Monetary Policy

Monetary policy is the policy that announced by central bank or government and make a decisions on the rate of interest ,the money supply and the exchange rate.It is as same as Fiscal policy they are all demand-side policies.So let's talk about it ,to see how it can affect our economic.

Now unemployment is a big problem for economic over the world so we should try to solve this problem first.What can we do ? Except what I have mentioned yesterday like increase government spending and reduce taxation we can also consider about the interest rate and the exchange rate .And monetary policies are include interest rate and exchange rate .So about the interest rate in monetary policies we can reduce the interest rate,because if the interest rate lower people will more likely to spend.So the consume will increase , also if the interest rate decrease it will be easier to borrow money from bank and hopefully the investment will also increase.Those two can send AD curve shift to the right . And the real GDP will increase.The most important is the unemployment will be less.

And for the exchange rate it is the same , because exchange rate and interest rate they have directly relationship,If the interest rate goes down the exchange rate will also decrease.Because if the interest rate is high in your bank people will save more so people from aboard will also save money in your bank, so the value of pound will increase ... if the interest rate goes down just the opposite way.

These policies are useful to reduce unemployment and increase the real GDP, but at the same time the inflation will be higher.This is a big problem we are facing.Because Inflation and unemployment have negative correlation ... So the government must think how to deal with these two problems.I think the supply-side policies can solve both two problems.So about the supply-side policies we are going to talk about them tomorrow.