The policy that reduces the poverty Essay Example | Topics and Well Written Essays - 2000 words

The policy that reduces the poverty - Essay Example It is the responsibility of the government to ensure that all the aspects of economy maintain a stable level so that the country can grow and expand. Government regulates many things in an economy including inflation, exports and imports, prices of many vital commodities, and many important economic aspects. The government of US has entrusted the job of regulating the monetary policy and interest rates along with the margin requirements. Fed was created by an act of Congress and consists of a seven member Board of Governors who is headquartered in Washington DC with operations spread across the major cities of the US. The primary responsibility of the Fed is to set up monetary policy by setting up a FOMC (Federal Open Market Committee) together with five other members. (The Board of Governors of the Federal Reserve System) The Fed comes out with the monetary policy in order to ensure a certain key objectives like, delivering price stability with a low inflation level coupled with an objective to support the Government's economic objectives of growth and employment. Price stability is taken care of, by the Government's usual inflation target of around 2 percent. There is a need to contemplate the crucial and critical role played by price stability in achieving the aforesaid economic stability, and in providing just the right conditions for a sustainable and longer living growth in output and employment. The government's intention is definitely not to achieve the lowest possible inflation rate, as a low inflation is supposed to be equally bad as a high one and for that matter inflation below the target of 2% is judged to be as worse as inflation above the predefined target. The inflation target is therefore very symmetrical. (How Monetary Policy Works) Impact of Inflation on the Economy The Fed has a monetary policy and it uses the same to regulate mechanism of the economy. Like when it decides to change the interest rate, the government is trying to check the overall expenditure of the economy. A change in interest rates is mostly used to contain inflation, which is the result of lavish expenditure by the country. The Fed sets a fixed interest rate at which it lends money to financial institutions and depending on this interest rate, individual banks and other financial institutions set up their own interest rates, which apply to the whole economy. This step is of indispensable importance to the economy, as this is very widely used to contain inflation. The only purpose behind such a step is just to contain undue inflationary levels prevailing in an economy. The point to be noted here is that, this interest rate set by the Fed is so effective and powerful that it regulates the whole economy. It affects the stock and bond prices and also influences the asset prices through out the country. This interest rate also regulated the savings in an economy, which eventually results in capital formation and reinvestment. It is note that when interest rates are high, people prefer to invest money in government deposits that are less risky in nature than the stock markets and similarly high interest rates boost up the savings. Lower interest rates make asset and real estate prices go up, as people start ignoring conventional saving instruments and make use of the high growth ventures like shares and houses, which pushes up their