Monetary policies
Monetary policies involve the measures that the central banks of any country take into account t control credit and cash flow in the economy. The main goal of monetary policies is to achieve an economy’s particular monetary objectives, depending on economic conditions. Developing counties base their monetary policies on economic development and stability. Developed and wealthy nations such as the U.K and U.S.A base their monetary policies on controlling deflation, inflation, equal distribution of credit, decreasing unemployment, and improving living standards. Monetary policies have a great effect on economic and social conditions. For example, monetary policies put in place dictate the prices of goods and interest rates. Monetary policies are implemented through cause-effect chains because these decisions affect commercial banks’ reserves and money circulation in an economy.
A cause-effect chain impacts money circulation, alters interest rates, investments, aggregate demand, and real GDP equilibrium. Changes in money circulation impact interest rates, which in return, affect investment spending and aggregate demand. Aggregate demand affects economic output, employment, and inflation. Efficacy of monetary policies is realized when prices are stabilized because high inflation negatively affects the value of money as its purchasing power is diminished. During high inflation, the Federal Reserve reduces money circulation by raising short-term interest rates of selling government bonds to curb increasing inflation. At stable prices, an economy benefits from maximum employment and moderate long-terms and short-term interest rates. These conditions support long-term economic growth and flexibility in fiscal policy implementation.
Price stabilization is the major strength of monetary policies because any economy’s economic conditions are pegged on the value of money and the prices of items. The central bank reserve controls money circulation in the economy using monetary policies that support the economy’s monetary objectives.
Reference
Corporate Finance Institute. (2019, December 2). Monetary policy – Objectives, tools, and types of monetary policies. https://corporatefinanceinstitute.com/resources/knowledge/economics/monetary-policy/
Reply
Reply to Twyman
I agree with monetary policies being a tool for control money and credit circulation in an economy by the central banks, the Fed reserve for the case of the U.S.A. Controlling monetary policies aids an economy attain full employment and reduce the inflationary impact on prices. Monetary policies have a great effect on economic and social conditions. For example, monetary policies put in place dictate the prices of goods and interest rates. Monetary policies are implemented through cause-effect chains because these decisions affect commercial banks’ reserves and money circulation in an economy. I agree with your cause-effect chain explanation, an economic metric such as the circulation of money in an economy affects the interest rates, affecting investment spending. Monetary policies stabilize prices and money circulation to achieve the monetary objectives set in place.
Reply to Matthew
Hello Matthew, I think you have defined monetary policy extensively, which is good. Monetary policies aim at managing inflation, reduce unemployment, and controlling interest rates. Monetary policies target inflation effects; for example: during high inflation, the Federal Reserve reduces money circulation by raising short-term interest rates of selling government bonds to curb increasing inflation. I think you have also covered the pros of monetary policies well, which can be summarized by explaining the cause-effects of inflation and how a central bank reserve reacts. Low inflation is healthy for any nation because it encourages investment spending and employment in an economy.