Monetary policy and the effects the policy has on the budgeting of New York City.

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The public policy that is going to be reviewed in this paper is the monetary policy and the effects the policy has on the budgeting of New York City. Public policy refers to set of legislations adopted by various states to achieve a desired outcome in a given state or city. The public policies are backed by laws for them to be enforced by court of laws and in case one fails to observe them, he or she can be prosecuted.

In some countries or states, public policies are entrenched in the constitution. Public policies are formulated to achieve a desired goal in a given country. Some of the desired goals of public policies are to create employment or reduce the level of inflation to those acceptable in the country usually single digit inflation. Public policies are formulated to ensure a certain level of investment is attainted.

According to Woodford, 2003, monetary policies are public policies formulated by the Federal Reserve to achieve a certain goal in the economy. Monetary policies are formulated to control the supply of currency in the economy. It is worth noting that the Federal Reserve has a constitution mandate to control the supply of money in the economy.

Excess supply of money in the economy leads to inflation. Inflation refers to general increases of prices of services and goods over a period of time. If the supply of money is more than the amount of goods produced in the economy, the prices of goods increases. This is because the purchasing power of residents increases. This causes the demand for goods to go high and since there is no additional products produced to satisfy the demand, prices of goods escalates thus creating inflation.

On the other hand, supply of money in the economy is very low; the level of investment goes down as goods produced are not demand. This has a negative effect on the growth of the economy. Thus the Federal Reserve has a responsibility of ensuring that there is optimum supply of money in the economy. This is achieved by the help of monetary policy (Woodford, 2003).

During the financial crisis that the world economies experienced in recent past, the role of Federal Reserve was clearly exhibited. The Federal Reserve applied tools of monetary policy to reduce the effect of financial crisis. Financial crisis we experienced recently threatened to collapse our economy. As a matter of fact many people’s livelihood was affected as result and thus Federal Reserve applied monetary policies to arrest the situation.

To begin with, the Federal Reserve Bank of New York reduced the base interest rate. The commercial banks borrow money from Federal Reserve which is in turn advanced to the people as credit (Galí, 2008). As a matter of fact Federal Reserve is a lender-of-last resort. In the event where commercial banks have no money to advance to the customer, they turn to Federal Reserve for loans at a certain interest rate. The Federal Reserve is also regulators of commercial banks.

This means Federal Reserve makes rules that must be adhered by commercial bank or risk punishment or even worse risk the withdrawal of their trading licenses. The low interest rate charge to commercial bank by Federal Reserve ensured that commercial banks can advance money to people at a low interest rate.

This low interest motivates people to come for loans hence economic growth. The money advanced to people as loans was to ensure that certain level of investment is attained in the economy hence economic growth. The investment made also would create employment opportunities that are badly needed after many people lost their livelihood as a result of economic crisis. The low interest rate made credit accessible to people hence excess amount of money in circulation.

The excess money in circulation led to inflation due to high demand of goods created by high purchasing power of citizens. Thus it is argued that the low interest rate that was meant to spur economic growth badly needed after the worst economic crisis in decades left the economy worse than it was before the intervention (Woodford, 2003).

According to Lee et al 2008, another monetary policy that was adopted by Federal Reserve is that of bailing out companies and organizations that were considered very crucial to the economy of the United States. The financial crisis what was experienced recently led to collapse of companies hence loss of employment and revenue to the government. To avoid further loss of employment in the country, the United States government through Federal Reserve gave cash bail-outs to the companies that were at verge of collapsing.

The negative effect of bail out was that tax payers’ money was put in the use in projects that were not popular thus most of American had a feeling that the bailout was not necessary thus wastage of taxpayers money. It was argued that bail-out gave some companies undue advantage to other companies who did not receive government assistance (Lee, Johnson & Joyce, 2008).

References

Galí, J. (2008). Monetary Policy, Inflation, and the Business Cycle: An Introduction to the New Keynesian Framework. New York: Princeton University Press

Lee, R., Johnson, W. & Joyce, G. (2008). Public budgeting systems (8thed). Sudbury, MA: Jones and Bartlett

Woodford, M. (2003).Interest and Prices: Foundations of a Theory of Monetary Policy. New York: Princeton University Press

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Monetary policy and the effects the policy has on the budgeting of New York City.

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