Q2. What is the basic objective of m... [FREE SOLUTION]

Chapter 16: Q2. (page 347)

What is the basic objective of monetary policy? What are the major strengths of monetary policy? Why is monetary policy easier to conduct than fiscal policy?

Short Answer

Expert verified

The basic objectives of the monetary policy are to achieve full employment, price stability, and economic growth. The strength of policy is that it can control the money supply, and it is easy to impellent as it does not have an implementation gap.

Step by step solution

Step 1. The objectives of monetary policy

The objectives of monetary policy are as follows.

Achieving full employment of all factors and resources through the adjustment of the aggregate demand and supply by influencing consumption, investments, and savings
Maintaining price stability by influencing the business cycle
Achieving economic growth through full employment and price stability

Step 2. Strength of monetary policy

The strength of monetary policy is that it can control the money supply in the economy by using various instruments such as bank rates, reserves rates, etc., and help the economy to find inflationary and deflationary tendencies so that the economy does not enter depression.

Step 3. Implementation gap

When under the fiscal policy, any measure is undertaken to help the economy stabilize and grow, and it takes time to implement it. If the government decides to increase public expenditure to increase employment, it is not possible overnight.

With monetary policy, if the Fed wants to reduce the money supply, it can increase the bank rates, and from the next day, taking loans will become expensive. Therefore, it does not have a large implementation gap and is easy to implement.