Introduction: In this essay, the reader will recognize and have the clear knowledge why the simultaneous targeting of the money supply and interest rates is sometimes impossible to achieve; correspondingly, how the central banks intervene in the foreign market exchange will be as well made known. Moreover, the reader will as well comprehend what the Bretton Woods Agreement is all about, and its ability to influence foreign exchange rates to fluctuate freely. Why the simultaneous targeting of the money supply and interest rates is sometimes impossible to achieve? The money supply is tied to interest rates as study showcase. If the Federal Reserve increases interest rates, the demand for loans will plummet, and therefore the increase rate of
But when interest rates are at almost zero, central banks need to adopt different methods - such as pumping money directly into the financial system. This process is known as Quantitative easing (QE). To stimulate the economy, central banks use a this monetary policy, usually when standard monetary policy has
This theory was unpopular with most Keynesian because of their belief that velocity was unstable and the economy would not return to potential output without help. However, the Monetarism theory relies on the ability to predict the velocity rather than stabilize it. Because Monetarists believed the economy was stable, they viewed the Aggregate supply curve as a steep slope. Another idea Monetarists believed was that the Fed should have a strict set of rules, which they should tie in monetary policies, including one of the most popular: the Money Growth Rule. The Money Growth Rule stated “The Feds should be required to target the growth rate of money so it equals the growth rate of real GDP.” However, Monetarists saw fiscal policy as useless, and believed government should not intervene, because the only thing that comes out of government intervention is interference with the free market.
Numerous economists question the classical form of monetarism and instead give an alternative to what they presume would serve countries well. Keynesianism Keynesianism theory of economy, on the other hand, emphasizes that fiscal policy can play a significant role in stabilizing the economy (Kindleberger, 2013:14). Unlike in monetarism, Keynesianism advocates for higher government spending; especially during a recession, as this can help recover the economy quicker. Keynesians argue that it is ill advised for governments to wait for markets to clear, as classical economic theory suggests. Principles of Keynesianism and its Links to the
On both occasions, inflation decreases from 6.04% to 5.4% and 13.54% to 13.33% respectively, whilst unemployment rate increases from 2.20% to 2.38% and 5.38% to 5.99% respectively. The data of declining inflation and rising unemployment supports the Phillips curve shown in graph 3. In conclusion, contractionary monetary policy is an effective tool for the central bank in order to reduce output level to its natural level. In reality, this policy alone might not be sufficient for the central bank and the government to achieve their economic objectives. As such, mixed policy should be implemented instead.
Central banks in various countries often reserve currency as the operating target, because the bank will need to change the commercial bank reserves, and then to influence the intermediate target and the ultimate goal, no matter what kind of policy tools banks need this operation. Because commercial bank reserves fewer bank loans and investment ability is stronger, it will lead to an increase in money supply and derivative deposit, many scholars believe that reducing bank reserve currency markets mean monetary relaxation. Another aspect of the reserve increase of the market shows that monetary tightening. However, due to endogenous variables as interest rates, reserve as financial indicators are often misleading central bank. The monetary
Also, floating rates, unlike fixed rates, automatically adjust to trade imbalances. Under fixed rate regime, an economy limits the use of monetary measures as those are fixed to preserve the exchange rate at its existing level. Hence, the scope of an economy gets limited mainly to its fiscal policy for addressing its other economic issues. When an economy decides its exchange rate regime it has indulge in some trade-offs and several considerations are considered, such as: 1. Stage of Economic Development: A floating exchange rate is preferred by developing countries as most of their debts are in foreign denominations.
Like many countries, industrialized and developing, one of the most fundamental objectives of macroeconomic policies is to sustain high economic growth together with low inflation. The variable inflation is very important to macroeconomists, financial analyst, academicians, policy makers and central bankers officials in understanding the responsiveness to Gross Domestic Product (GDP) to the change in general level and thus come up with the relevant policies so as to keep prices at the reasonable rate that stimulate production. In this present paper, the effect of inflation, interest rates, and exchange rates on the economic growth of a country is investigated. The relationship between inflation and economic growth have already been investigated
It may seem this policy is designed to slow down economic growth, although this is not the case. Instead, restrictive policies are used to slow down potential distortions, such as high inflation from an expanding money supply, unreasonable asset prices or crowding-out effects in capital markets. As such, the initial effect of this policy might be a reduction in nominal gross domestic product (GDP), but the final result could be higher and more sustainable economic growth and a
The aim of implementing monetary policy is to sustain the level of inflation by sacrificing its employment. On the other hand, the goal of fiscal policy is to lower the unemployment rate in the economy at any rate of inflation. Therefore, the coordination among these policies is very important in order to maintain the level of optimality of tradeoff between inflation and unemployment, which