Monetary Policy

Monetary policy is one of the tools that the government uses to assist in controlling the economy. It, along with fiscal policy, helps to influence the general rate at which prices rise and fall. That being said, monetary policy is an integral part of how a society succeeds or fails. History has shown us that a proper monetary policy can be critical to success. For example, a country like Russia instituted a policy in which they printed new money at such a high level that it made their currency nearly worthless compared to the goods and services it could buy. Their policy was designed to consistently pay for the various government functions by simply printing more money. I understand that this is an extreme case but when discussing monetary policy we must look at the various parts of the spectrum. Obviously, this type of policy would not work in the US as it would make inflation rates incredibly high.

Whenever discussing monetary policy, the first area to be addressed must be how the government creates money. The Federal Reserve has been in control of the money and credit in the US economy since 1968 when the US decided to get away from using gold as the standard in which to operate its monetary policy. The whole theory of this type of "central bank" is so that we can maintain the purchasing power of the US dollar and keep its comparative worth with the various other currencies in the world.

Monetary policy can have a dramatic effect on several areas of the economy. One of these areas is the unemployment rate. Many economists have said that monetary policy can have an affect on the natural unemployment rate.