Question

Suppose that we were already at the natural level of output before the increase in government expenditure or the reduction in taxes. What would happen to the inflation without monetary policy?

Answer 1

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Abstract

Following type of Impact will be there on inflation without monetary policy

1. As a strategy, inflation targeting views the primary goal of the central bank as maintaining price stability. All of the tools of monetary policy that a central bank has, including open market operations and discount lending, can be employed in a general strategy of inflation targeting.
2. As the Federal Reserve conducts monetary policy, it influences employment and inflation primarily through using its policy tools to influence the availability and cost of credit in the economy.
3. The primary tool the Federal Reserve uses to conduct monetary policy is the federal funds rate-the rate that banks pay for overnight borrowing in the federal funds market.
4. Changes in the federal funds rate influence other interest rates that in turn influence borrowing costs for households and businesses as well as broader financial conditions.

There is always corelation between the Government induced monetary policy and economic regulation with inflation rates.

For example, when interest rates go down, it becomes cheaper to borrow, so households are more willing to buy goods and services, and businesses are in a better position to purchase items to expand their businesses, such as property and equipment.

In absence of controlled monetary policy, there will be instability in market and inflation rates will be very high.

Businesses can also hire more workers, influencing employment. And the stronger demand for goods and services may push wages and other costs higher, influencing inflation.

During economic downturns, the Fed may lower the federal funds rate to its lower bound near zero. In such times, if additional support is desired, the Fed can use other tools to influence financial conditions in support of its goals.

However, there are many factors that affect inflation and employment. And while the linkages from monetary policy to both inflation and employment are not direct or immediate, monetary policy is an important factor.

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