Running head: EFFECTS OF MONETARY POLICY 1
EFFECTS OF MONETARY POLICY
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Institutional Affiliation
EFFECTS OF MONETARY POLICY 2
Effects of Monetary Policy
Monetary policy affects the stability of prices, work availability, and economic growth. In the case of work availability, monetary policy raises its level by encouraging loans to labor-concentrated sectors such as rural agriculture. Also, a policy that reduces the rate of interest includes expansionary monetary policy, and it is likely to result in an increase in investments, which causes increased job opportunities.
Achievement of price stability is the maintenance of prices at a general level. Inflation reduces money’s ability to effectively perform its functions, including a medium of exchange, store of value, and a standard of deferred payments. Monetary policies help maintain price stability by regulating money supply through the Central Bank tools, such as discount rates, open market operations, and minimum reserve requirements. Prices do not remain constant, but only inevitable change occurs. High inflation raises the cost of living, resulting in most people living below the poverty line. It makes export costlier, and people opt for more imports. The incentive to save is also low because of the low value of money. Expansionary monetary policy helps increase savings and lower the cost of living. With the expansion, the rate of investments goes high.
Reference
Villamizar-Villegas, M. (2015). IDENTIFYING THE EFFECTS OF SIMULTANEOUS MONETARY POLICY SHOCKS. Contemporary Economic Policy, 34(2), 268-296.
Schinkel, M. (2018). Coordinated Effects in Monetary Policy. SSRN Electronic Journal.
Soderberg, J. (2011). Customer markets and the welfare effects of monetary policy. Journal Of Monetary Economics, 58(3), 206-219.