Question

Explain Monetary policy & its effect on business. (In 500 Words)

Answer 1

PLX MARK IT AS BRAINLEST

Monetary policy is the term used by economists to describe ways of managing the supply of money in an economy. Monetary policy is the process by which the monetary authorityof a country controls the supply ofmoney, often targeting a rate ofinterestfor the purpose ofpromoting economicgrowth and stability.

The official goals usually includerelatively stable prices and low unemployment. Monetary economicsprovidesinsight into how to craft optimal monetary policy.

Monetary policy is referred to as either being expansionary or contractionary, wherean expansionary policy increases the total supply of money in the economy morerapidly than usual, and contractionary policy expands the money supply more

Answer 2

Answer:

Explanation:

The monetary policy operates through the changes in the quantity of money. It is controlled by the central bank of the country.

$\boxed{Instruments .Monetary. Policy:}$

Open market Operations: The central banks sells bonds in exchange for money and in the process, it decreases the stock of money.

Discount Rates: The interest rate that the central bank charges financial institutions, for loaning them money on a short-term basis.

Reserve Ratios: The ratio of reserves which commercial banks have to keep a certain proportion of their total assets in the form of cash reserves. (Cash Reserve Ratio, Statutory Liquidity Ratio etc.)

Margin Requirements: The proportion of the loan amount which is not financed by the bank.

Credit Rationing: It refers to limiting the amount of credit available for each commercial bank to grant to public.

Moral Suasion: It refers to the pressure exerted by central banks on financial institutions to follow certain guidelines on the availability and cost of credit.

Direct Action: Imposing actions if commercial banks does not follow directives of central bank and work against the objectives of the monetary policy.

Consumer Credit Regulation: Regulating the credit rules and guidelines of commercial banks.

$\boxed{Transmission Process:}$

Change in the real supply of money → Adjustments in the portfolio which bring about changes in prices of assets and interest rates → Changes in the interest rates lead to adjustments in aggregate spending → Changes in aggregate spending cause adjustments in output.

Effects of Monetary Policy:

Liquidity Trap

Classical Case (in which LM curve is vertical)