Chapter 8.2: Transaction Costs

Question 1

What is Monetary Policy?

Answer 1

Monetary policy is the macroeconomic policy laid down by the central bank. It involves management of money supply and interest rate to achieve macroeconomic objectives like inflation, consumption, economic growth and stability.

Question 2

Goals of monetary policy

Answer 2

to manage the supply of money in a country’s economy.

Objectives of monetary policy
1. High employment and output stability: To achieve the level of full employment, which is called the natural rate of unemployment
2. Economic growth
3. Stability of financial markets
4. Interest-rate stability: Fluctuations in interest rates create uncertainty for financial institutions
5. Stability in foreign exchange markets
6. Stability in price
7. Stability in currency

Question 3

Conventional Monetary Tools to control the money supply and interest rates?

Answer 3

open market operations, discount lending, and reserve requirements