Monetary Policy (Finance) Essay Example | Topics and Well Written Essays - 1000 words

Monetary Policy (Finance) - Essay ExampleThe Fed comes out with the monetary policy in order to ensure a certain key objectives like, delivering price stability with a low inflation level coupled with an objective to support the Governments stinting objectives of growth and employment. To have a look on how the Fed monitors the price related regulations to keep a microchip on inflation, we can consider a small example of the regulation on house and property prices. To take any decisions related to elicit aims keeping in mind the afoot(predicate) inflation drift, the Fed must be thorough with the booming property prices and must take steps to ensure that the prices are not artificial.Government intervenes by dint of its central bank to regulate the prices of many commodities, similarly it also regulates the prices of houses like any other important commodity. Fed has the responsibility to keep a check on asset prices including the prices of houses. There can be a number of reas ons why the prices of houses may shoot up, like the simple rule of demand and cut has a definite impact. (Demand and Supply for Housing).Other reasons behind a agitate in property prices can be Mortgages. A mortgage is the money borrowed to defile a house, as for most people buying a house is not easy. Over the years mortgage market has picked up greatly and the current scenario is totally different from the one that existed in the beginning. (The UK Housing Market - Factors Influencing the Housing Market Mortgages) The Fed has a monetary policy and uses the same to regulate instrument of the economy and deal with such erratic swings in the prices of property. Like when it decides to change the interest rate, the government is trying to check the overall expenditure of the economy. A change in interest rates is mostly used to contain inflation, which is the result of lavish expenditure by the country. The Fed sets a fixed interest rate at which it lends money to financial instit utions and depending on this interest rate, individual banks and other financial institutions set up their own interest rates, which apply to the whole economy. This interest rate also regulated the savings in an economy, which eventually results in capital formation and reinvestment. It is note that when interest rates are high, people select to invest money in government deposits that are less risky in nature than the stock markets and similarly high interest rates ascending up the savings. Lower interest rates induct asset and real estate prices go up, as people start ignoring conventional saving instruments and make use of the high growth ventures like shares and houses, which pushes up their prices. Interest rate change also affects exchange rates, as an increase in the interest rate in US will yield better returns to the investors compared to their overseas ventures. This phenomenon usually makes US dollar assets attractive, which pushes up the value of the currency vis a v is other currencies, and a stronger US dollar would mean less money would be shed on imports and less quantity of exports will take place as in that respect will a lesser demand for products made in US because of the currency being strong. It is interesting to have a look at the abut of how the bank sets interest rates. The primary step in this direction starts with the estimates of the money flow that