Monetary Policy Essay -- Expansionary and Contractionary Policy

Introduction financial insurance policy is among the m whatsoever tools utilise by a national government to manipulate its financial system. Monetary policy refers to the method used by the financial authority of any country to control the supply and availability of money (Woelfel, 1994). It is often targeted at amuse rate to achieve lay down objectives directed towards scotch growth and stability (Woelfel, 1994). Monetary policy rests on the link in the midst of interest order in an economy, that is, the relationship between interest rates and the total money supply. It employs a variety of methods to control outcomes like inflation, sparing growth, currency exchange rates and unemployment.Monetary policy can either be expansionary policy in which case there is a speedy outgrowth in the total money in circulation in the economy, or contractionary policy in which case there is a slow increase or decrease in the total make out of money in circulation in the economy (Woelfe l, 1994). The description of monetary policy takes the following near accommodative if the intention of the set interest rates is to stimulate scotch growth, neutral if the intention is neither to fight inflation nor to stimulate economic growth and tight if the intention is to decrease inflation (Woelfel, 1994). These can be achieved through various tools including raising reserve requirements, increasing interest rates by fiat, and decreasing the monetary base, depending on the intended results (Woelfel, 1994). Monetary policy is always intended to either increase or decrease the amount of money in circulation in the economy. Reducing interest rates encourages acceptance thus increases the amount of money in circulation. It is however challenging when the interest rates are... ...ood of increased tax on their savings (Goodfriend, 2000). It is therefore important for primal banks to promise the public that it will maintain some elements of numerical easing even as the econo my recovers in order to realize public trust. Besides adjustments on tax and expenditure instruments takes a nightlong period thus may only be effective in neutralizing the zero bound in the long run but non short term effect as required in this case.The planetary house ChannelThis channel unlike the others capitalizes on shaping the publics expectations through distinct signal about central banks future policy intentions. This channel is more of a visible sign for central governments perpetration to maintain zero policy rates for longer duration. This channel requires central banks to show a remarkable willingness to break from the previous conventional monetary policies.