Understanding Monetary Policy: Objectives, Types, and Implementation

This report provides a comprehensive overview of monetary policy, defining it as a crucial tool used by monetary authorities to control the quantity of money in the economy. It distinguishes between two primary types: contractionary and expansionary policies. Contractionary policies aim to curb inflation by increasing interest rates and reserve requirements, while expansionary policies seek to stimulate economic activity by lowering interest rates and reducing reserve requirements. The report details the specific tools used within each policy, such as adjusting interest rates, altering reserve requirements, and conducting open market operations. Furthermore, it outlines the key objectives of monetary policy, including promoting economic growth, increasing employment, maintaining price stability, stabilizing exchange rates, achieving balance of payment equilibrium, and reducing income inequality, emphasizing the role of monetary policy in fostering a stable and equitable economic environment. Desklib provides access to similar solved assignments and resources for students.

Monetary Policy

Table of Content
 Meaning
 Types of Monetary Policies
 Contractionary Policy
 Expansionary Policy
 Objectives of Monetary Policy

Meaning of Monetary Policy
It can be defined as one of the important policy
that helps the monetary authority of the
country or a nation to deal and control the
quantity of money available in the markets of
the economy. It also includes the new channels
which are acting as a major role in supplying
money in the economy.

Types Of Monetary Policy
There are 2 major type of monetary policy:
1.Contractionary Policy: These are those policies that play
an important role in increasing the interest rates which are
monitored by the central banks . The goal behind using
this policy is to control the inflation in the economy.
2.Expansionary Policy: It is a situation that states that
when the money supply is increased in the economy by
lowering the rate of interest. Thus, a certain amount of
money is injected in the economy to increase the
purchasing power of the people of a particular country.

Contractionary Policy
Contractionary Monetary Policy Tools:
1.Increase Interest Rates: In case of contractionary
monetary policy, the rate of interests on loans are
increased in order to control the excessive amount
money floating in the company.
2.Raise Reserve Requirements: It is basically taking
the money out of the economical money supply by
providing banks with the excessive reserves.
3.Expand Open Market Operations: In order to
regulate the supply of money by expanding the
buying and selling of the securities in stock market
to control the flow of money from the economy.

Expansionary Policy
Expansionary Monetary Policy Tools:
1. Decrease interest rate: The one of the major too of
expansionary policy is to decrease the interest rates on the
credit facilities so that the flow of money can be released
in the markets so that the purchasing power can be
increased.
2. Reduce reserve requirements: This tool basically
ensures that the reserves requirements are reduced so that
more amount of money can be injected in the economy.
3. Expand Open Market Operations: in this by expanding
the open market operations, people can sell out their
shares in the stock market to increase the liquidity of
money in their hands.

Objectives of Monetary Policy
1. Economic Growth: Monetary policy plays an important role in maintaining the
economic growth of a nation by regulating a better flow of money efficiently.
2. Increase in employment: Expansionary monetary policy plays a major role in
increasing the level of employment by providing higher level of supply of money
affecting the business operations leading to the expansion of markets for the
purpose of jobs.
3. Price stability & inflation control: It can be considered that monetary policies
ae considered as the key tools that help in maintaining the stability in the prices
and controlling the inflation and deflation effectively.
4. Exchange Rate Stability: Monetary policy plays a major role in maintaining the
prices of exchange rates in the foreign exchange business operations.
5. Balance of Payment Equilibrium: It means the difference between money
flowing inside the country over a period of time and money flowing outside the
country to the rest of the world
6. Reducing the income inequality: The main reason behind that is this policy
majorly focuses on the job expansion element that helps in increasing the income
of the people ultimately helping in preventing the element of income inequality.

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