The Government\'s Economic Policies Effect Good or Bad Economy

Introduction
Public policy is government decisions and actions designed to deal with problems and issues affecting the public (Madimutsa, 2008). The U.S. government policy areas include monetary policy, immigration, intellectual property, national defense, and welfare. This paper will review the impact of monetary policy on the U.S. economy.
Monetary Policy
Monetary policy is classified as the procedure by which the Federal Reserve uses monetary policy tools to regulate the money supply, exchange rate, and interest rates (the price of money) to stabilize the economy (Labonte, 2020). The interest rate is classified as the cost of borrowing and the reward for saving. The money supply can be defined as the total sum of money that is available in the economy. The exchange rate is the cost of the domestic currency concerning other currencies. The Fed uses various monetary tools, but over the years, they have relied on open market operations and the discount rate (Labonte, 2020). Open market functions indicate the selling and buying of government securities in an open market to influence short-term interest rates.
Monetary policy can either be an expansionary policy or contractionary policy. Expansionary monetary policy is a policy aimed at increasing the level of money supply within an economy. It is traditionally used to reduce unemployment during the recession because it lowers interest rates and increases aggregate demand. With a low-interest rate, entrepreneurs can expand their existing businesses or begin new enterprises. This helps in creating more jobs in different sectors of the economy.
Additionally, the expansionary policy causes demand-pull inflation and reduces net exports. The contractionary monetary policy reduces the money supply and increases interest rates within an economy. When the Fed implements this policy, it intends to stabilize the economy and reduce aggregate demand to reduce inflation. Contractionary monetary policy also causes deflation and an increase in net exports.
Goals of Monetary Policy
The Feds have two goals that guide its monetary policy: maximum employment and price stability (McGraw-Hill Education, n.d.) All economies suffer from the effects of deflation and inflation. Extreme inflation harmful to the economy because it reduces real wages. That is, each dollar earned by a worker has low purchasing power. Low and stable inflation encourages people to save more and businesses to invest more. Deflation, on the other hand, leads to an increase in real wages. Therefore, the monetary policy helps to maintain price stability. High unemployment adversely affects economic growth. Given this fact, monetary policy can be used to generate employment because it influences the rate of investment.
The above goals of monetary policy are similar because they help in stabilizing the economy. To fight the recession, the Fed stimulates economic growth by increasing the money supply. To fight inflation, the Fed sells government securities hence reduce the money supply. By carrying out these actions, the Fed stabilize the economy. There are also differences in monetary policy goals because high employment increases aggregate demand, which results in demand-pull inflation, while low or stable prices reduce aggregate demand causing deflation.
The Lifecycle of Monetary Policy
The lifecycle of the monetary policy process consists of five stages, which are: 1) policy agenda setting (problem identification), 2) policy formulation, 3) decision making (policy adoption), 4) policy implementation, and 5) policy assessment (Madimutsa, 2008). All these stages merge to form a seamless process.
Policy agenda setting is the first stage of the monetary policy process. The Federal Open Market Committee (FOMC) meets in Washington at least eight times in a year to review the economic and financial condition in all states to identify problems that need to be resolved (Federal Reserve, 2020). Next, the FOMC explores various policy options or courses of action that are available for addressing the problem identified in stage one, which could be inflation or recession. For example, they decide whether or not to change the federal funds rate and, if so, by how much. The federal funds rate is important to monetary policy because it affects interest rates banks charge each other and their customers.
The third stage is policy adoption. The FOMC decides on the ultimate course of action by setting monetary policy. Once a policy has been adopted, it must be put into practice. In other words, it must be implemented. The Feds use monetary policy tools such as the discount rate and open market operations to turn its monetary decisions into actions. Lastly, after a monetary policy has been implemented, it is important to assess its effectiveness in terms of expected and actual results. The FOMC critically examines the impact and outcomes of monetary policy.
Advantages and Disadvantages of Monetary Policy
Monetary policy can be implemented easily. That is, a decision can be made and implemented on the same day. Other advantages of monetary policy are: 1) the Feds can easily make decisions because they are independent of the government, 2) monetary policy has no political constraints, and 3) monetary policy does not lead to crowding out (Suman, 2015).
The disadvantages of using monetary policy include time lags in analyzing financial and monetary problems. Second, monetary policy is ineffective in a recession. Monetary policy is linked to the loan-making process, and the Feds have no control over the loan making process. So, they can increase reserves, but banks are not willing to lend money, or people are not willing to borrow (In a recession, both banks and people are very cautious). Lowering interest rates or expanding reserves is not enough to induce borrowers to take loans. Thus, monetary policy is ineffective during recessions. Third, fighting inflation with monetary tools can worsen it. During periods of inflation, the Fed adopts a contractionary monetary policy and increases interest rates. Businesses that borrow at this high-interest rate will transfer part of the costs to consumers by increasing the prices of their goods and services.
Recommendation
Past performance shows that monetary policy influences the economy. All through the 2007-2008 financial crisis, the Federal Reserve dropped its target for the federal funds rate to zero percent (Labonte, 2020). The Fed's also created special forms of loans to banks and other financial institutions. These actions were successful as the recession ended in 2009. However, the economy is still recovering slowly. In the future, Congress should enact laws to protect the Fed from Short-term short-term political pressures to meet their long-term objectives. That is price stability and maximum employment.
Conclusion
Monetary policy can be classified as the procedure by which the Federal Reserve uses monitory tools such as open market operations and the discount rate to stabilize the economy. Their goal is to maintain price stability and maximum employment. The Fed's actions during the 2007-2009 financial crisis are evidence that monetary policy influences the economy. They were able to prevent the financial crisis from turning into a disaster by lowering the federal funds rate to zero.
References
Federal Reserve. (2020, March 15). Federal open market committee. Retrieved March 30, 2020, from https://www.federalreserve.gov/monetarypolicy/fomccalendars.htm
Labonte, M. (2020). Monetary policy and the Federal Reserve: Current policy and conditions (RL30354). Retrieved from Congressional Research Service website: https://fas.org/sgp/crs/misc/RL30354.pdf
Madimutsa, C. (2008). The Policy Formulation Process. Retrieved from https://www.researchgate.net/publication/336927323_The_Policy_Formulation_Process
McGraw-Hill Education. (n.d.). The role of government. Retrieved from https://www.jasonsclassroom.com/social-studies/cc-basics/chapter-5/lesson-5.3/
Suman, S. (2015, October 26). Monetary policy: Objectives, advantages, and disadvantages. Retrieved from https://www.economicsdiscussion.net/monetary-policy/advantages/monetary-policy-objectives-advantages-and-disadvantages/12768