Being a consultant in Federal Reserve Bank for monetary policy, in order to eliminate the persisting unemployment problem, I would devise certain measures regarding monetary policy to control the problem of unemployment.
First of all, monetary policy can be defined as the process by which monetary authority controls the supply of money for the purpose to promote economic growth and stability. Expansionary monetary policy is used to control unemployment and recession by decreasing the interest rates and increasing the supply of money. Contractionary policy is used to control inflation by increasing interest rates and decreasing supply of money.
In order to reduce the problem of unemployment, some measures which should be taken to stimulate the economy are as under:
' Increasing the money supply
' Reduction in interest rates
' Increasing aggregate demand
An increase in the supply of money may decrease rates of interest which results in more investment. The increase in investment may increase the aggregate demand to large extent which is clearly explained in the following diagram:
If interest rates are reduced than, than cost for buying assets or equipments would also reduce. This will make capital investment more profitable. It may also decrease the opportunity cost to hold an inventory.
' Aggregate Demand
The increase in investment which arises due to lower interest rates, will inject more spending. As a result of this large spending, there will be an even larger increase in the aggregate demand of goods. (Schiller, Hill, & Wall, 2012)
Expansionary Monetary Policy
In order to combat the problem of unemployment, expansionary monetary policy is the best tool. Under this, lower interest rates are there which promotes investment and increase spending, resulting in increase in aggregate demand for goods (Schiller, Hill, & Wall, 2012).
' It increases economic growth during the phase of recession.
' When consumers spending increases than, businesses enjoy profits. As a result employment opportunities will be generated.
' It may restricts deflation to occur which arises in the period of recession. But, supply of money in large amount may cause inflation t o occur.
These are some of the ways which helps to eradicate unemployment. I would devise my plan and present my strategies in front of Fed Chairman. Being the chairman of Fed, he is being responsible for the problem of unemployment prevailing in the country. So, eradicating the problem of unemployment would be his first priority. I would present all these strategies and its cause and effect along with the graph and figures as shown above, and will convince the chairman to implement these strategies in order to promote economic growth and stability.
Unemployment is a problem that affects whole society. If more people are unemployed, than economy is affected badly and the process of growth and prosperity becomes stagnant. So, in order to find solutions to control the problem of unemployment, the Obama Administration, Congress and the Federal Reserve have taken measures regarding Monetary and Fiscal policy.
Monetary policy can be defined as the process by which money supply is being controlled by monetary authority for the purpose to promote stability and economic growth. It also influences demand for goods and services and inflation to a global level. Federal Reserve Policy makers use three important tools in order to manipulate supply of money. These tools are:
1. Open market operations;
2. Discount rate;
3. Reserve Requirements
In the current economic situation, monetary policy is adopted to control the process of money creation which is performed through fractional reserve banking. The Federal Reserve controls the fractional reserve banking process of money creation and money supply as well with the help of open market operations, reserve requirements and discount rates. Monetary policy is of two types:
' Expansionary Monetary Policy
' Contractionary Monetary Policy
In Expansionary Monetary Policy, Fed decreases the interest rates by increasing the supply of money which helps in reducing recession. In Contractionary Monetary Policy, Fed increases the interest rates and decreases the supply of money to reduce inflation (Schiller, Hill, & Wall, 2012).
By working on the monetary policy, the Federal Reserve will reduce its Fed Funds Rate in order to modify its monetary policy. This will overall reduce the interest rate prevailing in the country and motivate businesses and industries to borrow more money to make investment in their businesses. As a result, production will increase which requires more labor. So, hiring of more workers may reduce unemployment problem. In addition to this, low interest rates will also motivate investments in housing market as well, which will increase spending of personal consumption and will create or generate more wealth.
On the other hand, Fiscal policy can act as a very useful tool in order to fight unemployment. Fiscal policy is under the authority of legislative body of federal government which is responsible to collect tax and spend revenues. It is of two types:
' Expansionary Fiscal Policy
' Contractionary Fiscal Policy
If the economy is in recession, then appropriate fiscal policy adopted is to reduce tax or increase spending, which is known as Expansionary Fiscal Policy. During the time of inflation, the appropriate fiscal policy adopted is to raise tax and decrease spending, which is termed as Contractionary Fiscal Policy.
By taking measures on Fiscal Policy, Government can start new projects and with the increase in spending in new projects, government can create employment opportunities by hiring more workers. In addition to this, government can provide the benefits of tax cuts, which will boost economy just like a decrease in increase rate. Government can also provide loans to entrepreneurs to expand their existing business or to start new business. Taxation is every important tool to control unemployment. High tax means, consumers have less consumption because of less disposable income. And in this way, businesses will have less revenue. Therefore, tax cuts leave more money in the hands of customers, which can generate more revenues for businesses. Another important tool is government spending. Increase in government programs may require more labor or workers. Hiring workers may reduce the problem of unemployment (Schiller, Hill, & Wall, 2012).
Every government introduces its stimulus packages in an attempt to fix the problem of unemployment prevailing globally. These stimulus packages must be introduced by analyzing its long term benefits. The fiscal stimulus package introduced by the organization normally consists of three important options which are:
' Use of tax cut;
' Increase in government spending;
' Increase in transfers.
All these options if used may cause the government expenditure to increase. These options will temporarily boast up the economy but in order to eradicate the problem of unemployment, government must have to permanently find a technique to fund these stimulus packages. According to the Keynes's point of view, the goal of macro economy is to balance the economy at full employment level, instead of balancing the budget only. If jobs are less available, than there would be an increase in transfer payments such as unemployment benefit. But, if jobs are available than, burden of government of giving transfer payments may reduce, and tax collection revenue may increase to greater extent (Schiller, Hill, & Wall, 2012).
In the phase of recession, the economic state is not good for investment purposes. So private organizations will not prefer to invest because their initial motive is to make profit, which is not possible in recession. Private organizations are interested more in creating profit and jobs when an investment is made. Profit generated from private companies can contribute a lot in the economic growth process. So, they play an important role in private market system.
On the other hand, Commercial banks would result in crowding out effect, because if government borrowing is increased than private borrowing will decrease. Crowding out effect creates opportunity costs for spending of government because of less progression. When the government is left with no other options than, they go for money borrowing in order to finance budget deficits which will increase the interest rates. There is a limited amount of money available for borrowing. And, if government borrows than, less amount of money will be available for investments of businesses. So, commercial banks play an important role being a part of private market system.
Wealthy individuals are the people who save more and do less spending. They also make investment in those countries which are better in economy. Because of their saving and investments, more profits can be earned which will contribute a lot in the economic growth and prosperity. So, they are of extreme importance in our private market system.
Hence, our private market system is based on the three power group of private companies, commercial banks and wealthy individuals. They have the strong capability to influence the consumption rates because of investments. The major problem is the availability of less number of jobs to increase the economic growth. If jobs are available than growth process will also become faster. So, unemployment is the root cause of all problems. Our future generation will not be better than us, if problem of unemployment and recessions are not dealt in a serious manner.
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