Economic Indicators



Economic Indicators

Question Number 1

Monetary Policy

The monetary authority, Central Bank and Government of a country controls the supply of money, cost of money or rate of interest and availability of money with the help of monetary policy. They often control the rate of interest in order to control the economic stability and growth in the country. The major goals of monetary policy are to make stability in prices and reduce unemployment. In monetary theory it shows that hoe monetary policy is formulated and implemented. Monetary policies can either me expansionary or contractionary. An expansionary policy means increasing the supply of money in the market. On the other hand contractionary policy is t shrink the money supply in the market (Friedman, 2001).

Expansionary policy is used to control recession and unemployment in the country by reducing the interest rates. The reason behind reducing the interest rate is that businesses can easily avail this opportunity for expanding their business. Contractionary policy is used to get control on inflation so that distortions of assets value can be avoided. It is significant for monetary policy maker to do credible announcements. The reason behind these announcements is that, if an employee expects that prices are going to rise in future then that employ can make contract with their employer of high wages in the future. So that employee can meet he rise in prices (Friedman, 2001).

On the other hand the expectation for lower wages depends upon the wage setting between employees and employer. This is called demand pull inflation because employees are having low wages and there is no cost pull inflation. Money circulation is the only basic tool in order to implement any type of monetary policy. Base money circulation is done by the authorities of monetary policy by buying and selling of financial assets. These operations can are also called open market operations and they can change liquidity or amount of money. The effects of these actions are because of the multiplier effect of fractional reserve banking.

The types of monetary policy are; inflation targeting, price level targeting, monetary aggregates, fixed exchange rates, gold standard and mixed policy. In inflation targeting and price level targeting, the target variable is interest rate on overnight debts. In monetary aggregates, the target variable is growth in money supply. In fixed exchange rate the target variable is the spot price of currency, gold standard's target variable is also o spot price of currency and in mixed policy the target variable is mostly interest rate (Friedman, 2001).

Influence on Inflation

Monetary policy influence inflation in short run. When ever rates of federal funds are decreased it results in the huge demand for goods and services. This demand pushes wages and other costs like production cost higher. This thing results into the higher demand for labours and materials which are very necessary for production. The policy actions also have influence on the future expectations about the economy. These expectations include the performance of economy in future which includes the ...