Question

With the uncertainty in goods market, suggest an appropriate monetary policy stretegy should be taken by a central bank, either to target the interest rates or to target the monetary aggregates.

Answer 1

Monetary policies through which central banks target interest rates and monetary Aggregate -

• Contractionary monetary policy - contractionary monetary policies are used by the central bank which reduces the inflation rate as a result of which money supply falls and banks have less money to lend therfore they charge higher interest. This also results in fall in aggregate demand of money
• Expansionary monetary policies - Expansionary monetary policy is also used by the central banks to tareget the inflation and aggregate demand. Expansionary policy helod to reduce unemployment rate and help to reduce rececsion. This help to increase the supply of money in the market and which in turn results in fall in interest rates and increase in aggregate demand of money