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How Monetary Policy Helps Employment & Inflation

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Can you please help me discuss how monetary policy operates to help achieve the economic goals of low unemployment and inflation?

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Solution Summary

Actions of the Federal Reserve to stabilize the economy are discussed step-by-step in this solution. The response also has the sources used.

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Monetary policy helps achieve the economic goals of low unemployment by developing a balanced monetary policy. When there is expansionary monetary policy, the total supply of money increases. The expansionary policy is normally used to achieve the goal of low unemployment. The methods used include lowering the interest rates, purchasing securities on the open market, and lowering reserve requirements. Whatever tool is used by the Federal Reserve, it leads to a decline in the rate of interest. This leads to higher levels of capital investment. The overall purpose is that lower interest rates and easy credit will attract businesses into expanding. In other words businesses invest more in plant and machinery and employ more workers. In general when there is an expansionary monetary policy, the supply of money increases which leads to an increase in non-governmental spending. As businesses invest more, they employ more and ...

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