Monetary Policy Essay Assignment
Analyze How Monetary Policy Could Influence the Long-Run Behavior of Price Levels, Inflation Rates, Costs, and Other Real or Nominal Variables
Government uses the monetary policies as a way of influencing how the economy works. Usually, the monetary policies are inclined to the existing political objectives that may have been adopted. The monetary policies in any country are considered the building block that determines the supply and availability of money in the economy. The goal of the monetary policies has been ensure there exists the macroeconomic stability that ensures there are manageable low levels of unemployment, inflation, economic growth and the balance of the payment (Malmendier & Nagel, 2015).
Monetary policies are relied by lowering the interest rates which partly is a move aimed at aiding customers to spend more hence making the whole borrowing process cheaper and ensuring an increase in demand and the level of employment also known as the expansionary monetary policy. A fall in the exchange rates, which may be, characterized by the imported inflation and in turn influence the level of spending made on the imported products. However, the real success to the monetary policy lies in finding the existing gap between the high degree of insecurity and unpredictability. Central banks usually aim at attaining low inflation and stability in the prices in an effort to ensure high level of economic growth (Hanson & Stein, 2015).
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Source: (Edwardmcphail.com 2017).
The contractionary monetary policy also exists as an approach that can reduces the level of inflation hence influencing the rise of the interest rates. The rise in the interest rates urges consumers to stop spending, save more and avoid borrowing at any cost. The demand for the nation’s currency rises making importation less expensive. Consumers can then afford the cheaper imports as opposed to the local products. This effect trickles down to high unemployment since firms cut on labor; banks face stiffer exchange rates and consumers face tough rates, thus loans become unaffordable. In the long run, capital investment of firms reduces and the economic growth slumps.
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