Macroeconomic Principles and Policy

The Federal Reserve controls the United States money supply by varying through the country's annual itinerary to meet recurrent fluctuations in the constraint for money, which helps in keeping the interest rates less explosive and unpredictable. This paper aims to address issues regarding the Fed's Monetary Policy in connection with government expenditure, recession, unemployment and inflation.

Money Supply and Government Expenditure

If the Federal Funds rate is held constant while government expenditures are expanding, interest rates for lenders and borrowers will generally follow the trend. The impact will be felt on private spending because it affects all kinds of economic and financial decisions that Americans make; whether to purchase a new house or get a loan or start-up a business. This is due to the fact that financial investors generally react/respond to any change in the interest rates.

Monetary Policy and the Recession

The Fed claims that its monetary policy can be a tool to bring the United States of out of recession because it has distinct strengths - it is faster and more elastic than the fiscal policy since Fed can trade securities everyday. The policy works to remedy both GDP issues and trade stability, increasing domestic spending and GDP to erase a trade deficit, leading to a recession that is almost non-existent.

FED on Unemployment and Inflation

Fed has been helping the United States economy to maintain full employment, price immovability, and economic growth. However, if an unemployment report will show lower than anticipated unemployment and upward pressure on wages; this cascades to money supply, interest rates and bond prices which are not known in advance and a varied nominal return. Thus, Fed has to take an active policy that would make indispensable inflation targeting, making monetary policy conventional and crystal clear.

Conclusion

No one, an American in particular, wants to see high unemployment, high inflation or a recession to take place. Everybody would rather have a strong, predictable and steady economic growth, with an opportunity for a high standard of life and job breaks. Fed upholds that a Monetary Policy can help achieve these goals and thus, they feel obliged to serve the United States citizen through this policy.

References

1. Chapter Fifteen: Monetary Policy
Retrieved March 03, 2008, from http://www.oswego.edu/~edunne/200ch15.html

2. U.S. Monetary Policy
Retrieved March 03, 2008, from http://www.frbsf.org/publications/federalreserve/monetary/MonetaryPolicy.pdf

3. The FED and the Markets
Retrieved March 03, 2008, from http://www.pathtoinvesting.org/experts/pdfs/fed.pdf