Question

please minimum 500 words

Outline the differences between monetary policy instruments, targets and objectives.

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Answer 1

Monetary policy is a policy implemented by the monetary authority of a nation that monitors either the interest rate payable on very short-term borrowing or money supply, frequently targeting inflation or interest rates to ensure price stability and general confidence in the currency.

Instruments:

The three monetary policy instruments of the Federal Reserve are;

Open market operations: include the acquisition and selling of government securities. The word "free market" means that the Fed will not determine on its own the securities dealers it will negotiate with on a specific day. Rather, the choice emerges from the "open market" in which the various securities dealers with whom the Fed operates – the primary dealers – compete on a price-based basis. Open market operations are flexible and therefore the most frequently used tool for monetary policy.

The discount rate: It is the interest rate paid by Federal Reserve Banks to depository institutions for short-term loans.

Reservation provisions: These are those parts of deposits that banks are allowed to keep either in their vaults or on deposits with the Federal Reserve Bank.

Target:

The three most commonly defined monetary policy priorities are;

Interest rates,

Monetary aggregates and

Exchange rates.

Such targets are typically interim targets that can be rapidly reached and easily assessed, which instead push the economy towards the overall macroeconomic targets of full employment, stability and economic development.

Objectives: There are mainly objective;

Inflation: Monetary policies should target inflation. Low inflation is perceived to be safe for the economy. When inflation is strong, this problem can be resolved by a strategy of contraction.

Currency exchange rates: Using its fiscal authority, the central bank may control the exchange rate between domestic and foreign currencies. For example, the central bank may cause inflation by issuing more money. In such a case, the domestic currency is cheaper than its foreign counterparts.

Unemployment: Monetary policy can influence the level of unemployment in the economy. For example, expansionary monetary policy usually reduces unemployment, as higher money supply increases economic activities that contribute to the expansion of the labor market.

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