The mechanism of drafting, announcing, and implementing the plan of actions taken by the Central Banks, currency organizations, or other monetary authority of a country that controls the quantity of money in an economy and the channels by which new money is supplied is known as monetary policy. The management of money supply and interest rates, to achieving macroeconomic objectives which include controlling inflation, consumption, growth, and liquidity are the goals of monetary policy. The mechanisms such as modifying the interest rate, buying or selling government bonds, regulating foreign exchange rates, and changing the number of money banks are important to achieve higher foreign reserves.
What is the importance of Monetary Policy?
Monetary policy has great importance. For example, at times of recession monetary policy plays a crucial role by involving the adoption of some monetary mechanisms which helps the state to increase the money supply and lower the interest rates which stimulates aggregate demand in the economic processes. Additionally, during the rise of inflation, the monetary policy aims to decrease the aggregate spending by contracting the money supply or by raising the rate of interest.
It is worth noting that in developing countries, along with achieving equilibrium such as full employment or potential output level, monetary policy also encourages economic growth in the industrial and as well as in agricultural sectors of the economy.
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