Q:

How does monetary policy affect unemployment?

A:

Quick Answer

Monetary policy, established by the federal government, affects unemployment by setting inflation rates and influencing demand for and production of goods and services. Additionally, having stable prices and high demand for products encourages firms to hire workers, which reduces rates of unemployment. In the United States, the Federal Reserve holds responsibility for instituting a national monetary policy. Sometimes, such as during economic downturns, the Federal Reserve asserts its control by implementing long-term and short-term measures to stimulate economic production.

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How does monetary policy affect unemployment?
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Full Answer

The Federal Reserve controls economic situations concerning the private and public spheres. Traditionally, it accomplishes economic control by controlling the federal funds rate, which is the rate that lending institutions charge one another for short-term loans. Short-term investment rates ultimately influence borrowing rates, which refers to money borrowed by purchasers and consumers of goods and products. The short-term investment rates influence longer-term rates as well.

In both short-term and long-term scenarios, firms and consumers look for low interest rates, which allows them to make investments. Low interest rates result in lower borrowing rates, which enables investors and firms to borrow money and repay loans in the future. The increased activity of borrowing in turn raises demand for market goods, which triggers companies to hire workers. Workers benefit from higher wages and job security as companies can afford to hire them and will retain them to continue meeting consumer demands.

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Related Questions

  • Q:

    What are the major strengths of monetary policy?

    A:

    The greatest strengths of monetary policy are increased accountability and transparency on the part of the Federal Reserve. Because the Reserve is in no way democratically elected or appointed, this gives taxpayers more involvement in and control over its decision-making.

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  • Q:

    What does an expansionary monetary policy shift?

    A:

    An expansionary monetary policy shifts the supply curve for money to the right because of heightened market expectations, according to Boundless. This results in lower interest rates and increased economic growth during periods of slow economic growth.

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  • Q:

    What is the basic objective of monetary policy?

    A:

    According to European Central Bank, the basic objective of monetary policy is to improve price stability and achieve a high level of employment in the economy. Monetary policy also serves as a tool to stimulate economic growth during recessions and reduce price inflation.

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  • Q:

    How does poverty affect the economy?

    A:

    Poverty compromises the market's access to skilled labor which is essential for production of needed goods and services. Poor people lack access to good health care, which presents challenges in workforce productivity. The economy also spends more on health care for people who can’t afford it. Further, poverty poses greater demands for the criminal justice system, which reduces productivity of those incarcerated and results in property damage for those affected.

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