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Monetary Policy

Christopher Williams
Economics
Thursday, 21 November 2002

Q. Explain what is meant by monetary policy? (b) Discuss the monetary policy measures a government and/or central bank may take to stimulate economic activity.

Monetary policy refers to the use of interest rates and the level of money supply to manage the economy. Monetary policy may be used to increase the level of economic activity (reflationary policies) or to decrease the level of economic activity (deflationary policies). A relationship therefore exists between monetary supply and the rate of interest. Economic theories have been suggested as to the extent of this relationship. Nevertheless, the monetary authorities may use various monetary policy measures to stimulate economic activity in the country.
The Monetary authorities can establish either the level of money supply or the rate of interest, not both. If the demand for money (liquidity preference) does not change, any change in the supply for money will alter...

Posted by: Carlos Hernandez

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