The Figure Above Shows Changes In The Rates Of Unemployment AND Inflation In U.S (Pettinger, 2014) Essay Sample

DISCUSS HOW THE TOOLS OF MONETARY POLICY OPERATE TO HELP INFLUENCE THE ECONOMIC GOALS OF LOW UNEMPLOYMENT AND INFLATION

Monetary policy is the tool that is usually used by the government to control the flow of money in the economy for the purposes of making sure that the business cycle stabilizes hence reducing the problems of unemployment and inflation. This was initially undertaken by either printing more or less paper currency but in the modern economies, it is undertaken by controlling the money creation process through the fractional reserve banking (Slavin, 2013). Monetary policy comes in two varieties the first being expansionary monetary policy which increases money supply and lowers interest rates and the contra-dictionary policy which decrease money supply and raises interest rates.
These changes in the financial affect the economic activity. When the interest rates go down in the case of expansionary monetary policy, it makes borrowing cheaper and households are tempted to borrow more and this means households will be able to increase their purchases of goods and services in the economy. This will make firms to increase their sales and being able to expand their businesses. When their production capacity increases it compel the firms to hire more people to meet the production needs of the market. This will further increase the household wealth and the level of employment will increase in the economy and hence lowers unemployment rate (Slavin, 2013). This will also be favored by the banks willingness to lend money to the consumers.
Monetary policy will also have an influence on inflation in the sense that when the federal interest rate is lowered, there is increase in the demand for goods and services in the economy and this will have the habit of pushing the wages up and also the cost of production and this will also tend to push the prices of goods higher in the long run and this increases the level of inflation in the economy and higher nominal interest rates (Slavin, 2013). Monetary policy also has a tendency to affect the inflation directly through the anticipation consumers and businessmen have in future that is, if they expect the prices to rise in future they will also try to bargain for higher wages and prices. This automatically raises the level of inflation without affecting employment and output.
Too high inflation is not good to the consumers of goods and services and at the same time deflation is not goods to the businessmen and therefore, the government has to come up with inflation target. This will be achieved through periodic adjustments to the interest rates targets. These interest rate targets are maintained for certain duration maybe monthly or yearly by use of the open market operations. Low inflation will be brought about by the price stability and when the rate of inflation is low it will mean people will not waste their money and other resources trying to protect themselves from the inflation (Slavin, 2013).
Conclusively, the government should promote high levels of employment and at the same time maintaining price stability since high unemployment will be bad to economy and at the same time high inflations creates uncertainty in the economy, lowers the levels of investments and this will result in the slower growth in the economy. It has been proved that there is a tradeoff between higher inflation and lower employment in the short run but the tradeoff usually disappears in the long run. Therefore the goals of the monetary policy are to ensure that there is high employment, price stability, and Economic stability and that there is financial markets stability.

References

Stephen L. Slavin. (2013). economics (11th ed.).
Tejvan Pettinger. (2014). Unemployment Stats and Graphs | Economics Help. Retrieved from http://www.economicshelp.org/blog/5695/alevel/unemployment-stats-and-graphs/