Objective 4: Examine domestic monetary policy.
Monetary policy is the use of central bank policies to influence the level of economic activity. Fiscal policy is the use of government purchases, transfer payments, and taxes to influence the level of economic activity (Principles of Macroeconomics, p. 280).
The goals of monetary policy should include the maintenance of full employment, the avoidance of inflation or deflation, and the promotion of economic growth. The monetary policy of the Federal Reserve Bank and the Fed’s expansionary and contractionary monetary policy decisions affects economic growth and international trade.
Also of importance is discussion of the Equation of Exchange: How money supply relates to the aggregate economy: MV=nominal GDP.
The equation of exchange shows that the money supply M times its velocity V equals nominal GDP. Velocity is the number of times the money supply is spent to obtain the goods and services that make up GDP during a particular time period (International Economics, p.425).
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