Define monetary policy. Describe the mechanism that leads from a change in monetary policy to changes...

Define monetary policy. Describe the mechanism that leads from a change in monetary policy to changes in interest rates, exchange rates, and the current account balance.

Expert Solution

Ans.

Monetory Policy - It is the policy which is controlled and practiced by the Central Bank of the country , under this process the supply of money is controlled by the help of interest rate to achieve price stability and increase and obtain high economic growth of the country.

The mechanism is called Expansionary Policy-

When implemented the domestic interest rates are reduced.
Lowers the supply of foreign currency and the income from foreign financial capital also decreases.
domestic value of currency gets lower in value.
Switching the consumer spending more towards the domestic product rather than the foreign good due to depreciation in exchange rate.
Consumption increases , which is caused by income increase of consumer.
the current account gets worsen , because the income rises which leads to imports to increase.

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Rahul Sunny answered 8 months ago

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