ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -Monetary policy affects aggregate demand and inflation through a variety of channels. Adverse shocks, such as an oil price increase, can lead to higher unemployment and higher inflation. Many governments have given responsibility for monetary policy-often described as inflation targeting-to central banks.

Detailed explanation-2: -The policy interest rate is an interest rate that the monetary authority (i.e. the central bank) sets in order to influence the evolution of the main monetary variables in the economy (e.g. consumer prices, exchange rate or credit expansion, among others).

Detailed explanation-3: -The fed funds rate impacts how much commercial banks charge each other for short-term loans. A higher rate means more expensive borrowing costs, which can reduce demand among banks and other financial institutions to borrow money.

Detailed explanation-4: -Inflation Targeting If prices rise faster than their target, central banks tighten monetary policy by increasing interest rates or other hawkish policies. Higher interest rates make borrowing more expensive, curtailing both consumption and investment, both of which rely heavily on credit.