ECO/533 Economics for Managerial Decision Making
December 1, 2004
Monetary Policy Analysis
This paper will look at the Federal Government's monetary policy, and evaluate the impact of monetary policy using a framework of aggregate demand. It will also examine the role of the Federal Reserve in implementing monetary policy and it impact on economic growth. The basis of this analysis is taken from McConnell and Brue (2001) "Economics Principles, Problems and Policies, 15th Edition" and Arnold (2001) "Economics Fifth Edition." References cited and used are at the end of the paper in the references section. McConnell and Brue (2001) indicated that macroeconomics often uses the aggregate demand (AD) and aggregate supply (AS) framework of analysis to discuss the price level, GDP, Real GDP, unemployment, interest rates, discount rate and economic growth (Chap. 13 - 15). Collins and Devanna (1994) stated, "Monetary policy refers to the government's control of the nominal stock of money, fiscal policy to its control over government expenditure and taxation" (p. 115). 1. Evaluate the impact of monetary policy using a framework of aggregate demand. When evaluating the impact of the monetary policy using the framework of AD, McConnell and Brue (2001) stated that the monetary policy of the Federal Reserve is the deliberate change in the interest rate, discount rate to control the supply of money and level of spending in the economy. The also indicated, "The goal is to achieve and maintain price-level stability, full employment, and economic growth" (p. 282). As we discussed last week in class, several components make up the GDP. They are C = Consumption, I = Investment, G= Government purchases, NX = Net exports, EX = Exports, and IM = Imports. If there are changes in spending in these various components, it has a definite impact on the changes in AD. For example, if C, G, NX, and I increase, then AD will also increase. If C, G,...