April 11, 2011
Caryn Callahan, Ph.D.
Monetary policy and its effect on macroeconomic factors
The extremely large number of money exchanges that occurs each day all over the world form a highly complex web that is very resistant to analysis. However, it must be understood that the basis rules of money creation that govern these exchanges are readily understood and very simple. How money works is a little complex, however the effects it has on the macroeconomics factors such as GDP, unemployment, inflation, and interest rates can become very complex indeed. This paper will discuss monetary policy and its effect on macroeconomic factors such as GDP, unemployment, inflation, and interest rates. The paper will also explain how money is created. Ultimately, the goal of this paper is to which combination of monetary policy will help best achieve a balance between economic growth, low inflation, and a reasonable rate of unemployment. Monetary policy affects many financial and economic decisions people make in our
country. The Federal Reserve System conducts monetary policy and it influences demand by
raising and lowering interest rates. The Federal Reserve was established so that a central bank
would stabilize the economy and banking system. The purpose of the monetary policy is to
manipulate the performance of the economy in such factors as unemployment, inflation, interest
rates, and GDP. The monetary policy works by affecting demand across the United States.
There is lower unemployment and higher GDP when money is released into the system, but inflation is also raised. Real GDP and inflation work at cross-purposes and if the right balance is strike, they both can be very critical. When you compound this with the domestic policies, your macro-economic system can be unpredictable. The actual process of money creation takes place in banks. Money is...