Question

Define monetary policy. Describe the mechanism that leads from a change in monetary policy to changes in interest rates, exchange rates, and the current account balance

Answer 1

Monetary policy: It is controlled and practiced by the central bank of the country. Under this process, the rate of interest help to control the supply of money for the further achievement of price stability and increase and obtaining high economic growth of the country.

The mechanism is known as Expansionary policy-
When there is an implementation of the reduction in the rates of interest.
The supply of the foreign currency is lowered and income coming from foreign financial capital also reduces.
There is a decrease in the domestic value of the currency.
Consumer spendings are more switched towards the domestic product rather than the foreign because of depreciation in the rate of exchange.
There is an increase in the income of consumers due to which consumption increases.
The position of the current account becomes worse because of rise in income which results in the increase of imports.