Factors that determine what is monetary policy?

Monetary policy has an impact on the allocation of money resources and it greatly affects economic development. In the UK, to ensure economic and social stability, and create conditions for post-pandemic economic recovery. The government has implemented many macroeconomic policies, including monetary policy. So, what is monetary policy? Objectives and tools What is monetary policy? Let‘s learn more about this topic with Learn Forex Trading.

Information you need to know about what is monetary policy.

Let’s dissect the concept of what is monetary policy. To better understand the adjustment and management of money resources in the current era of international integration.

what is monetary policy?

Monetary policy is the use of tools related to credit and foreign exchange. To stabilize the currency and thereby stabilize the economy, promoting growth and development. Simply, monetary policy is a macroeconomic policy. Implemented by the authority responsible for the currency or the Central Bank. The central bank implements monetary policy to achieve the macroeconomic goals set by the government. Such as price stability, unemployment rate, and economic growth.

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What types of monetary policies are popular today?

The two most common types of monetary policy include:

Expansionary monetary policy

Expansionary monetary policy can be understood as loosening monetary policy. Is a measure that the State Bank takes to increase the money supply in the economy beyond the normal level. To do this, the State Bank can implement one or a combination of two of the following three methods: 

• Reduce discount interest rate.
• Reduce the required reserve ratio. 
• Increase stock purchases.

When expansionary monetary policy is applied, interest rates decrease. This encourages businesses to borrow more money to develop their businesses and people to consume more. This leads to increased aggregate demand and creates many new jobs for people. Usually, this policy is applied when the economy is in a recession and the unemployment rate is high.

Tight monetary policy

Tight monetary policy, also known as contraction. The State Bank will adjust and reduce the money supply for the economy. This is done through measures such as increasing discount rates, increasing required reserve ratios, and selling securities to the market. When this policy is applied, interest rates increase. Makes individuals and organizations more careful in spending and investing. 

Current monetary policy goals

Regardless of whether expansionary or tightening monetary policy is applied. Their common goal is to reduce the unemployment rate and create jobs for people. At the same time, controls inflation and ensures stability and sustainable economic development. There are also other monetary policy goals such as:

• Economic growth: By adjusting the amount of money supply to the economy. This monetary policy directly affects interest rates and aggregate demand. This contributes to increased investment, overall production, and increased GDP, demonstrating economic growth.
• Increased money supply: Helps expand the scale of the economy, as businesses increase production and need to recruit more workers. Thereby creating jobs for people and reducing the maximum unemployment rate. 
• Price stability in the economy: Eliminates price fluctuations and helps the State determine economic development goals more effectively. Stable prices create a stable and safe investment environment. Easily attract investors and promote investment capital into the economy, creating conditions for economic growth and development.
• Control inflation: Inflation occurs when the price of goods increases and the value of money decreases. This makes it difficult to exchange goods domestically and internationally. The State Bank will now use monetary policy to control inflation.

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What factors affect what is monetary policy?

There are many factors related to what is monetary policy in the macro economy such as:

• Competition and diversification in the financial system: The level of competition in the financial market and the diversification of financial instruments affect the regulatory ability of monetary policy. When there are many factors affecting the money supply other than the banking credit system, the impact of monetary policy will also be limited.
• Financial status: The financial status of individuals, households and businesses affects monetary policy.
• Foreign exchange policy: When substitution is stable, all monetary policy measures will be neutralized through capital flows. Increasing access to foreign capital also helps businesses reduce their dependence on domestic credit. This will help reduce the impact of monetary policy on aggregate demand.
• The status of dollarization in the financial market: Including statistics on the total amount of money, determining goals, and other measures. Dollarization of both assets and liabilities also creates risks due to maturity imbalances and differences between currencies.

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List of monetary policy tools

What monetary policy tools does monetary policy use? Here are 3 main tools:

Required reserve ratio

The required reserve ratio is the ratio of money a bank must retain compared to the total amount of customer deposits according to the regulations of the State Bank. To adjust the money supply level in the economy, the State Bank can increase or decrease the required reserve ratio. When the State Bank increases the required reserve ratio, the amount of money supplied decreases. On the contrary, when the State Bank reduces the required reserve ratio, the amount of money supplied increases.

Open market operations are a monetary policy tool

What is monetary policy and why are open market operations monetary policy tools? In essence, open market operations are activities that affect the reserves of commercial banks and affect their ability to supply credit to the market, thereby adjusting the money supply. 

When the State Bank buys securities on the open market. Commercial banks will increase their reserves. And this increases the money supply for the economy and vice versa. When the State Bank sells securities, the money supply will decrease. The goal of monetary policy is to adjust the money supply through operations such as these.

Bank discount interest rate

Discount interest rates are applied by the State Bank to commercial bank loans to meet unusual cash needs. When the discount rate is adjusted, the monetary base and money supply also change. 

Commercial banks must reserve a certain amount of cash. To meet unusual cash withdrawal needs from customers. When the State Bank increases the discount rate, commercial banks will be more careful in borrowing this money and increase reserves. Leads to a decrease in the money supply in the economy and vice versa.

Epilogue

Above, Learn Forex Trading has shared the most basic information about policies, tools, goals, and roles of monetary policy. Hope this information helps you understand the concept of what is monetary policy. At the same time, know the implementation of the monetary policy of the State Bank at present.

Frequently asked questions?

what is monetary policy?

Monetary policy is a set of measures implemented by the state bank. The purpose is to control money supply and interest rates. To achieve economic goals such as controlling inflation. Maintain financial stability and support economic growth.

The main goal of what is monetary policy?

The main goals of monetary policy include: controlling inflation and supporting economic growth. At the same time, maintain financial stability while protecting the value of money.

Does monetary policy affect people?

Have. Monetary policy can affect people by controlling bank interest rates. Prices of goods and services, employment status, and overall economic growth.