Puggie M.
asked • 10/28/22Monetary policy can work to increase output, employment, and prices by:
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Micah D. answered • 10/30/22
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PhD in Economics with 10 years of teaching intermediate macroeconomics
...increasing aggregate demand.
This question asks about increasing output, employment and prices, but everything works in reverse too. The type of monetary policy that increases these macro variables is called "stimulative" It works by increasing the money supply and decreasing interest rates.
There are short-run and long-run aspects of monetary policy to think about too. In the short-run some prices can't change so when the Fed increases the money supply and decreases interest rates consumers have an easier time making purchases. This means businesses produce more, meaning output increases. Then they hire more, so employment increases.
However, this only works in the short run. Eventually, in the long-run prices begin to adjust upward. Businesses are selling more so they start to increase prices to make more revenue. Eventually, prices increases which results in inflation. At that point the stimulative monetary policy stops affecting employment and output.
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Christopher F.
Monetary policy refers to the actions taken by a central bank, such as the Federal Reserve in the United States, to influence the supply and demand of money in the economy. The goal of monetary policy is to achieve economic stability, which includes maintaining low and stable inflation, full employment, and strong economic growth. There are several ways in which monetary policy can work to increase output, employment, and prices: Expansionary monetary policy: This involves increasing the money supply in the economy, lowering interest rates, and increasing access to credit. This can stimulate demand for goods and services, leading to increased output and employment. It can also lead to higher prices if there is too much demand and not enough supply. Quantitative easing: This involves the central bank buying securities, such as government bonds, from banks and other financial institutions. This increases the money supply and lowers interest rates, which can stimulate economic activity and increase output and employment. Forward guidance: This involves the central bank providing information about its future monetary policy intentions, which can help to reduce uncertainty and increase confidence in the economy. This can encourage businesses to invest and hire more workers, leading to increased output and employment. Overall, monetary policy can be an effective tool for influencing economic activity and helping to achieve economic stability. However, it is important to use it carefully, as it can also have unintended consequences if not implemented correctly.12/29/22