Please enable JavaScript.
Coggle requires JavaScript to display documents.
Monetary Policy - Coggle Diagram
Monetary Policy
-
Expansionary
Definition Monetary policy aiming at increasing aggregate demand through a decrease in interest rates; also referred to as easy monetary policy.
-
-
-
Contractionary
Definition A policy employed by the central bank involving an increase in interest rates and aimed at decreasing aggregate demand and thus inflationary pressures. Referred to also as tight monetary policy.
-
-
-
What is it? A demand-side policy using changes in the money supply and interest rates in order to achieve economic objectives relating to output, employment, and inflation.
Strengths
Relatively quick to put into place In most countries, the interest rate is set by the central bank and can be altered quickly, when it is felt to be necessary.
Absence of the "Crowding out" effect Expansionary fiscal policy involving increased government borrowing may lead to higher interest rates and a "crowding out" of private investment. This is not the case with monetary policy, where interest rates are s imply lowered.
No political intervention Because the interest rate is normally adjusted by the central bank, there do not have to be political processes that are gone through before the rate can be changed. This is the opposite of fiscal policy.
The ability to make small changes Because interest rates may be adjusted by as little as one-quarter of one percent, it is possible to be more precise than fiscal policy and to set more exact targets - for example, an inflation target of 2%, Monetary policy enables more fine-tuning of the economy.
Weaknesses
Time lags Although they are quick to change, monetary policies still take time to have an effect on the economy. It may take a number of months before there is a noticeable effect on aggregate demand.
Low business and consumer confidence Even though interest rates re reduced, the effect on expenditure may be very much dampened by low consumer and business confidence. This is especially the case if the economy is in a deep recession.
Ineffective when interest rates are low Expansionary monetary policy through cuts in the rate of interest cannot be use forever. Eventually interest rates will start to approach zero and there will be no room left for further cuts.
