Ihope that you are faring on well. The last time we talked youinformed me that you were in the process of selecting a college toattend. It has been a while since we talked and I thought that Ishould update you on the most interesting bits of my classes. Iremember how much you loved learning about new things, especiallythose that touch on the economy. This semester I have had the chanceto study various business units and the topic that has fascinated mehas to be that on monetary policies. I find the monetary policy to bean interesting economic tool because it allows the Federal Reserve tocontrol the money circulating in the economy. It is a very powerfultool that is used by a single entity, yet it has ripple effects oneveryone’s life.
Themonetary policy works through many ways. One, the Fed could alterinterest rates. These rates, in turn, affect the price of loans.Expensive loans tend to turn away potential borrowers. Thus, lessmoney is lent out by banks less money enters the economy. Secondly,the Federal Reserve could buy or sell government-issued bonds. Bondsrefer to an investment in government debt whereby the governmentpromises to repay you back at a particular rate after a given period.By issuing bonds, the government pulls money out of the economy.Thirdly, the Federal Reserve can change the amount of money bankshold in their reserves. This money is not to be lent out to customerssince it is meant to be used in handling regular customer withdrawalrequests. Increasing the reserve amount reduces the amount that bankscan lend.
Ifound an article by Jeanna Smialek on Bloomberg.com which willprovide you with up to date information on how monetary policies areused in real life. The article is a summary of multiple publicationswritten by authoritative figures within financial circles. Bystudying macroeconomics this semester, I have learned how tointerpret the various issues summarized within the article. Smialekbegins by analyzing John William’s opinion piece on the U.Smonetary policy. William argues that the US monetary policies haveslowed down economic growth and have put the inflation levelsunacceptably low. He adds that policymakers need to change monetarypolicies to favor a higher inflation level by lowering borrowingrates (Smialek).
Courtesyof my education, I understand that the higher the interest rate, thelower the amount of money circulating within an economy. When alittle sum of money is exchanging hands, people do not invest. A lackof investment slows down the overall economy because people arespending less money. When Williams advocates for lower interestrates, he hopes to increase the velocity of money. Smialek notes thatBen Bernanke advises policymakers to be cautious when raisinginterest rates. Bernanke believes that raising interest rates willcause the economy to contract (Smialek). From my macroeconomicsclass, I understand that increasing interest rate increases the costof lending and makes production expensive. In the long run, it willlimit the amount of money that people and businesses can invest.
Further,Smialek summarizes an article by Jobust and Lin of the InternationalMonetary Fund. Smialek states that Jobust and Lin view the negativeinterest rates that have been implemented in some European countriesas being beneficial because they have boosted spending in theEurozone while having a minimal effect on banks’ profitability.However, the IMF researchers caution against prolonging thelow-interest rates because they will adversely affect banks(Smialek). Because of my recently acquired understanding, I now knowthat a negative inflation rate is implemented to stop people fromhoarding money in banks by charging them interest on their deposits.As such, individuals are forced to spend their money. In turn, theeconomy grows. I hope that my letter has been informative andenlightening to you. Please have a look at Smialek’s article sothat you may understand the monetary policies in detail. I lookforward to receiving your response.
Smialek,Jeanna. "Monetary Policy Makers Rethink The Rules, And OtherEconomic Must-Reads". Bloomberg.com.N.p., 2016. Web. 12 Dec. 2016.