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Monetary Policy
Monetary policy is the procedure of managing the money supply to control interest rates and the total level of spending in the economy. The goal is to achieve and maintain price level stability, full employment and economic growth. (McConnell-Brue, p.268) Monetary policy effects every purchasing decision consumers make, whether to purchase a new home, start a new business, invest in the stock market or in a savings account. Through this exploitation of the money supply, government influences other factors such as GDP, inflation and the unemployment and interest rates.
Gross Domestic Product (GDP) is the total market value of all final goods and services produced in a given year. Final goods are goods and services that are purchased for final use by the consumer, not for resale or further processing or manufacturing. (McConnell-Brue, p. 112-113) Higher levels of money in the economy lead to a higher GDP.
Unemployment is defined by the following three groups: 1) people who are institutionalized and are not considered a member of the workforce, 2) people who are willing to work but are unemployed and are not seeking work and 3) people who are willing to work and those actively looking for work. An increase in spending leads to demand and employment opportunities going up which makes the unemployment rates decline. As money is drained out of the system, GDP and employment falls which increases the unemployment rate.
The unemployment rate is the percentage of the labor force unemployed. The present unemployment rate is 4.9 percent. Federal Reserve Board Chairman Bernanke said "the Fed's baseline is for a 5.2-5.3 pct unemployment rate by the fourth quarter ...