Monetary policy AND TYPES

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Monetary policy AND TYPES

  1. 1. Monetary policy is the process by which the monetary authority of a country control the supply of money for the purpose of promoting economic growth and stability. In other words: This policy is adopted by the central bank of an economy in order to control & regulate the money supply in the country as to stabilize the economy. The main function of monetary policy is to control & regulate credit money.
  2. 2. There are two types of monetary policy:
  3. 3. Expansionary monetary policy is appropriate when the economy is in recession and unemployment is a problem. The goal of expansionary monetary policy is to reduce unemployment. Therefore the tools would be an increase in the money supply. To increase the money supply the federal government can:  Buy government bonds(open market purchase)  Lower the interest rate  Lower the reserve ratio
  4. 4. This would shift the AD curve to the right decreasing unemployment but it may also cause some inflation. Change the money supply affect the economy through a these process: Money supply rise Interest rate decline Investment level rise Aggregate demand rise RealGDP rise Unemployment decline Price rise Inflation rise
  5. 5. Contractionary monetary policy is appropriate when economy is in expansion and inflation is a problem. The goal of contractionary monetary policy is to reduce inflation. Therefore the tool would be the decrease in the money supply. To decrease the money supply the federal reserve can:  Sell government bonds(an open market sell)  Raise the interest rate  Raise the reserve ratio
  6. 6. This would shift the AD curve to the left decreasing inflation. But it may also cause some unemployment. Change the money supply affect the economy through these process: Money supply decline Interest rate rise Investment level decline Aggregate demand decline RealGDP decline Unemployment rise Price decline Inflation decline

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