Expansionary Monetary Policies
This paper is based on an analysis made by the editor for the New York Times titled “The Fed Has Not Stopped Trying to Stimulate the Economy”(Wolfers, 2014). The article purely relates the current economic condition of the United States to the fundamental role undertaken by the Federal Reserve in determining monetary policies. This process entails the alteration of base interest rates which automatically impacts on the quantity of money supplied and demanded in an economy. According to the article, the FED has been geared towards frantic efforts to stimulate the US economy. Theoretically, this move has to be backed by a decision by the Federal Open Market Committee to alter a one or a combination of the following factors. The first one is to influence the open market operations which then impacts on the purchase of securities. The second option could entail lowering the federal discount rate while the third option is to lower the reserve requirements through dividend tax cuts or other market control mechanisms. According to the article, the FED has been a pursuant of expansionary monetary policies for a long period. The standard tools that have been used to enable this implementation include the determination of the federal funds rates which have been set at zero since 2008.
The federal reserves have gone further into lowering the short-term interest rates while allocating more money towards buying long-term securities. The decision to buy these securities is aimed at pushing down the interest rates. According to macroeconomic principles, this action by the Fed is called quantitative easing and it facilitates the attainment of an expansionary economy where people have more money to invest and spend (McConnell & Brue, 2005). The selection of the title for this media article responds to the speculations regarding the decision by the Federal Reserves to stop their purchase of long-term securities. This action has confused some economists who think that this will lead to monetary tightening/ contractionary monetary policies. Nonetheless, it is arguable that this decision only eases the stock of securities without impacting on the monetary policies since the FED still plans on retaining their long-term interest’s rates at a minimal figure. This decision means that the FED has relaxed its previous campaign for expansionary monetary policies thus this could be a suitable time to observe the market behaviour. In the recent past, it is reported that the FED has been using macroeconomic policy makers to lower the long-term interest rates. This has been done by influencing the expectations of the people about the future decisions regarding monetary policies in a process that is known as forward guidance. According to McConnell and Brue, (2005) the FED’s decision
Figure I: Expansionary Monetary Policy Decreases Interest Rates
is aimed at stimulating economic growth, and this is graphically represented below.
This graph illustrates the impact of expansionary monetary policies. It is identified with the shift in the supply curve to the right. The quantity of money in supply increases while the interest rates decrease. This is based on the assumption that the demand curve will remain constant. The FED’s decision to increase the money supply by using OMO such as the purchase of securities leads to the rightward shift in the supply of money from Ms1 to Ms2. The increase in supply of money lowers interest rates from r1 to r2.
Figure II: Decreasing Interest Rates Increases Investment
Figure II supports that the expansionary monetary policies applied by the FED have the impact of stimulating investments thus economic growth.
References
McConnell, C. & Brue, S. (2005). Microeconomics: Principles, Problems, and Policies. New York: McGraw-Hill Professional.
Wolfers, J. (2014). The Fed has not stopped trying to stimulate the economy. Retrieved from:http://www.nytimes.com/2014/10/30/upshot/the-fed-has-not-stopped-trying-to-stimulate-the-economy.html?abt=0002&abg=0
