Question

How does the monetary policy affect inflation?

Answer 1

Monetary policy affect inflation in several ways, monetary policy imposed by the central bank of a country. Change in interest rate affect the inflation suppose if interest rate increase then people will save more and consume less as a result inflation reduces on the other increase interest rate reduce the investment as a result aggregate demand also decreases and inflation fall. Other tool of monetary policy suppose inflation in the economy then by open market operations central bank sell the securities in the open market and as result money supply reduced and inflation also fall. Other tool of monetary policy is bank rate in time of inflation central bank increase the bank rate as a result cost of loan increases and demand for loan decreases as a result money supply in the economy reduces and inflation fall.