In any economy, several tools can be used to control the amount of money in circulation. The most common tools of controlling money in circulation in any economy are in form of policies like monetary and fiscal policies. Monetary policy addresses the issue of money supplied in the economy by either expansionary or contractionary policies which regulate the amount of money in circulation (Michael 2008.).
Since money can be claimed to be the main factor that dictates employment, inflation and of the economy related issues in a region, its supply has direct impact on the mentioned spheres of the economy. An expansionary monetary policy calls for increased money supply which is mostly done by lowering the interest rates of the lending banks. Due to the increased money supply over a certain period of time than the normal rate of supply, en economy can force full employment. This appears to be the case for a country like Netherlands (Michael 2008.).
However, increased amount of money in circulation than the normal amount that should be in circulation makes the value of the money to depreciate compared to foreign currencies. As a result, inflation sets in. to control this, the monetary policy can be made contractionary reducing the amount of money in circulation. This would in turn force the money to appreciate in value compared to foreign currencies helping combat any inflation (Kenneth, 2005).
Another closely related aspect is the Federal Reserve. This can be defined as the overall central bank in the US. This bank can be claimed to be the one responsible for enactment and full implementation of the monetary policies. According to this system, a bank must have a certain reserve with the FED. Increase in any illiquid assets reduces the available money for lending. This results in contractionary monetary policy. Likewise, a reduction results in more money for lending which can be used to force full employment. By ensuring that the above named goals of the American economy are met, the economy aspires to have adequate growth rate and a balance of payments where a person earns what he/she is worth in the economy (Joseph, 2009).
In the recent past, this policy and FED have addressed the issue of unemployment in US. From the findings of the FED, the best situation can be achieved by supplying the money for investment to cover about 95%. This aims at providing about 95% of the American population with employment which is an increase from 67% level which was recorded in 2008 (Joseph, 2009).
In conclusion the American economy is a large economy which requires the economic advisors to consider all possible factors that might affect the economy. However, the monetary policy and Federal Reserve System can help stabilize the economy by providing employment, reducing inflation rates and providing a balance of payments.
References
Michael D. 2008. Monetary policy, history of," The New Palgrave Dictionary of Economics, 2nd Edition Penguin publishers
Kenneth G, 2005. The Optimal Commitment to an Intermediate Monetary Target, Quarterly Journal of Economics
Joseph S. 2009. Monetary policy basics, retrieved from http://www.federalreserveeducation.org/about-the-fed/structure-and-functions/monetary-policy/
