Question

Discuss the various monetary policy levers used by politicians and bureaucrats to guide the economy in the direction they deem most beneficial. Why do these policy levers produce unexpected results?

Answer 1

Monetary policy refers to the policy that change the availability and cost of money. Monetary policy is operated through the central bank of country or Federal Reserve. Following are levers:

• Federal Fund rate: it is rate which is charged by the one bank from another ones.
• Open market operation: it concerns with buying and selling government securities in open market thereby affecting the money supply in india.
• Discount rate: it is rate at which Federal Reserve lends out commercial banks.

These policy tools do not affect the economy positively sometimes. Inside lag effect is smaller in monetary policy but outside lag effect is greater , thus economic conditions might be different when monetary policy starts showing up effects in economy.