Question

Which of the following are goals of monetary policy?

Answer 1

The main goals of monetary policy are to achieve low and stable inflation, full employment, and sustainable economic growth. Controlling inflation is often a top priority, allowing businesses to plan and invest more effectively. However, they must balance this with minimizing unemployment and sustaining growth, which can sometimes lead to conflicts in policy objectives.

Step-by-step explanation:

Goals of Monetary Policy

The primary goals of monetary policy include maintaining low and stable inflation, ensuring full employment, and fostering conditions for long-term economic growth. One of the key targets for many central banks is the management of inflation rates. Based on the neoclassical model of economics, it's believed that expansionary monetary policy solely leads to inflation without altering GDP or unemployment. Thus, maintaining low inflation is seen as essential, as it allows businesses to focus on real economic issues rather than the unpredictability associated with high inflation. Moreover, minimizing the risk of exchange rate fluctuations is also a consideration, which not only stabilizes the economy but also encourages both domestic and international competition.

However, these goals can sometimes be conflicting, as efforts to reduce unemployment via monetary stimulus might trigger inflationary pressures, while measures to curb inflation can lead to higher unemployment and sluggish economic growth. Additionally, central banks may use interest rates, such as the federal funds rate, as a tool to indirectly control monetary conditions.

Answer 2

Monetary policy primarily aims to maintain low and stable inflation, minimize exchange rate risks, and promote employment and economic growth, with central banks often using the federal funds rate as a policy target.

Step-by-step explanation:

Goals of Monetary Policy

The primary goals of monetary policy include maintaining low and stable inflation, minimizing the risk of exchange rate fluctuations, and fostering conditions that lead to high levels of employment and economic growth. However, these goals can sometimes conflict with each other, as measures to stimulate the economy and reduce unemployment might lead to higher inflation, while efforts to curb inflation can suppress growth and increase unemployment.

According to the neoclassical model of economics that most central bankers follow, the aggregate supply curve is vertical at the level of potential GDP, meaning that monetary policy's effect on real GDP and unemployment is limited in the long term.

As such, central bankers often focus on keeping inflation low, as this creates a better climate for a healthy and growing economy by allowing businesses to concentrate on real economic decisions instead of worrying about inflation.

Choosing appropriate targets for monetary policy, like interest rates, money growth rates, or the price level, is crucial as it determines the focus and actions of a central bank.

Historically, the Federal Reserve, for example, has used the federal funds rate as a key target to influence the economy.