Monetary Poliocy

Monetary Policies

Daniel Batt

University of Phoenix, Harrisburg

Monetary policies dictate how the government disperses money in the economy. In this paper I will discuss how money has a purpose and function in an economy. Next, I will discuss how a central bank manages a nation’s monetary system. I will outline the United States most recent monetary policy and its intended direction and give an example of one policy action that the Federal Reserve has taken to confirm that direction. Finally, I will discuss how monetary policy can affect production and employment in the economy.

Money functions in an economy three different ways. First, money can function as a medium of exchange for people to purchase goods and services (Mankiw, 2007). For example, Tom offers Kent 5 ducks to buy some beef from Kent. Kent agrees on the sale making the ducks the medium of exchange. Second, money functions as a measuring device for people to determine prices on products and services. Additionally, money is a way for people to record debt this is called unit of account. Third, money functions as a store value, which is money acquired in the present by a person and spent in the future by that person on goods and services (Mankiw, 2007). For example, Kent bought a Sony Play Station 3 from Tom for 300 dollars today. Due to the Kent’s sale Tom now has 300 dollars to spend in the future on goods and services if he chooses.

A central bank operated by government officials manages the monetary system in three different ways. The central bank controls the amount of money in circulation in an economy, which is called setting monetary policy. One of the ways policymakers can change the money supply is by using what is called an open-market operation (Mankiw, 2007). An open-market operation uses the buying or selling of government bonds from to regulate the money supply in an economy. For example, the government can increase the amount of money in an economy by purchasing bonds back...