Impact of Tight Monetary Policy and US Protectionism Policy on Global Economy

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The Global economy
By (Name)
Course
Instructor’s Name
Institutional Affiliation
The City and State
The Date

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\Question 1
The political maneuvering or management of the economy is known as the monetary
policy. The monetary is made by the Federal Reserve Bank in the US. Prime interest for lending
and discount is set by the Federal Reserve. When landing to each, the interest rate charged by
banks is the discount rate. When customers borrow money, they are charged with prime rate.
When interest rates are increased, then it means that the economy is tightened, this lead to
various intended impacts in business and personal environments. The main objective of a tight
monetary policy is to effectively reduce the amount of money supply that is available in the
economy and bring about a fall in the total aggregate demand. Serious policy blunders may arise
as a result of the implementation of a tight monetary policy by the US due to the pressure caused
by pickup inflation. The tightening of the monetary policy by the US may result into other banks
like the ECB to loosen policy again due to the excessive tightening in global financial conditions
and others problems (Wu and Xia 2016).
Therefore to keep the policy loose there is a risk that it may result into a nasty marker sell
off and hawkish Fed. Policy analysis argues that the restrictive monetary policy being undertaken
by the Fed may bring another recession to the United States of America (Taylor and Weerapana
2010). It is important to note that in its easing program, the fed bolt up over 4.5 million dollars in
securities such as bonds and others. At a faster pace monetary conditions are tightened by the
dual approach of hiking rates while cutting asset holdings. Therefore, such policy ultimately
results and of the monetary policy that is accommodating (Mankiw 2006).

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Thus the tightening of the monetary policy poses a number of risks to the domestic and
global economy. The economies of the US and other countries can be derailed in case there are
abrupt changes in conditions in global finance. It is imperative to note that the various financial
vulnerabilities that have been attained or accumulated in the period of extremely low volatility
and rates pose a huge risk to economic growth(Graceffo 2017). It is good for interest rates to be
raised by the central bank in a relatively communicated and gradual manner to avoid risks
associated with tighter monetary policies on both the domestic and global economy. A tight
monetary policy if not well implemented may reduce the overall production levels. The fall in
the demand for products coupled with high and expensive capital for investment means that there
will be reduced production in the economy. A more tight policy can make organizations
shuttered planned expansions and at the same time reduce on the levels of productions. Therefore
a tight monetary policy needs to be effectively managed otherwise it is capable of driving
economies into recessions (Gomory and Baumol 2009).
Further, the increasing levels of interest rates and reduced productions hinder job creation
and industrial expansion hence fueling the unemployment problem(Fleuriet2008).Limited
employees are likely to be hired by organization when there are reduced production and
profitability levels. It is important to note that most business aim at profit maximization, once the
costs of production are higher than the profits, any rational investor will look for ways of cutting
down the costs of production which may involve among others shutting down some of existing
plants, reducing the size of workforce and production. Economic contraction is made extremely
severe when there is increased unemployment due to the fact that it reduces demand for services
and products(Feenstra et al 2009).

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Economic growth is usually affected by a tight monetary policy mainly due to high levels
of interest rates. High interests make the accessibility of capital of inform of loans difficult and
expensive. Meaning that less people will be able to participate in the production process due to
limited credit access. Also the available enterprises collapse or fail to expand. Hence a result
there is limited investment levels in the economy meaning lower levels of economic growth. A
tight monetary policy is very risk and requires a high level of prudency to be effectively
managed in order to guard against the potential risks it put on both the domestic and global
economy (Evenettand Fritz 2017).
Also, cases of cost push inflation are likely to occur as a result of the policy. For instance
the global oil prices may increase due to the US tight monetary policy. Given that oil is used
across the word, cost push inflation may occur(Dunn 2015 ). It is important to note that a tight
monetary policy is good when there are high levels of confidence in the economy since despite
high interest rates may continue to spend and borrow. However, this may not be the case in the
US and other economies posing a lot of risks to the overall levels of economic growth and
development(Douma& Hein 2013).
Further, there risks of conflict with various macro economic variables due to the tight
monetary policy. A tight monetary policy hinders access to particular services that are vital for
economic growth and development due to higher interest rates. Most businesses and individuals
in the economy use loans to start and at the same time grow there businesses. By raising interest
rates it means that your are discouraging the development and establishment of medium, small
and large enterprises in the economy. Given that the inflow of both local and foreign investors
informs of FDI is discouraged. It is important to note that most investors desire to undertake
there investment ventures in areas where there is a low cost of doing business. Thus a tighter