Monetary Policy Essay Example | Topics and Well Written Essays - 500 words

Monetary Policy - Essay Example The Federal Open Market Committee (FOMC) is group within the Fed that meets several times a year to adjust the interest rates. Lower interest rates will increase demand for products and can stimulate the economy. For example, a decrease in interest rates lowers the cost of borrowing which leads to an increase in investment spending. It also leads families to buy automobiles, houses, and durable goods (Federal Reserve Board). Lowering interest rates is an approach taken when the economy goes into a period of recession. Lower rates may induce banks to lend to businesses and households. This will increase spending and stimulate productive output .It should be noted that the change in interest rates has only a short term effect of returning inflation or employment to its long term objectives (Federal Reserve Board). By setting interest rates, the FOMC is able to indirectly control the money supply. Lower interest rates alter the total of amount of loans, bonds and shares issued. According to the quantity theory of money, as the money supply increases the inflation rate rises ("The Quantity Theory of Money"). Setting the interest rate becomes a task of stimulating economic output while keeping inflation under control. The effects of interest rate changes may take from three months to two tears to show an effect. Chart 1 in