how does monetary policy affect the economy?

Question

how does monetary policy affect the economy?

Answer 1

If you tighten monetary poilcy, it slows the economy, if you loosen monetary policy, it stimulates the economy.

Answer 2

Monetary policy is a means that a central bank (such as the US Federal Reserve) controls the price of money and the availability of money.

There are various means of doing this. The Fed can increase or decrease interest rates. An increase in interest rates means that money costs more to borrow. Less people will take out mortgages, buy cars, may be discouraged to use credit cards, etc. Decreasing interest rates would have the opposite effect.

In addition, the Fed can change what is called the reserve requirement ratio. The reserve requirement ratio is the amount of cash a bank needs on hand to cover deposits. If you remember the bank run scene from It's A Wonderful Life, Jimmy Stewart stated your money is here Tom it's in Joe's house which is right next to yours Bob. And Bob yours money is in Bill's house (or something like that.) The reserve requirement can impact the supply of money because banks would be required to keep more money on hand to cover operations meaning they would have less money to loan out. This is rarely adjusted, but does also have significant impact on the economy.

Anyway, the jist of it is raising or lowering interest rates slows the speed at which money flows through the economy, while the RRR adjust the amount of money in the economy.

Answer 3

Depending on the monetary policy that the Federal Reserve places it could either affect positively or negatively.

Example when there is too much inflation, the Federal Reserve (Bernarke) may opt to increase interest rates, or perhaps advise the Goverment to increase taxes for certain tax brackets. By doing so, then less people are out there spending money like buying cars, houses, using credit cards, they consume less. Therefor then less consumption leads to stabelizing the economy.

You should take an economics class, it will teach you the basics.

Answer 4

This is a simplified version
People own bonds. People can't spend bonds. So they sell them to the Fed. Now the people have money which they put in the bank. The bank wants to loan out this money so to encourage people to borrow the money they lower the interest rates. The people borrow the money and buy things with it. Thus buy buying bonds the Fed increased the money supply the interest rate dropped and people spent more money.