Question

1. Does the monetary policy affect macroeconomic condition? Explain how.

Answer 1

Yes monetary policy macroeconomic conditions. It affects in following ways

1. Inflation: A tighter monetary policy can decrease inflation in the long run and a loose monetary policy increases inflation in the long run. Reduction in liquidity system can reduce inflation and increase in liquidity system can increase inflation.
2. Demand: A tighter monetary policy can decrease demand of the economy and this is because of lower liquidity in the market. A loose monetary policy increases demand because liquidity lowers.
3.Interest Rate: Tighter policy increases interest rate of the economy as all interest rates are linked to fund discount rate which increases. Expansionary monetary policy decreases interest rates in the economy.