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Learn the toughest concepts covered in your Macroeconomics class with step-by-step video tutorials and practice problems.

Monetary Policy

Goals of Monetary Policy


Goals of Monetary Policy

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go a little deeper into monetary policy. So let's go ahead and start by defining what are the goals of monetary policy. So monetary policy is the management of the money supply. Okay, so we're thinking about the supply of money. Remember M one and M. Two. We define those as the money supply. So we're gonna get into a little more detail about that now. And the money supply is managed by the Fed Right? The Federal Reserve, which is the central bank in the United States. Well what is the goal of monetary policy? Why are they going to be managing this money supply? The first two are the most important goals here and then. The other two have been goals more recently as well. So price stability. We're basically managing inflation. Okay. We want to keep inflation under control and it allows money to hold its value right we don't want inflation to grow and grow and grow and whatever money that you have to lose its value. Remember when we learned the definition of money and the function of it, it must be able to act as a medium of exchange and a store of value. Right? It has to be able to store the value that when you go to work and you get paid in money, you want that money to hold its value for when you use it. Right? So that's one of the goals of monetary policy. The other one is high employment, right? Because under used resources reduce our GDP below its potential level. So by managing our money, managing our money supply, it basically keeps the level of investment in the economy at a high level and keeps employment high. So these go kind of hand in hand, managing inflation and managing employment. Okay, so these other two are, uh, I don't want to say less important, but there are other goals of monetary policy, the stability of financial markets. So basically ensuring that the markets do not fail right? So the Fed acts as the lender of last resort when things start to go bad, we kind of depend on the Fed to kind of bail us out of problems and hey, you know, things are going wrong, do something, right? So they want to keep stability in the financial markets. And when the Fed was created in 1930, That stability was mainly concerned with commercial banks and this is where you keep a checking account or something like that. But in the most, uh, this recession of 2008, um, the Fed also was working with investment banks and we get into more details about that crisis in 2008, uh, in other videos as well. So, the final goal here economic growth, right? We want economic growth in our society. So they want to allow for this economic growth by managing the interest rate in the financial markets. Okay, so remember that interest rate determines the amount of investment by firms. Right, Higher interest rate, I'll put Ir for interest rate, uh, well, that, that means loans cost more, right? There's more interest on a loan. Let me get out of the way loans cost more. So less investment, Right? So, as the interest rate goes up, well, then there's gonna be less investment because it's costlier to make an investment. And firm investment is a key key element of economic growth. So they want to manage the level of investment by managing the, uh, managing the interest rate. Okay, so, let's go into a little more detail about monetary policy and what the Fed actually does to reach these goals. Cool. Alright, let's do that in.