Introduction to MONETARY POLICY

Question 1

What is monetary policy?

Answer 1

Monetary policy is a macroeconomic strategy designed by a country’s central bank.
Its primary goals are to manage the money supply and interest rates.
It influences economic variables such as inflation, consumption, savings, investment, and capital formation.

Question 2

Why is monetary policy important?

Answer 2

Monetary policy plays a crucial role in achieving:
Price stability: Helps control inflation.
Economic growth: Promotes sustainable growth.
Job creation: Supports employment generation.
Social justice: Contributes to economic fairness.

Question 3

Who was Milton Friedman, and what was his contribution to monetary policy?

Answer 3

Milton Friedman was an influential American economist.
His research significantly popularized the study of monetary policy.
He emphasized the importance of controlling the money supply to stabilize the economy.
Friedman won the Nobel Prize in Economics in 1976 for his work.

Question 4

Explain the Phillips Curve.

Answer 4

The Phillips Curve illustrates an inverse relationship between inflation and unemployment.
When inflation increases, unemployment typically decreases, and vice versa.
This relationship underscores the challenges faced by policymakers in balancing inflation and unemployment targets.

Question 5

What is considered a healthy inflation rate, and how does the RBI manage it?

Answer 5

A stable and moderate inflation rate is considered beneficial for economic growth.
The Reserve Bank of India (RBI) targets an inflation range of 2-6% using the Consumer Price Index (CPI).
The RBI employs a bi-monthly monetary policy crafted by a 6-member Monetary Policy Committee to achieve inflation goals.