Monetary policy is the attitude of the political authority towards the monetary system of the community under its control. It is the process a government, central bank, or monetary authority of a country uses to control (i) the supply of money, (ii) availability of money, and (iii) cost of money or rate of interest to attain a set of objectives oriented towards the growth and stability of the economy. Monetary policy is one of the tools that a national Government uses to influence its economy. Using its monetary authority to control the supply and availability of money, a government attempts to influence the overall level of economic activity in line with its political objectives. Monetary policy is referred to as either being an expansionary policy, where an expansionary policy increases the total supply of money in the economy, and a contractionary policy decreases the total money supply.
Objectives of monetary policy:
To save guard the country’s gold reserve: The gold standard is a better monetary system. The far right advocates the gold standard because it gets government out of the business of controlling the money supply. They fear that printing money creates inflation, and retracting money causes recessions.
To maintain price stability: The benefits of price stability are substantial. Maintaining stable prices on a sustained basis is a crucial pre-condition for increasing economic welfare and the growth potential of an economy
To maintain exchange stability: It shows that fixing the exchange rate to a basket of currencies instead of a single currency serves to promote long-term stability to which the Bank remains strongly committed. A stable exchange rate imposes a constraint on domestic monetary policy which could be regarded as a useful safeguard against unsound policies.
Elimination of cyclical fluctuation: In recent years the problems of monetary policy have been approached more and more with a view to both stabilizing the value of the monetary unit and eliminating fluctuations in the economy. To attempt at explaining and publicizing these most difficult economic problems. It may perhaps be appropriate to speak of fashions in economics.
Achievement of full employment: Needlessly high levels of unemployment are a contributing factor to a wide range of social ills, which would be substantially alleviated by driving unemployment. This will require substantial increases in government deficits and debt.
Acceleration of economic growth: Expansionary monetary policy is monetary policy that seeks to increase the size of the money supply. In most nations, monetary policy is controlled by either a central bank or a finance ministry. There is no clear consensus on how monetary policy affects real economic variables. Both economic schools accept that monetary policy affects monetary variables
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