MONETARY

POLICY
Monetary policy is the manipulation of interest
rates, exchange rates and the money supply to
control the amount of spending and investment
in an economy.

INTREST RATES
Intrest rates can refer to the price of borrowing
money ata financial institution . The main monetary
policy measure is the use of intrest rates to
influence the level of economic activity. For example
, higher intrest rates will make borrowing expensive
and create Merle incentive to spend, tending to
reduce overall spending in an economy.

MONEY SUPPLY
Money supply refers to the entire quantity of money circulating
in an economy., including notes and coins, bank loans and bank
deposits.The government can control the money supply in order
to influence the level of economic activity . For example allowing
commercial banks to lend more money, boosting consumption
and investment expenditure in the economy.

FOREIGN EXCHANGE
RATES
The foreign exchange market has a direct impact on
the domestic money supply. For example, domestic
customers need to purchase foreign currency in
order to buy imports. The buying and selling of
foreign currency will affect money supply in the
economy.

THE EFFECTS OF MONETARY POLICY MEASURES ON

MACROECONOMIC AIMS
ECONOMIC GROWTH: the monetary policy measure of lower intrest rates can be used
to achieve economic growth. This will tend to reduce cost of borrowing for households
and firms. Therefore boosting consumption and investment. Savers receive a lower
rate of return, discouraging saving and encouraging more spending . Finally, those with
existing loans and mortgages will have lower repayment costs, and so will have more
tmoney to spend . The combination of lower savings, more consumption and more
investment economic growth will occur.
FULL EMPLOYMENT: Lower intrest rates, as described , will tend to cause economic growth
More spending and investment in the economy will tend to create more jobs.
LOW INFLATION: economic growth stimulated by lower intrest rates will result in higher
consumption and investment expenditure . This will increase the productive capacity of the
economy, so more can be produced without having to use higher prices. High intrest rates
are used to limit consumption and investment in order to control the rate of inflation.
BALANCE OF PAYMENT STABILITY: A lower exchange rate, through government intervention
in the foreign exchange market, will improve international competitiveness of the country

BY SAFFIYAH MOHIDEEN