. Disclaimer: This work has been submitted by a university student. Many of them are PHD economists. But when you're trying to push the string in the situation where the economy's in a recessionary gap, and you as a central bank are trying to raise GDP, sometimes the string just wrinkles up, and you never get to your objective. Monetary policy -- controlling the money supply and interest rates -- is the responsibility of the Federal Reserve, which executes its policies with three primary tools.The Fed sets the reserve requirement, the amount that banks must hold to back up their deposits.It sets the discount rate, the interest rate that banks must pay if they borrow money from the Fed. And this is their one objective, and their one reason to be working where they are. The monetary policy is the act of regulating the money supply by the Federal Reserve Board of Governors, currently headed by Alan Greenspan. If the economy is The changing of tax rates, and changing government spending. These concepts will give you the tools to develop your own position in many current economic debates, such as fiscal stimulus vs. austerity, the merits of quantitative easing, the need for higher interest rates or the future growth path of many modern economies. Both policies have their strengths and weaknesses, some situations favoring use of both policies, but most of the time, only one is necessary. To one of the weaknesses of monetary policy, which is that sometimes, we can't - in a recessionary gap - we can't get the change in the money supply to actually affect the economy. Let's imagine a situation where the Central Bank wanted to raise GDP because the economy is in a big recessionary gap. This is their one objective. And when central banks are truly independent, this is a great asset to them because they really concentrate on stabilizing the economy and getting it where it should go. This course will employ a non-technical approach to analyze how governments use policy to influence a country's economy. If the Fed believes there is too much money in the economy, they will sell the securities back to the banks. In this case, the Keynesian model is not helpful, while a deeper understanding of the monetary sector of the economy is crucial. The primary objectives of monetary policies are the management of inflation or unemployment, and maintenance of currency exchange ratesFixed vs. Pegged Exchange RatesForeign currency exchange rates measure one currency's strength relative to another. Strengths and Weaknesses of Monetary Policy. It doesn't take them long to decide what to do because they're not elected officials, they meet together frequently and they say, Wow, we've got a recessionary gap coming in a few months We need to respond in time. The weakness of fiscal policy lies in the difficulty of applying sufficient restraint in times of inflation. Globalization, Economic Growth and Stability Specialization, Construction Engineering and Management Certificate, Machine Learning for Analytics Certificate, Innovation Management & Entrepreneurship Certificate, Sustainabaility and Development Certificate, Spatial Data Analysis and Visualization Certificate, Master's of Innovation & Entrepreneurship. Is to increase the money supply, but let's imagine that when they increased the money supply, that maybe the interest rate falls. Because a tax cut can take a year to really take effect, the economy could revive from the recession and the new unnecessary tax cut could cause inflation. Monetary policy involves the actions by central banks, such as the U.S. Federal Reserve, to regulate a nation’s supply of money. This action changes the reserve amount the banks have on hand. If you need assistance with writing your essay, our professional essay writing service is here to help! What Ben Bernanke, used to like to say is you can't push on a string. 1. Summarize the strengths and weakness of monetary policy. The strength of a currency depends on a number of factors such as its inflation rate. Registered Data Controller No: Z1821391. Other weaknesses in monetary policy. The “Fed” has three tools to manipulate the money supply. Monetary policy can be expansionary and contractionary in nature. Maybe even the interest rate would fall. With them it is possible to control demand for services and goods and the ability to pay for them. Another problem is monetary velocity. So, you can see that monetary policy would break down, wouldn't it? From simple essay plans, through to full dissertations, you can guarantee we have a service perfectly matched to your needs. Adrian Orr said monetary policy will remain focused on medium-term goals, beyond the immediate economic bounce … So this is another weakness of monetary policy. Study for free with our range of university lectures! All work is written to order. Maybe 12 months, 18 months. For instance, liquidity is important for an economy to spur growth. Write. A change in government spending has a stronger effect on the economy than a change in tax rates. The most powerful tool available is the reserve requirement. Monetary policy refers to the actions taken by a country's central bank to achieve its macroeconomic policy objectives. Monetary and Fiscal Policy The Monetary and Fiscal Policies, although controlled by two different organizations, are the ways that our economy is kept under control. One weakness is that tight money policy works better that loose money policy. Does not cause deficit 2. So, this is the great strength of monetary policy. The Monetary and Fiscal Policies, although controlled by two different organizations, are the ways that our economy is kept under control. Copyright © 2003 - 2020 - UKEssays is a trading name of All Answers Ltd, a company registered in England and Wales. Okay, that would be step two in our transmission mechanism. It will be to the monetary sector we will turn to in the next lecture. Reserves can be increased or decreased in small or large incre­ments. STUDY. When monetary policy is general in nature and impersonal in impact, the fiscal policy, in contrast, is selective. Dollar Weakness Is a Policy Success By Daniel Tenreiro. Well, the biggest problem you can see if you think through that chain of events that I've been talking to you about, where here's the money supply. Both policies have their strengths and weaknesses, some situations favoring use of both policies, but most of the time, only one is necessary. If tax cuts are initiated and government spending is increased, then the president is more likely to be re-elected, but has first to deal with the inflation his tactic caused. Registered office: Venture House, Cross Street, Arnold, Nottingham, Nottinghamshire, NG5 7PJ. They buy and sell government bonds and other securities from member banks. Despite expansionary monetary policy, there is still no guaranteed economy recovery.Some economists who criticize the Federal Reserve on the policy say that in times of recession, not all consumers will have confidence to spend and take advantage of low interest rates. This week we're tackling a fascinating issue, which is monetary policy, and I anticipate some very interesting debates. A second advantage of using monetary policy is its flexibility with regard to the size of the change to be implemented. So they decide what to do. And they don't want to lend to more they won't, they don't want to create more bad loans, right? Reference this. Monetary authorities work through the money supply and can use open market operations, their own lending rates and reserve or cash ratios to influence money markets and hence the real economy. When a stimulus is necessary to keep growth happening, then banks can lower their interest rates on lending products to encourage additional spending. Monetary policy involves the use of central banks to manage interest rates and the overall currency supply for the economy. But this time, this does not seem to provide a ready explanation for the dollar’s weakness. Our academic experts are ready and waiting to assist with any writing project you may have. And all they think about is where is potential GDP, and how can we bring the economy there? The discount rate is not used as frequently as it was in the past, but it does serve as an indicator to private bankers of the intentions of the Fed to constrict or enlarge the money supply. Lower interest rates create price reductions, which help keep spending at a consistent level. Devalues the currency 2. But then, when they change the interest rate, it may take quite a while before it feeds it's way through to fresh investment and fresh GDP growth. Monetary and fiscal policies help keep the nation’s economy stable. Free resources to assist you with your university studies! PLAY. -Although policy changes can be implemented rapidly (short administrative lag), there is a lag of at least 3 to 6 months before the changes will have their full impact. Monetary Policy. That's fast. Strengths And Weaknesses Of Monetary Policies And Fiscal Policies. While it fixes some parts of the economy and stabilizes things, it almost always causes harm to a different component. Its other goals are said to include maintaining balance in exchange rates, addressing unemployment problems and most importantly stabilizing the economy. For example, long-term inflation expectations have generally remained below 2% since the introduction of the euro. The second way to influence the money supply lies in the hands of the government with the Fiscal Policy. About Daniel Tenreiro Follow Daniel Tenreiro on Twitter July 29, 2020 6:30 AM. Politics are another problem. They are actually trained economists with a lot of technical skill. Or imagine that commercial banks don't really want to lend money. This is used to control overall money supply. You realize that sometimes monetary policy is not very effective. The only monetary policy that's harmless is a neutral one where the Central Bank or the Federal Reserve basically leaves things alone because inflation and employment rates are ideal. Their doing all they can do it's not raising GDP. They are the reserve requirement, open market operations, and the discount rate. This happens often, in fact, in the next session we're going to be talking about how central banks try to combat that breaking down of the transmission mechanism. One of the main responsibilities of the Federal Reserve System is to regulate the money supply so as to keep production, prices, and employment stable. Monetary policy has firmly anchored inflation expectations in line with price stability. This is an important achievement which reflects the high level of credibility of the ECB and its monetary policy. But once they decide what to do, if they increase government spending or decrease government spending that immediately affects the economy. Does not raise interest rates resulting in the "crowd-out" effect on investments(in other words it allows short-term growth damaging investments for long-term growth) Weaknesses: 1. When the economy begins to falter, then you will see interest rates being cut or reduces with this policy, which makes it less expensive to take on debt while increasing the supply of currency. At its meeting today, the Monetary Policy Committee (MPC) of Bank Negara Malaysia decided to reduce the Overnight Policy Rate (OPR) by 25 basis points to 2.50 percent. We'll see that sometimes monetary policy is the winner in effectiveness. Monetary policy is superior to fiscal policy in many ways, but its greatest weakness is that it does not work nearly as well in recessionary gaps as in inflationary gaps. Learn. I give 5 stars with a small remark: Some technical issues, grading and recognition enhancements, would leave this course even better. The monetary policy is a good way to influence the money supply, but it does have its weaknesses. To export a reference to this article please select a referencing stye below: If you are the original writer of this essay and no longer wish to have your work published on the UKDiss.com website then please: Our academic writing and marking services can help you! The great strength of monetary policy is, that the people who are deciding what to do for the economy are not elected officials. It is hard to predict inflation and recession, and it can be a long period of time before the situation is even recognized. The benefits of the monetary system are that it can be enacted immediately with quick results. Moreover if fiscal policy were to try to push the economy beyond Q superscript p into the classical range, the primary result would be inflation. Okay. Economics Gravity. Monetary policy is the other main tool that governments can use to influence the economy. It takes quite a long time to affect the economy. Looking for a flexible role? When member banks want to raise money, they can borrow from Federal Reserve Banks. If the Fed believes there is not enough money in circulation, then they will buy the securities from member banks. The former permits the market mechanism to operate smoothly. It is possible to manipulate the money in private hands without directly affecting them. Strengths: 1. Question 1 a. Monetary Policy MONETARY POLICY Monetary policy is the process by which the Monetary authority of a country controls the supply of money, often targeting a rate of interest for the purpose of promoting economic growth and stability Fiscal Policy is government spending policies that influence macroeconomic conditions. [MUSIC] [BLANK_AUDIO], To view this video please enable JavaScript, and consider upgrading to a web browser that. When you pull the string toward you as you do in an inflationary gap, trying to reduce the level of GDP That works, banks respond right? 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