How Does Monetary Policy Affect Unemployment?


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.

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.