Direction Of Monetary Policies

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DIRECTION OF MONETARY POLICIES Monetary policies are strategies used to control money supply by a country’s monetary authority . The Federal Reserves has tried to adopt conventional monetary policies over the last 3 - 5 years.
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• The main goal is to stimulate economic growth by reducing the interest rate required on federal funds. Since the cost of borrowing is lower, agents spend more and businesses produce more and employ more manpower. • The supply of money has steadily been increasing over the last 3 - 5 years. • This is due to implementation of expansionary monetary policies by the federal reserve which results to lowered interest rates and increased aggregate demand.
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• However the money market has a way of balancing its self such that there is always a cycle which tries to keep the economy at an equilibrium. • When interest rates are low, people want to borrow more from the banks thus raising demand for borrowed funds which in turn causes investors or the supplier of funds to the banks to raise the interest earned by their funds. • The banks are forced to increase their cost of lending to meet the high costs of acquiring those funds.
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• This raises interest rates on borrowed funds thus reducing the ability of people to borrow which in turn reduces the money circulating in the economy.

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