Objective of Monetary Policy, Essay Example

Monetary policy is the system of a centralized bank or financial institution of a nation’s monetary government controls the flows of currency throughout the economy. This control over the supply of currency is maintained through establishing interest rates or economic inflation. The objectives of monetary policy are to cultivate price stability and obtain increased economic development. Monetary policy considers macroeconomic objectives such as lowering the unemployment rate, reducing poverty, and establishing federal minimum wage. The economic outcome of monetary policy sets the bar for what strategies should be set in place in order to create the most economically effective monetary policy. (Amadeo, 2014)

Monetary policy usually has two primary outcomes. The outcomes of monetary policy can lead to economic expansion. In this scenario, the monetary policy drives up the total supply of currency throughout the economy at a faster rate than how it is normally distributed. This form of monetary policy is primarily used to help reduce the unemployment rates during an economic recession or depression. This is done by reducing interest rates for businesses. When interest rates are reduced, businesses are more likely to finance their operations through loans or credit which gives them the opportunity for business expansion. This can open up new jobs and contribute to lowering the unemployment line. (Amadeo, 2014)

Conversely, monetary policy can lead to economic contradiction. In this scenario, the supply of currency is distributed at a much slower rate than normal and sometimes is even drawn back negatively. This form of monetary policy is usually used to reduce economic inflation. (Amadeo, 2014)

To sum it up, if the power of an economy’s currency rises too quickly, then it leads to excessive economic inflation. On the other hand, if the currency power is too slow, then this slows down the rate of economic growth. Monetary policy keeps the economy’s currency in healthy standing.

References

Amadeo, K. (2014, November 29). What Is Monetary Policy? Objectives,Types and Tools. Retrieved from About News: http://useconomy.about.com/od/glossary/g/Monetary_policy.htm