The Effect Monetary Policy Has on Macroeconomics

The Effect Monetary Policy has on Macroeconomics.

Antonio C. Marks

University of Phoenix

MBA 501

Dr. Ronald E. Polk

April 4, 2007

The Effect Monetary Policy has on Macroeconomic Factors

Monetary policy includes the manipulation in the money supply by the Federal Reserve that will influence interest rates, which will cause a snowball effect in total overall spending. The change in interest rates, in many cases are a determining factor in the decision-making process to purchasing a house, a new car, borrow money for home improvements and many other decisions on purchases which will impact the total level of spending in the economy. The Federal Reserve has two main assets, securities and loans to commercial banks, thrifts-savings and loans, mutual savings and loans and credit unions. “ Securities are government bonds that have been purchased by the Federal Reserve Banks. They consist largely of Treasury bills (short term securities), Treasury notes (mid-term securities), and Treasury bonds (long term securities) issued by the U.S. government to finance past budget deficits (Brue 2004).” “Although securities are an important source of interest income to the Federal Reserve Banks, they are mainly bought and sold to influence the size of commercial bank reserves and, therefore, the ability of those banks to create money by lending (Brue 2004).” By controlling the money supply and interest rates in the economy, macroeconomic factors are affected such as GDP, unemployment and interest rates.

How Banks Create Money

“When early traders began to use gold in making transactions, they soon realized that it was both unsafe and inconvenient to carry gold and to have it weighed and assayed (judged for purity) every time they negotiated a transaction. So by the sixteenth century they had begun to deposit their gold with goldsmiths, who would store it in vaults for a fee. On receiving a gold deposit, the goldsmith would issue a receipt to the depositor. Soon people were paying for goods with goldsmiths’ receipts, which serviced as the first kind of paper