ECONOMICS
MONETARY POLICY
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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Increased
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Reduced
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Either A or B
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None of the above
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Detailed explanation-1: -If inflation is too high, tightening monetary policy (which raises interest rates in the economy) will help to bring inflation back towards the target, but will also be likely to reduce economic growth and put upward pressure on unemployment, all else being equal.
Detailed explanation-2: -Monetary policy involves the management of the money supply and interest rates by central banks. To stimulate a faltering economy, the central bank will cut interest rates, making it less expensive to borrow while increasing the money supply.
Detailed explanation-3: -An expansionary monetary policy worsens the balance of payments. An increase in the money supply has three effects: the real interest rate falls causing an outflow of capital, so the BOP worsens. real income rises, so imports go up and the BOP worsens.
Detailed explanation-4: -A nation’s money supply and interest rates have an inverse relationship. This means interest rates should be lower if there is a higher supply of money in a country’s economy. Conversely, rates should be higher if the money supply is lower.