Dealing with Monetary Policy - Research Paper Example

By controlling the prices in the market, the monetary policy temporarily stabilizes the economy, giving institutions and major banks to recover loss and regain strength in the economic cycle. The monetary policies not only control the interest rate for debts, but it also sets a benchmark of prices and cost of service in the market, making it possible for manufacturing companies to afford raw materials for continuous operation which in the process keep current employees lose their jobs, and for household and consumers personal expenditures to be at minimal.

By applying the Taylor rule on short-term interest rates, the monetary policy sets an interest rate for short-term loans, the typical loans have is usually less has less than a year to mature, covering debts that include bank certificate of deposits and treasury bills. This is one of the instruments used as are means of financial establishments or institutions to raise funds and maximize the ease of liquidity problems. The possible problem that may prevent monetary policies from having an immediate impact on the economy is the continuous increase in the unemployment rate.

If the unemployment rate increases by one percent of the federal’s target for funds rate will go down and the inflation rate would go up in terms of personal consumption and household expenditures.