The Purposes Of Implementing Monetary Policy In A Country

The purpose of a country implementing monetary policy is for maintain domestic price to stability. Price stability means that the general price level in an economy does not change much over time. There is no significant degree of inflation or deflation no matter the price neither go up or down. When people make some economy decisions, they also don’t feel compelled to take inflation into account. Importance of monetary policy to maintain stability of price due to if the domestic price instability and fluctuating prices will cause disturbances in economy. In the other words, when those countries’ economy is at monetary equilibrium, the quantity of money demanded will equals the quantity of money supplied. The price stability mean price equilibrium when the supply of money equals demand. The price will tends to be stable unless some outside element influence demand of supply.

Besides, those countries implementing monetary policy are to achieve full employment of resources. This is because the achievement of full employment included domestic price stability and exchange stability. It is also to bring about equilibrium between saving and investment at full employment level. This is because the problem of unemployment and disguised unemployment particularly in more growing populated countries, so that, application monetary policy is most suitable to solve the acute problem of unemployment and achieve full employment. During the period of high unemployment, those countries forced to spend more on unemployment benefits and those countries’ tax revenues that they received will become lower. Therefore, high unemployment will increase government borrowing. Some unemployed may exacerbate social problems such as crime , robbery and so on, especially if unemployment happens to immature youths. On the other hand, to achieving full employment will bring a lot of social benefits. For example, if unemployment become lower, it will reduce government borrowing. Indirectly, it will help to economic growth. If the unemployment gain new work, they will increase their income and spending. Those uninterrupted effect will also help to increase those countries’ economy growth.

Next, those countries will achieve higher rates of economic growth through implementing monetary policy. They use monetary policy makes economic growth is maintenance of price stability. Those countries’ higher rates of economic growth are associated with lower price levels. For example, a lower interest rates of monetary policy will lowers the cost of borrowing, it will cause higher investing activity and purchase of consumer durables. Through strengthen of economic activity, it will prompt banks to ease lending policy. Indirectly, enables business and households to increase their spending. When low interest rates regime, stocks become more attractive to buy and it will increase households’ financial assets. Consumers’ spending may also become higher. When interest rate is lower, value of money will fall. This is because demand of domestic goods increase when import goods become more expensive. Those factors indirectly increase consumers spending and investment, and it will let those countries achieve higher rates of economic growth.