Basic objective of monetary policy

What are the basic objectives of monetary policy? Comment on the cause-effect chain through which monetary policy is made effective. What are the major strengths of monetary policy?

*********** FIRST PERSON*********

John Booker |

The term "monetary policy" refers to what the Federal Reserve, the nation's central bank, does to influence the amount of money and credit in the U.S. economy. What happens to money and credit affects interest rates (the cost of credit) and the performance of the U.S. economy.

Cause-effect chain: Changes in the money supply affect interest rates, which affect investment spending and therefore aggregate demand. Changes in aggregate demand affect output, employment, and the price level.

The goals of monetary policy are to promote maximum employment, stable prices and moderate long-term interest rates. By implementing effective monetary policy, the Fed can maintain stable prices, thereby supporting conditions for long-term economic growth and maximum employment.

The major strengths of monetary policy are its speed and flexibility compared to fiscal policy, the Board of Governors is somewhat removed from political pressure, and its successful record in preventing inflation and keeping prices stable. The Fed is given some credit for prosperity in the 1990s.

*************** SECOND DEGREE **************

Maher Kouzer |

Monetary policy can be explained as the measures the central bank of a country takes to control the credit and cash flow in the that country. The main goal of monetary policy is to fulfill particular monetary objectives.

Depending on a country's economic conditions, its monetary policies would differ or be similar based on that. In many third world and less developed countries, their main objectives would be for economic development and monetary stability. In developed and rich countries, their objective would be to decrease the unemployment rate without affecting the inflation rate. All in all the main objectives of the monetary policy is control deflation and inflation, equal distribution of credit, improve standard of living, decrease unemployment etc. The monetary policies taken by countries, greatly affect the economic and social conditions of the ordinary masses. For example, Inflation reduces the amount of goods money can buy for the general population.

The monetary policy is made effective through a cause-effect chain because the decisions taken affect the reserves of commercial banks, which in turn affect the supply of money altering the interest rate, investment,aggregate demand and finally affecting the equilibrium real GDP.

The major strength of a monetary policy is to stabilize prices. Inflation harms the value of money by diminishing its purchase power. When the rate of inflation rises higher than expected. The Federal Reserve may remove money out of circulation by selling government bonds or raise the short term interest rates. Other examples of strengths of monetary policy are its political acceptability and flexibility