Monetary Policy in an economy Essay Example | Topics and Well Written Essays - 2000 words

fiscal policy in an economy - Essay ExampleHowever, the effectiveness of fiscal in controlling the economy is genuinely terms remains to be a debatable issue.If interchange bank attempts to control economy by implementing monetary policy through varying interest appreciates, it bottom of the inning have some indirect impacts on the overall economic activities that might lead to problems. This writing illuminates the speculative foundations upon which the monetary policy rests. It discusses the various methods utilize to determine and implement the monetary policy in an economy on the part of Central banks. The paper also elabo grade the effectiveness of monetary policy in controlling economy and critically discusses its effectuality in meeting the intended economic ends such as controlling pretension and maintaining price stability.Developing and implementing monetary policy happens to be the most crucial responsibility of a Central Bank. Monetary policy refers to the stra tegies of Central Banks implemented for the purpose of controlling various economic factors such as inflation and employment and so on Bofinger, Schchter and Reischle propound that the main aim of monetary policy is a control of final targets of the economic handle (price stability, real growth, full employment), which have been set in such a direction as to maximize the ultimate goal of social welfare.1 Theoretically, there are four compares that are used to estimate the impact of specie or monetary policy on the overall economy. The aggregate demand power emphasises the impact of total demand on interest rates which consequently affects inflation. The Philip-Lucas cut curve or the supply function relates the total output in an economy to the rate of inflation. The third equation relates the demand of money in an economy to total expenditure as well as the interest rates. The fourth equation of monetary policy relates it to the supply of money in the economy on the part of Central Bank.2 The theoretical foundations of monetary policy rest on the fact that money plays a great role in the economy of a country. Therefore, various economic factors, in particular, the inflation rate and employment level can be controlled by an effective monetary policy. King also propounds that money growth is higher, the higher is the inflation rate.3 The growth of money or credit in an economy goes a long way in determining the prevailing inflation rate and employment level in the long run. Monetary policy helps Central banks to achieve the goal of economic stability and inflationary targets. Mahadeva says that Central banks have perpetually been in the forefront of those that promote low inflation or price stability as a or the goal of monetary policy.4 It is because of the fact that controlling inflation or maintaining a sought after level of prices is considered to be the important functions of monetary policy and crucial aims of a Central bank.Central banks limit the supply and growth of money in the economy by changing interest rates in order to affect the aggregate demand. Arestis and Sawyer delineate the rate of interest as, the Central Bank rate can be viewed as the key rate on which all other interest rates are based-often explicitly so as in the case of the interest rates charged by banks on loans and paid by banks on deposits (2004, p443). Hence the Central bank influences the supply of mon