The currency is accepted in 17 countries belonging to the European Union. The currency came with the signing of the Maastricht treaty (Mulhearn & Vane 2008). The treaty had the guidelines on how the countries would…
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This meant that the signatories’ domestic currencies would not fluctuate against the Euro and each other. The Euro was initially launched as electronic money and eventually became a legal tender on 1st January the year 2002. The European Central Bank was tasked with the responsibility of implementing monetary policies on countries using the Euro (Gunyé 2004).
One of the main reasons why the Euro was introduced was to provide a common currency that could be used all over Europe. It is important to note that European countries are small and trade with each other. A common currency would make trade between the European countries easier. This eliminated exchange rates that were a common hindrance to trade among the countries. The common currency was expected to be stronger than other currencies of the individual countries and this would have increased the competitiveness of exporters using the Euro.
Since the Euro was incepted in the year 1999, it has remained fairly stable against the US dollar. The euro in 1999 would buy the US dollar at $1.18. This figure has since risen to $1.38. The lowest amount that the Euro has ever bought the US dollar is $0.82 and the highest ever level the Euro has ever bought the dollar remains at $1.60.
Some of the member countries have been experiencing high labor costs and this has been affecting their export competitiveness in the market. In such a case a currency would devalue to solve the scenario. It is, however, impossible to devalue the Euro and this has led to major problems for countries like Greece, Portugal and Italy. This is due to the fact that they are experiencing a fall in exports.
It is widely thought member countries are protected from financial crisis. However, this is not the case as Greece is experiencing a major financial crisis. The member countries are given less incentives to implement structural reform (The
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Central banks also acts as the government banks bank and the government lend or borrows through it. It also acts as the lender of last resort to the financial sector during the financial crisis. It is through the central bank that the government borrows from the public through the issue of treasury bonds and bills.
Since the time of King William of Orange, central banks around the world have become influential and important for functioning of the economy and countrywide security and welfare. As importance of the government for the welfare of all citizens increased, so did the central bank’s importance (Cechetti & Schoenholtz, 2011, Chapter 15).
As the new roles of central banks changed into agencies of public policy, there were underlying objectives that were infrequently stated. In the context it is used, an individual can conclude that objective that underlie all functions for the interest of the economy, is consistent with economic policy of the government.
There are above 500 million residents in the EU who comprises of 7.3% of the population of the world (Osterreichische Akademie der Wissenschaften, “European Union reaches 500 Million through Combination of Accessions, Migration and Natural Growth”). As of 2010, the gross domestic product (GDP) of the EU was 16,242.25 billion USD, which represents around 20% of the global GDP in terms of purchasing power parity (PPP) (International Monetary Fund, “Report for Selected Country Groups and Subjects”).
The economy of the United States has been passing through rough winds since 2007. This paper looks in to the policy prescriptions of the monetary policy making group of the Federal Reserve System and investigates the issues arising from these policies. Alternative policy solutions are thereafter discussed in this paper.
The 1913 Federal Reserve Act allows the Federal Reserve to create a monetary policy. There are three important tools of monetary policy, and they are, the reserve requirements, the discount rate, and the open market operations (Orphanides and Volker, 17).
Monetary policy can be either a contractionary policy or an expansionary policy. (Kenen, 1995)
Contractionary policy will decrease the total money supply thus raising interest rates a thing that helps in reducing inflation while the expansionary policy increases the total supply of money in a given economy thus commonly used in eradicating unemployment in periods of recession by lowering interest rates.
“The term fiscal policy refers to the expenditure a government undertakes to provide goods and services and to the way in which the government finances these expenditures” (The Financial Pipeline).
“The fiscal policy consists of two main tools. The changing of tax
The government uses this policy in affecting the economy. When a state experiences recession, the government might lower tax rates to fuel economic growth. If the people pay their taxes, they have the money to spend or invest and with increased consumer spending, an