Last Updated on November 24, 2019 by Sultan Beardsley
Modern monetary policy is the action taken by the Central Bank that facilitates the steps and the necessary communication needed to ensure a consistent and steady supply of money to provide a stable economy. The government trades with the private sector. The government buys products from the private sector, exchanging cash for the products they have to offer, and the private sector pays for the taxes charged to them by the government, meaning that the government spends money and gets it back in the other way. The money supply in the policy includes credits, cash, check, and money market mutual funds. The most significant aspect, in this case, is the credit aspect; it includes loans, mortgages, and bonds.
The main aim of monetary policy is to maintain liquidity at a point where the economic growth is at a steady increase, and at the same time, prevents inflation. The inflation management makes up one of the main objectives of the monetary policy; the other aim is to reduce the unemployment rate by providing loans to entrepreneurs, just an example, to start businesses and create employment opportunities. By effectively managing inflation, there is a reduction in the unemployment rate. The other main objective is substantially moderating the interest rate, and this will attract enough people to utilize the loans offered, ensuring an effective monetary policy.
There are two main types of monetary policies — the contractionary monetary policy, which is designed to reduce inflation in the policy paradigm. The second one is the expansionary fiscal policy, which is used by the central bank to lower the unemployment rates and also to avoid recession. The contractionary system reduces the money given to the banks, which in turn reduces the amount of money they can loan out. With that put in place, the banks are forced to charge high-interest rates, thus loans become an expensive option, and people retract from borrowing loans to start a business, thus slowing the growth. Expansionary monetary counters contractionary monetary policy, thus keeping it balanced.
The new monetary policy has quite several shortcomings, which are countering the aspect of it being the best policy to be put in place by the central bank. The fundamental element is to explain what modern monetary means because there is eminent confusion of what accurately validates the application of this policy. There is the theory of money concept, which suffices because of explaining how exactly it works, and there is also the political aspect. Under the political perspective, the modern monetary is view as a plot by the government to significantly increase the social spending, which I return increases the government income and ts enormous pressure on the citizens to curb the deficit brought about by the demand.
The monetary policy has substantial distributional implications that should be tailored to ensure an even distribution that favors the entire demography it covers. A perfect example of this particular scenario is the aspect of charging low-interest rates from the borrowers as captured in the expansionary monetary policy and affects the savers because it means that they, in turn, get minimal interest concerning their savings. Another scenario that would demonstrate a shortcoming in the new monetary policy would be an overheating economy coupled up with excess in demand. Businesses will increase the prices for the goods and services to cater for the expenses paired with an increase in demand. The chances are that the policy would call for a tax increment to control the inflation, whose effect is significantly slowing the economy.
In conclusion, the current monetary policy is a very vital aspect aimed at ensuring that the money supply is in check. Therefore, it is a core element in maintaining a steadily growing and stable economy. Once the loopholes are covered, everyone affected by the policy will have an equal chance to invest in it, and then the plan, in general, will not, at any one point, pause a threat to the economy.