Question

How does monetary policy influence inflation and employment? Explain 6+ sentences

Answer 1

Ans.)

(i) Monetary policy refers to the policy in which the central bank of a country controls the money supply either by reducing the quantity of money in the economy or by expanding it.

(ii) Some of the monetary policy tools that the central bank uses to change  the money supply are: (a) Reserve ratio (b) Fed rate (c) Open market operations.

(iii) When the money supply is increased in the economy, interest rate in the economy is reduced so as to induce people to hold more money.With the decline in the interest rate, the output in the economy increases.

(iv) Similarly, when the money supply in the economy is decreased, the interest rate in the economy increases, thus leading to the decrease in investment and consumption as the loans become expensive and firms and households take less loans from the banks.

(v) When there is change in the investment and consumption pattern, the output(or GDP) in the economy also fluctuates.

(vi) With the change in the level of output in the economy, the demand for labor by the firms also changes and thus it leads to the change in the employment in the economy.