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Macroeconomics is concerned with overall economic activity such as national wages, unemployment, inflation, and growth rate. It analyzes the general financial system, trend, efficiency, and decision making in its most simple form. Monetary policy, reasons for hanging onto currency, Federal Reserve policy behavior, and the equation of exchange are only a couple of the macroeconomics projects that aid in the evaluation of economic graphs (Luo 116). My essay will be based on the issues listed above.
Monetary policy is a concerted attempt by the central bank or other financial governing authority to regulate the economy's money supply (Rey 200). Monetary policy takes into account modification of interest rates, buying and selling government bonds and credit-cash assessment mostly regarding loans and bonds. The two types of financial policies are contractionary policy, which reduces the money supply and expansionary policy which increases the money supply in the economy. The central bank uses tools of monetary policy to assess the money supply. These tools include first, reserve requirement whereby banks are mandated to preserve a certain percentage of all its deposits daily. The value will be high if less money is to be circulated and it will be low if circulation in the economy has to be increased (Luo 79). Second, discount rates to banks are set at a convenience percentage depending on the situation of money to be in circulation. The third tool is open market operations meaning that the Federal Reserve buys and sells treasuries from their member banks. The rate of buying and selling will depend on the current money circulation in the economy (Walsh 47). Fourth it is the use of inflation. The banks deliberately provoke inflation crisis hence making buyers buy in bulk in anticipation of the rise in prices. This serves to reduce money supply in the economy.
Many factors make people hold onto money. When the income level of an individual is high, one tends to keep less cash in anticipation of more to come. Individual's temperament is also a factor. People who are less optimistic in life squander a lot of money compared to those who are more confident (Rey 37). When the duration between incomes is short, such individuals hold less money compared to those with a long income level. An individual from a poor background will keep more money compared to rich ones who anticipate cash any time (Walsh 87). Young people tend to spend a lot compared to elderly who foresee the future generation. Lastly, households with more dependents tend to hold onto money for supporting the dependents.
The Federal Reserve is in charge of monetary policy in the U.S. It has the mandate to realize maximum employment, that’s, 5% unemployment rate and stability in prices. It does this through keeping long term interest low (Luo 119). It is the lender of the last resort in the country hence a major policy-shaper in the economy (Rey 40). It provides cash to the banks depending on the current economic demand.
The equation of exchange is a financial equation which shows the relationship between expenditure index, the supply of money, the velocity of money and price level where M × V = P × T.M is the supply of money, P -price level, V-money velocity and T-expenditure index (Luo 126).
Luo, Yanxin. "Evaluation of an Equation for the Canada-US Real Exchange Rate." (2017).
Rey, Hélène. Dilemma not trilemma: the global financial cycle and monetary policy independence. No. w21162. National Bureau of Economic Research, 2015.
Walsh, Carl E. Monetary theory, and policy. MIT Press, 2017.
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