What is Monetary Policy

When it comes to Monetary Policy, it’s one way of controlling the amount of money flow by central bank, in order to go along in a stable growth rate. An economy has great importance of this policy. Central bank, in most of the countries has the authority to control the money supply.

Key Objective

The basic purpose of monetary policy is to make sure growth of economy remain stable and in the most positive way.  Have a glance at the key reasons or purposes for why this policy is introduced.

  • Controlling Money Supply
    The basic purpose of monetary policy made and implemented by central bank, is to govern supply of money in the economy. There are numerous sub objectives that are to be accomplished through this single one. It means through controlling money supply with monetary policy, government authority, the central bank, can make economic growth of the nation stable.
  • Stable Prices
    Yet another purpose of monetary policy applied by central bank is to control prices. Economic growth has indirect relation with price of commodities. Such policy is made that is capable of keeping the price under control in long term.
  • Increased Employment
    Third key purpose of en effective monetary policy is; it can reduce the unemployment level. When a policy can successfully keep the prices under control with certain amount of money supply in market, it’s very much possible to increase the chances of employment.

Essential for Economic Growth

After having read the basic purposes, for what monetary policy is created, you must have realized how vital its role is in stabling economic growth. A country can definitely make rapid developments if, the monetary policy introduced by government body is effective. There are two types of monetary policies.

  • Expansionary Policy
  • Contractionary  Policy

For combating different sorts of economic barriers there are two different kinds of policies created and implemented. Expansionary policy basically is introduced when employment rate and progress is quite low. Through increasing the amount of money in the market, it tries to get the economy back to normal. The rate of supplying money in market is also quicker than normal. Whereas, the later one, contractionary policy, is to reduce the money supply or bring it down to normal.  The basic purpose of this is to overcome inflation. Because of overflow of money in the market often rates of commodities are higher.

Monetary policy is created after through look at different rates of interest. It means various rates of interest control it to a certain extent. Though it already is a kind of tool in nature, but there are various sub tools used within it to make sure the best results are achieved.

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