Question

Discuss the following monetary policy goals and how central banks try to achieve them. 1. Price Stability (inflation Targeting 2. High employment and output stability 3. Economic growth 4. Stability of financial markets 5. Interest-rate stability 6. Stability in foreign exchange markets

Answer 1

Page No. Date: Monetary policy and fiscal policy are the tools that makes goodsand money marieet equilibouse fiscal policy is adopted by government of any county to stabilize economic activity by influencing taxes on government spending monetary policies are adopted by central bank fany country by influencing isat Interest rates onlendinq ciemoney market to achieve ils- several doblective. It can be both expansionary Increasing money pupply and contractionary decreasing mmey supply wo IS-LM foame wogik model: y LMI Ccontractionary LM money supply LMcexpansionaru inoney supply int mate - Y' Yo Y" Dutput Poice Stability π = i-u Accedung to Eisher's equation Cqwen above, Linflation Conis equal to nominal interest loade cominus stealinterestuale con

Page No. Date: Iwthere is inflation now economy that mean Lis_high, se central banke_can inledvene by luneducing expansion du mond Lcing the money supply that is by following 1. Sartha interest Hat As the Gesult; usceping sealinterest sate constant; fallin nominal int deest late will sesult in fallin tales esteta inplation | Converse is possible when there is deflation's Unicreslolate willincueased by centralbank So I will use _ILHia High Emploumentandoutput stability - d LExpansionamonetak pouce willetin interest od rates to face . Hence, the investos Hwill take this optimistic siqnal of falling interest Hates and pitant taking credit and do Lose and more investment. Să as the mesult aggregale demand will use . Demand sise leads the Il produceres to hire more labows that is #moue_employment to produces moseoutput: Economic Geowth As mentioned above, expansionary monetary (pousy wheescelts in moste output. U mais implies molle economic activities and MOMO Moth

Pane No. Date: ston 1 Stability of financal markets If there is a us domestic investors 24 Investin the bond ondfio LISA Lecession in any economiSO beste investors are steluctant to heyoue taking there money back. Smailast; Bis the plight of potentialumvestorebi H Hence, the centre de bank of that countsey could | 144o.promise_losease'dinterest Coates so that investors invest in our market. fog this, they have to adopt contouchanely monetare monetary policy Interest Rate Stability J | Interest Rate and money Dupply are two Icoutical tools of cenior bank to cont9101 any cincumstance. So central bank by holding set expandieq money pupply they.cons Interest Yates V Stability in foreign Exchange Market | Suppase, foueign country is offering fiqh interest locate foletheize assets and holding. As the seesult Il the domestic investores day to Sconvegt domestic lewencimta tonean discency. As the result Idepreciation of our custuency and appreciation of there their currency pline donal wartourcomency to loss it competitiveness by mosland make depreciation

contralbank can intervene by contraction are monetary policy and using the threrest U rates ad domestic assets. As the deesults Stabilize_foreign comency position.