Objectives of Monetary Policy

Objectives of Monetary Policy

1.    Constant Increase in Money Supply

Money supply can bring inflation in the economy, which is not a favorable situation. Similar a tight monetary policy can also bring depression to economy, which would not be good for the economy. Therefore there must be a constant and controlled increase in money supply.

2.    Stable Exchange Rate

Stable exchange rate is important for international trade. A continuous change in the exchange rate creates an uncertainty and therefore international trade suffers. Easy money policy will devalue the money and country will suffer losses on imports (imports expensive), tight monetary policy would appreciate domestic currency (foreign country will suffer).

3.    Controlling Inflation

Monetary policy can be used to control price (inflation) in the country. Inflation control is one of the fundamental aspects of monetary policy. It is important to note that many issues are linked with inflation. At the time of high inflation, tight inflation monetary policy is used to bring the prices down.

4.    Employment and Inflation

Employment can be generated with investment and investment can be attracted by easy or lenient monetary policy (lower bank rates). People would love to invest at lower interest rate and such investment will create employment.

5.    Improve Balance of payment

Government can implement tight monetary policy to boost export. Tight monetary policy will prices will fall and export will increase and thus situation of balance of payment will improve accordingly.

6.    Higher Growth

Higher growth targets can be achieved by lenient monetary policy, as lower interest rate will encourages more investment. Similarly higher investment will increase the income & saving of people and those saving will be consumed which would extend market.