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MONETARY POLICY AND ITS IMPACTS

DEFINATION

Monetary policy is the process of a country’s state bank, government or monetary authority.

Monetary Policy involves the changes in the interest rate of an economical sector.

INTRODUCTION OF MONETARY POLICY:

Monetary policy deals with the changes in interest rates in an economy. It controls the money borrowing and money supply in an economical sector. It operates the open market structure. It also deals with the interest rate changes and credits.

FORMS OF MONETARY POLICY:

There are two forms of monetary policy which are as under,

• Decision of coin money
• Decision about printing of paper money

FUNCTIONS OF MONETARY POLICY:

There are some functions of monetary policy which are as under,

• Debt Management
• Foreign Exchange Management
• Issuance of Coin Money
• Issuance of Paper money
• Short term interest rate management
• Long Term Interest Rate Management
• Federal Fund Rates
• Open Market Operations
• Discount Rates

IMPACTS OF MONETARY POLICY:

There are some impacts of the monetary policy on financial economy which are as under,

• Inflation Control
• Interest Rates
• Business cycle
• Spending
• Employment Facilities

INFLATION CONTROL:

The first impact of the monetary policy is on the inflation control. The monetary policy controls the inflation rate. And also controls the value of currency through using different kind of tools. When the inflation raises so monetary policy also raises the interest rates.

INTEREST RATES:

Monetary Policy also impacts on the interest rates. Central bank deals the interest rates. Central bank of a country raises or lowers the interest rates and tackles the effects of interest rates changes. Central bank charges the interest on loans and deposits.

BUSINESS CYCLE:

Business is the name of ups and downs tackling. Monetary policy controls these ups and downs in the business sector. Business cycle consists of four parts which are as under,

• Initial Point
• Boom
• Recession
• Recovery

SPENDING:

Monetary policy checks the money spending. In the lower interest rates more money spent on the economy. Through this way more money distributed in an economy.

EMPLOYMENT:

Monetary policy also impact on the employment. Due to changes in inflation rate in monetary policy it leads to the unemployment lower. And higher inflation also impact on the employment sector.

Tags: Foreign Exchange Management, Functions of Monetary Policy, Open Market Operations, Paper And Coin Money