The monetary policies of the united states and other countries - Research Paper Example

Furthermore, since the US is essentially the largest economy globally, its monetary policies also encompass substantial financial and economic effects locally and international. Monetary policies influence the performance of countries’ economies as indicated through factors such as economic output, employment rates and inflation. In the US, the Federal Reserve controls the country’s monetary policy. The US federal government uses the country’s monetary policy to control the economy. When money supply grows too fast, inflation rate also increases and conversely, when money supply is too low; economic growth also declines rather substantially.

The US Federal Reserve uses the country’s monetary policies to establish inflation targets aimed at sustaining steady inflation rates of between 2 and 3 percent. The purpose of the US monetary policy is to dictate the performance of the economy as indicated through employment rates, inflation and other equivalent economic factors. Monetary policies work by influencing demand within the economy, particularly with regard to companies and people’s willingness to spend money on products and services (Havrilesky 73).

This influence is one of the most positive effects of US monetary policies. Another notable consequence of the US monetary policies is to deterring inflation expectations from spiraling to high magnitudes. This is particularly because inflation expectations are an integral determinant of the prevailing inflation rates. Therefore, monetary policies aim at maintaining long term inflation expectations anchored. Stability in inflation expectations emanates from effective monetary policies. In essence, the populace’s belief that inflation will remain stable over the long term lies in its belief that the Federal Reserve’s monetary policy will effectively deliver stable and low inflation in the long term.

In addition, monetary policies affect the national economy, especially with regard to financial markets (McConnell and Brue 303). Whenever the Federal Reserve increases monetary supply and enhances the availability of credit, interest rates, which influence the amount of money borrowers pay for loans, will decrease substantially. The US policy allows the Federal Reserve to regulate interest rates and maintain low rate to encourage businesses to borrow investment capital. Low interest rates also stimulate individuals to borrow money to buy goods such as real estate and automobiles.

For instance, in the late 1970s, the US monetary policy provided loan interest rates of 8% and an inflation rate of at least 10%. This led in diminished borrowing as financial institutions reduced their lending. However, monetary policies produce adverse results when money and credit supply grows at a faster rate than production of products and services. This phenomenon pushes prices up and ultimately results in an increased inflation rate. Ineffective monetary policies cause inflation, which is a serious issue, particularly for most Americans who live on fixed earning.

This is because such people’s income remains constant while their capacities to purchase goods and services decreases (Everett 175). When banks anticipate high inflation, they increase interest rate to cushion themselves against losses. When money and credit supply grows rather slowly, interest rates are likely to rise, resulting in decreased spending on investments, as well as conventional, durable