Question

1. What, exactly, is “monetary policy”? Please describe the two types of monetary policy. 2. “Expansionary” monetary policy has been described as a complex 5 step process. Please take me through each step, starting at step 1, then moving through steps 2, 3, 4, then step 5, and describe each step in detail. 3. There are, in theory, four “links” between the 5 steps. Please describe them for me. 4. a) In theory, how could Link A be weak? How could link B be weak? How could link C be weak? How could link D be weak?   b) What is the ‘cash drain’, exactly?

Answer 1

1) Monetary policy is the policy adopted by the central bank or monetary authority of a country. This policy aims at ensuring macroeconomic stability in the economy by ensuring price stability and confidence in the country's currency. Monetary policy aims at affecting the interest rates and money supply in the economy through policy instruments like discount rate, reserve requirements and open market operations. There are two types of monetary policy namely expansionary monetary policy and contractionary monetary policy. Under expansionary monetary policy, money supply is increased in the economy at times of recession. Under contractionary monetary policy, money supply is reduced in the economy at times of inflation.