Monetary Policy Essay -- Expansionary and Contractionary Policy

basis pecuniary policy is among the many tools apply 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 supplement and availability of property (Woelfel, 1994). It is often targeted at interest evaluate to arrive at lay down objectives directed towards economic growth and stability (Woelfel, 1994). Monetary policy rests on the link between interest rates in an economy, that is, the relationship between interest rates and the measure money supply. It employs a variety of methods to control outcomes like inflation, economic growth, currency exchange rates and unemployment.Monetary policy can both be expansionary policy in which causal agency there is a rapid increase 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 amount of money in circulation in the economy (Woelfel, 1994). Th e comment of monetary policy takes the following approach accommodative if the purport of the manipulate interest rates is to stimulate economic 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 genteelness 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 borrowing thus increases the amount of money in circulation. It is however challenging when the interest rates are... ...ood of increased tax income on their savings (Goodfriend, 2000). It is therefore fundamental for substitution banks to promise the earthly concern that it will maintain some elements of quantitative easing even as the economy recovers in order to gain public trust. Besides adjustments on tax and expenditure instruments takes a longer period thus may only be final resultive in neutralizing the zero bound in the long run but not short term effect as required in this case.The signaling ChannelThis channel different the others capitalizes on shaping the publics expectations through visible signal about central banks future policy intentions. This channel is more of a visible sign for central governments commitment to maintain zero policy rates for longer duration. This channel requires central banks to show a queer willingness to break from the previous conventional monetary policies.