Question

iii. Explain the impact of the new monetary policy actions on individuals and businesses within the economy by integrating the macroeconomic data and principles for 2000-2010.

Answer 1

Answer:

Usually when the monetary policy reduces the interest rates then the lending activity of the banks increases or the individuals and the business increase their borrowing activities. The borrowing by individuals and businesses increases because this is the time when at low cost of capital the individuals and business think about increasing their consumption (in case of individuals) and production activities (in case of businesses). In short, firms carry out investments such as buying new machinery, opening new plants and procuring more producttion units. On the other hand the households indulge in buying cars, homes, more luxury goods or other things. This overall leads to an increase in GDP.

The Federal Reserve defines or formulates monetary policy to influence the availabillity and cost of money and credit. The Federal Reserve of US sets a target for the federal funds rate i.e. the rate at which banks borrow and lend reserves on an overnight basis. From September 2007 the federal funds target was reduced from 5.25 percent to a range of 0-0.25 percent in December 2008. This was referred as the zero lower bound. Since then the policy interest rate had been around 0.25 percent and in December 2015, the Federal Reserve began its march towards increasing interest rate. In Dec 2015 it was reported that the consumer and business spending in fixed investments were at its all time high.

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