Monetary policy.docx - Monetary policy is the policy adopted by the monetary authority of a country that controls either the interest rate payable on

Monetary policy.docx - Monetary policy is the policy...

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Monetary policy is the policy adopted by the monetary authority of a country that controls either the interest rate payable on very short-term borrowing or the money supply , often targeting inflation or the interest rate to ensure price stability and general trust in the currency Further goals usually to contribute to the stability of gross domestic product to achieve and maintain low unemployment , and to maintain predictable exchange rates with other currencies . Expansionary policy occurs when a monetary authority uses its tools to stimulate the economy. An expansionary policy maintains short-term interest rates at a lower than usual rate or increases the total supply of money in the economy more rapidly than usual. It is traditionally used to try to combat unemployment in a recession by lowering interest rates in the hope that less expensive credit will entice businesses into expanding. This increases aggregate demand (the overall demand for all goods and services in an economy), which boosts short- term growth as measured by gross domestic product (GDP) growth. Expansionary monetary policy usually diminishes the value of the currency relative to other currencies (the exchange rate ). The opposite of expansionary monetary policy is contractionary monetary policy , which maintains short-term interest rates higher than usual or which slows the rate of growth in the money supply or even shrinks it. This slows short-term economic growth and lessens inflation . Contractionary monetary policy can lead to increased unemployment and depressed borrowing and spending by consumers and businesses, which can eventually result in an economic recession if implemented too vigorously. History of Monetary Policy Monetary policy is associated with interest rates and availability of credit . Instruments of monetary policy have included short-term interest rates and bank reserves through the monetary base two forms of monetary policy Decisions about coinage; Decisions to print paper money to create credit . Interest rates , Paper money originated from promissory notes called " jiaozi " in 7th century China . Jiaozi did not replace metallic currency, and were used alongside the copper coins. The successive Yuan Dynasty was the first government to use paper currency as the predominant circulating medium. In the later course of the dynasty, facing massive shortages of specie to fund war and their rule in China, they began printing paper money without restrictions, resulting in hyperinflation . With the creation of the Bank of England in 1694 , which acquired the responsibility to print notes and back them with gold, the idea of monetary policy as independent of executive action began to be established The goal of monetary policy was to maintain the value of the coinage , print notes which would trade at par to specie, and prevent coins from leaving circulation.
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