The justification of Monetary Policy

A continuation from the previous blog, ( well i made this simple enough for dear readers to understand).

Whenever there is an inflation in the country, the government usually tend to reduce the money supply and reduce the purchasing power, how? this question can be answered from the previous post in this blog. However more importantly, when the government want to overcome inflation, they usually will reduce the money circulation in the country and makes money or currency become limited and people spend less than usual. Cost of borrowing which is interest rate is higher, and bank will restrict their loan policy and cost of borrowing become expensive.

 In the condition of recession, where money in circulation is not much, the government will apply the expansionary monetary policy, and increase the money in the circulation within the economy system. they reduce the interest rate and borrowing and lending become cheaper and people will spend more and more until the economy became stable, and high employment achieved. However, this only can be applied in the short-run. Why? this is because in the long run, increase in money supply may lead to inflation problem. we do not want that ,do we? for beginners SMEs, they can take advantage of the expansionary policy since they need the capital to run their businesses or productions.

During inflation, it is advisable for us to save more.

expansionary monetary policy is used to reduce unemployment, however, it is impossible for a country to reach zero unemployment due to frictional unemployment (people who between jobs and fresh graduates) and structural unemployment ( mismatch between job requirements and and the job skills).

There are 5 goals of monetary POLICY :

1. High employment
2. Economic growth
3. Price stability
4. Interest rate stability
5. Stability of Financial Markets