionary policies are appropriate. Monetarists believe that the economy is normally stable. According to them, the central bank should not conduct any intervention to stabilize the economy. The theory postulates that alterations within the money supply do not influence interest rates and investments. Instead, the impact results into increased spending. This has the effect of increasing inflation but not o the output.
The monetarist view is based on quantity model of money. The monetarists consider inflation to be the greatest threat to the economy. As a result, they recommend non-discretionary policies. The growth of money should be at the same rate as that observed in the GDP (Poole 4). The argument is that a stable growth in money will make people’s expectations to remain rational. The link between money supply and spending in the economy is also observed to be direct. The monetarists believe that money demand is not sensitive to interest rate changes. Moreover, they indicate that investment demand is sensitive. It is important to note that these perceptions explain the dynamics of the general economy. Observably, the Keynesian postulation remains superior. This is because it is not possible for an economy to operate effectively minus the intervention of the government.
Macroeconomic Policy Goals to be considered by Policymakers
There are different goals of the macroeconomic policies. Some of these include reducing the inflation rates, attaining elevated growth and development rate and realizing full employment. Ideally, policy makers must respond to all of these objectives. Drafting guidelines and policies that have the capacity to enable the accomplishment of the basic goals is a critical process (Gavin & Mandal 2001). The policy makers should respond in case the inflation levels in the economy rise. Inflation leads to the rise in the prices of basic commodities. Therefore, this occurrence has a remarkable influence on the general demand pattern. The policy makers must respond to this through the use of contractionary policies. High unemployment levels in the country affect the revenues collected. It also influences the demand and output. Therefore, policy makers must respond whenever the rates of unemployment increase. High GDP is a basic indicator to development as well as growth of a nation.
Macroeconomic policies usually aim at achieving high rate of growth in the gross domestic product. Thus, all policy makers must respond whenever the growth rate is slow. Manipulation of the rates of revenues and taxes is an important policy strategy (Poole 6). Generally, it might also be an applicable macroeconomic policy for consumption by the central bank. The application of public or government expenditure methodology may also be appropriate. The revenue rate might be reduced significantly, rendering most individuals with more disposable earnings. Particularly, this applies when the objective of the main central bank is well defined. Usually, this aims at increasing the amount of money supply in order to help in the elevation of demand. Notably, there are several initiatives through which the rate of government spending might increase. Some of these may include road constructions and investment in other public infrastructure.
There are several strategies applied in achieving basic macroeconomic objectives. These macroeconomic objectives might include full employment, reduced rate of inflation and a rationalized GDP (Fuhrer 211). As learnt from the unit, there are no other appropriate non-monetary policies used to attain these objectives. The Keynesian reiterate the importance of manipulation of demand through policies. On the other hand, the Monetarists explain the mechanisms of controlling the level of money supply in an economy.
Monetary policies strive to manipulate the average economic situations related to inflation. Apart from this, they control the factors of employment and growth of the GDP. They aim at the accomplishment of full employment. Other important considerations for the policy include low levels of inflation and increased growth rate within the GDP. I have developed important insights into the issues concerning public monetary policies. Policy makers must consider the relevant dynamics and economic factors that are eminent in the globalized society. This consideration is vital in enhancing economic sustainability. Other key areas that may require additional exploration include the application of inflation targeting within economies. Policy makers also have to question the implications of technological advances on economic performance.
Fuhrer, Jeff. Understanding Inflation and the Implications for Monetary Policy: A Phillips Curve Retrospective. Cambridge, MA: MIT Press, 2009. Print.
Gavin, William & Mandal, Rachel. Forecasting Inflation and Growth: Do Private Forecasts Match Those of Policymakers? 2001. Web.
Poole, William. Best Guesses and Surprises. Federal Reserve Bank of St. Louis. 2004. Vol. 86. Is. 3: 1-7.