An economy may experience both direct and indirect consequences arising from interest and mortgage rates. Any country intending to increase its loan facilities and the circulation of money is also inclined to major difficulties.
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There are many problems experienced by a number of countries in creating a balance between mortgage rates and an expansionary economy. Some of these issues concern keeping progressive price increases under control. Seeing that mortgage rates are not high, the growth of an economy is another issue experienced by countries. However, these problems have become rather challenging to these countries. This essay will discuss some of the major issues that the countries experience in developing a balance between mortgage rates and an expansionary economy.
According to Hubbard (2008), in the last ten years, the increasing housing price greatly depends on the primary debt pay decrease that influences mortgage recipients. As a result of this, middle-class citizens can manage to acquire a house. This process of owning a home can lead to a high level of demand and this successively can raise the cost of houses.
Developing a balance between mortgage rates and an expansionary economy
Fiscal policy is an approach by which countries regulate their level of expenditure with the aim of tracking and shaping the economy (Heakal, 2002, par.1). As a result of the 2002 growth in housing and the increase in mortgage rates, the government policies were put in force to decelerate and amend the housing problems faced. The government implemented economic decline policies to retard high demand and keep prices from fluctuating. In order to combat the growth in housing and the increase in mortgage rates, high-interest rates were implemented.
With the introduction of the sub-prime mortgage rates amendments in 2006, several landlords could not uphold the changed mortgage rates and defrayments, thereby, driving mortgages into legal proceedings to repossess the security for a mortgage loan that is in default. In addition to the meltdown in the business of mortgaging, the declining housing market and increased interest rates set out a downward constant accelerating alteration in the economy.
Economic development requires the implementation of monetary policy, which is a guiding principle of shaping the economy through transformations in the banking system’s treasury that manages the supply of official currency issued by the government and credit accessibility (Hubbard, 2008). The former monetary policy includes a reduction in the rate of federal funds to manage economic issues. Monetary policy, on the other hand, has definite but not specified weaknesses. It has a wide-ranging effect on all parts of the economy.
Economic professionals often differentiate credit, assessment, and impact of slow development. However, the advantages of monetary policy are delimited to uphold low, constant, and expected cost increases as the most excellent effort that monetary policy can introduce to an operational economy. It influences individual expenses and investment choices with self-confidence.
In the year 2001, the Federal Reserve System forcefully progressed to oppose the weakness that had surfaced in total supply. Toward the end of the year, it had reduced the rate of federal funds by 1 ¾ percent (The Federal Reserve Board, 2008). The government applied expansionary monetary policy to combat these processes.
In early 2002, the U.S. economy flourished and there was a rise in the production of goods. At the same time, reduced interest rates sustained the acquisition of consumer products and the need for shelter (The Federal Reserve Board, 2008). Since then, the housing market has worsened with little demand, increased legal proceedings, and excess inventory on the market.
Over the past year, the U.S. economy had attenuated a great deal and housing needs continued to decrease. With inflation prospects expected to be practically fixed and stable, energy and other product prices are likely to balance, and demands on resources on the verge of easing, inflation is likely to tone down a bit in 2008 and 2009. With this experience, the Federal Reserve significantly relieved the position on monetary policy in 2008 (The Federal Reserve Board, 2008). The Federal Reserve is still receiving results of the preceding year’s stimulus fiscal and monetary inflicted policies.
The whole housing market was unwelcoming and little can be done in the approach of the government concern at present. As a result of the rise in the rate of unemployment, progressive increase in prices, and the depreciated change in dollar expansionary, the economy would only strengthen these states. The monetary policy of the United States changed all sorts of economic and financial choices made by its citizens, and that of other countries worldwide.
In England, the purpose of monetary policy is to control the running of the economy rate of inflation, rate of exchange with other monetary systems, and unemployment. The Monetary agency has the power to revise the interest rate and the money made available, as a consequence of the need of the economy. The Federal Reserve System primarily affects demand by changing (increasing and decreasing) the current interest rates, to accomplish policy objectives. These objectives are stated in the 1977 alteration to the Federal Reserve policy. This policy effectively decreased the flow of money in circulation, but it assisted in setting off a sharp state of the economy that declined in the early 1980s. The rate of progressive increase in prices fell, and by the mid-1980s the Federal Reserve was once more capable of carrying out a careful expansionary policy. The rates of interest, from the other perspective, remained fairly high, as the government had to finance its excess expenditures over revenues by taking heavy loans. The interest rates gradually fell, as the excess of expenditures over revenues reduced and eventually vanished in the 1990s.
The increasing consequence of monetary policy and the decreasing function of fiscal policy in economic development activities that may show both political and economic state of being actual or real, expect the government to take detested actions like cutting down expenditure or increasing taxes while solving the issue of unemployment with long-established fiscal policy solutions. Though, political experiences may permit a bigger position for monetary policy at some stage in the inflation period.
The primary objective of monetary policy is to receive a large indefinite amount of output. However, an economic experience in terms of recession and improvement, as well as development and rejection, will influence production and employment in a short term. At the moment when demand is in control, there is a state of economic decline, in which the Federal Reserve can accelerate the economy on an interim basis. This is achieved by decreasing the interest rates. At the same time, a long-term economic improvement cannot be realized by the Federal Reserve. If they attempt, the price increases would shoot up abruptly and unemployment would not become stable. A high price increase can obstruct economic growth. When price increases are high, it creates anxiety about the expectations.
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The next objective of monetary policy is to strengthen the cost of goods for a period of time, which is called a low price increase. Although the low increase in price is eventually realizable, it is not of great concern, because it eventually becomes expensive.
The Federal Reserve has three important ways of exerting control over the circulation of funds and money available as loans in the economy. The most influential approach is the introduction of the open market, or trading of government securities in order to increase the circulation of money. This process is carried out through acquiring of government securities from banks, companies, or stockholders by the Federal Reserve while issuing checks as payment. When the checks are paid into the bank account, they act as new reserves. However, if the Federal Reserve intends to cut down the circulation of money, it sells securities to financial institutions that accept deposits and channel the money into lending activities, while taking reserves from them. Resulting from the fact that banks have lesser reserves, they must decrease their lending rate, and the circulation of money will consequently decrease. Consequently, it may cut down short-term interest rates.
The Federal Reserve can manage the money in circulation by determining what reserves financial institutions must save either as money in their strong-room or as deposits at their local Reserve Banks. Increasing reserve demands pushes banks to hold back a larger amount of their money, by this means cutting down the money in circulation, as decreasing demands, also operates in contrast to increase circulation of money. Financial institutions frequently loan each other money during the night to fulfill their reserve demands. The rate on such transactions, called “federal funds rate”, is an important measure of how “rigid” or “free” monetary policy is, at a particular moment of time.
Without deviation, this alters the amount of money in circulation. In line with this, the government monetary authority that distributes currency and regulates the supply of credit, and controls the reserves of other banks can introduce the open market approach to lower the amount of money in circulation. The Central Bank will trade on bonds in exchange for money in the form of bills or coins. This changes the medium of exchange in the economy, as well as the monetary base.
The third approach of the Federal Reserve is the instituted interest rate that member banks are charged on loan acquired through the Federal Reserve System or the interest rate that financial institution pays on loans from the reserved banks. At the same time, through the increase or reduction in the interest rate, the Federal Reserve System has the option of either discouraging or encouraging borrowing hence regulating the available income for the purposes of loans. Furthermore, the interest rate set by the Federal Reserve, which member banks are charged when they acquire loans through the Federal Reserve System, can point out an important change in the monetary policy. A high-interest rate can be used to establish a more limiting policy, while a decrease in the policy may establish an expansionary policy.
The Monetary Policy impacts the economy by the model of market price determination. The request for products and services is not concerned with the rate in the market but with the interest rates of the amount that is corrected for inflation. Market interest rates are known as the amount that is not adjusted for inflation rates. Real interest rates are the amount that is not adjusted for interest rate, cutting out the supposed rate of the price increase. Adjustments in the interest rates of inflation influence consumers’ demand for products and services by changing the rate. A reduction in the real interest rates decreases the borrowing rate, which stimulates the rise in the acquisition of consumer goods. On the other hand, earnings and costs will start increasing if the monetary policy has a forceful effect, and this creates an increase in price.
Monetary policy has an effect on all areas of the economy. It does not profit anyone if the government constructs the potential objectives. Though, there is significant control to the usefulness of monetary policy at some point in the period of unpleasant downturn in an economy. Yet, the monetary policy process of correcting economic decline is to increase the amount of money being circulated, in this manner interest rates will be reduced (Sullivan & Steven, 2003). On the other hand, as soon as the interest rates get to the level from which positive or negative mathematical quantities can be measured, the Federal Reserve cannot render any assistance (Sullivan & Steven, 2003). The intended goal, in that case, is to make the economy suitable for all. This is possible if all the information is accurate. This will motivate people to spend money on consumer products.
When attempting to regain a former condition after a financial state of the economy declines and motivates economic development, it is possible to raise the price of goods because of the increase in the circulated fund if the expansionary policies are extended. There has to be the introduction of a balance that will decrease unemployment, prevent price increase, and even support steady growth in the productive capacity of the economy. Though, monetary policy has been the preference to control the circulation of money since it is able to voluntarily adjust to different conditions on time and secluded from political influence (McConnell & Brue, 2004).
The government can develop the process of the open market, the rate of interest set by the Federal Reserve that member banks are charged when they borrow money through the Federal Reserve System, and the reserve ratio to realize a balance between price increase, economic development, and unemployment. If the expansionary monetary policies give rise to too many expenses and a high rate in price increase, it can be controlled by trading on securities or raising the rate of interest and reserve ratios of the financial institutions.
The three approaches of monetary policy which consist of open market processes, the rate of interest, and the reserve ratio are rather useful in the implementation of expansionary or restraining monetary policies to fight economic declines or reduce price increases. Whenever the government reduces the interest rate or the reserve ratio, they increase financial institutions disposing of money or property which encourages aggregate need and investment. The open market operation appears to be the most efficient approach used regularly, as the government trades in securities repeatedly to control the financial institution’s reserves. The Monetary policy is the most efficient as a result of rapidity and quality of being adaptable or changeable. It is exempted from political control and can be quickly implemented to deal with increases in price and unemployment and to generate growth in an economy.
Heakal, R. (2002).“What is Fiscal Policy” Web.
Hubbard, R. G. (2008). Money, the Financial System, and the Economy. Harlow. Essex: Addison-Wesley Longman Incorporated.
McConnell, C. R. & Brue, S. L. (2004). Economics: Principles, Problems and Policies. 16ed. New York: The McGraw-Hill Irwin Companies.
Sullivan, A., & Steven, M. S. (2003). Economics: Principles in action. Upper Saddle River, New Jersey: Pearson Prentice Hall.
The Federal Reserve Board. (2008). Monetary Policy Releases. Web.