Question

How effective is monetary policy? Answer this question from the perspective of (1) the monetarists and (2) modern money theory.

How would you judge “Effectiveness”?

Answer 1

Monantory policy :- it is a policy used by government to permote maximum employment, stable long- term interest rate and stable price.

Effectiveness of monentory policy :- due to effectiveness of monantory policy fed is able to maintain price Stablilty that support long term economic growth and maximum employment.

• in recession time it is used to increase money supply and

Low interest rate so as to stimulate aggregate demand of in economy .

• in inflation it seeking to contract the aggregate spending.

1):- :- monetarist theory :- it is that economic theory that believe that money supply is most important deriver of economic growth . As money supply increase people demand more, job increase, production increase.

According to this theory it is much better than fiscal theory to explain effectiveness of monantory policy because stimulus spending added to money supply and create deficit by adding country sovereign debt which increase interest rate.

• central bank is more powerful than government.

2) :-Modern money theory :- it also come in light due to doubt of effectiveness of monantory policy in addressing economic shortfall. • in perspective of MMT on effectiveness of monantory policy.

Mmt emphasis of that central bank should support fiscal policy by maintain interest rate equal to zero lowing interest conduct by open market operation with commercial Bank using government bond the objective of monantory policy shifted slowly to make fiscal policy as effective as possible.