Question

2. Review Ch13.2 the monetary transmission mechanism: monetary policy has lots of different channel for operation; please describe an advantage and a disadvantage of this fact.

Answer 1

Monetary policy instruments are used for managing currency supplies by currency boards, central banks or even governments. In addition to the interest rates paid by lending agencies, customer access to cash provides economic foundations for companies to build on. The instruments used to govern these basic needs determine how much financial markets stability is found. There are several ways in which monetary policy instruments can be used as a positive for society. They maintain a value balance with currency exchanges, stable economies and may even fix issues of debt or unemployment.

Advantages

They promote greater rates of economic activity.- Monetary policy instruments promote market investment based on current economic status. When a stimulus is necessary to keep growth happening, then banks can lower their interest rates on lending products to encourage additional spending. Higher interest rates trigger price cuts that help hold investment at a steady pace. People have more opportunities to buy small, even though their incomes are below the national median, which means their spending gives the local community energy.

They encourage greater accountability.
Monetary policy instruments produce predictable outcomes when used as expected. Everyone involved in the financial sector knows what happens when there is change in any direction – or if the status quo is then retained. Such tool designs require people who use them to do so in ways that the general public understands, encouraging organizations and customers to make decisions about their future now, rather than waiting for the tools to have a tangible impact.

Disadvantages

They take time to get started working.- The U.S. relies on budget projections which reflect 10 years of operation. In half that time, some countries will measure improvements, while others use cycles that last for 20-40 years instead. Since currencies at this period are not dependent on the scarcity of precious metals, the tools have to adjust the overall demand rather than trigger economic changes. It takes many years for such improvements to start showing positive results. During the early days of a method being applied there can still be unpleasant interactions too.

Rsk creating hyperinflation.Within an economy, low rates of inflation are not a bad thing. They promote investment, empower workers to expect higher salaries, and stimulate growth at all social levels. Over time making all products cost a little more will delay growth when needed. If the interest rates are set too low then the rates are artificially low. That causes financial bubbles in which prices grow too fast, often to rates that pose barriers for the average consumer to reach.