8.
Explanation
Monetary policy is the management of a country’s money supply and interest rates by its central bank to achieve specific economic objectives. It plays a crucial role in influencing the overall economic environment and is one of the key tools for macroeconomic management. The primary functions of
monetary policy are as follows:
1. Price Stability: One of the main functions of monetary policy is to control inflation. Central banks aim to maintain stable prices by adjusting interest rates and the money supply to prevent excessive inflation or deflation.
2. Economic Growth: Monetary policy can also support economic growth by influencing interest rates. Lower interest rates can encourage borrowing and investment, which can stimulate economic activity.
3. Full Employment: Central banks often aim to promote full employment by adjusting monetary policy to encourage or discourage borrowing and spending. Lower interest rates can make borrowing more attractive for businesses, leading to job creation.
4. Exchange Rate Stability: Monetary policy can influence exchange rates by impacting interest rates and the demand for a country’s currency. Central banks may intervene in foreign exchange markets to stabilize their currency’s value.
5. Financial Stability: Maintaining the stability of the financial system is another key function. Central banks monitor and regulate banks to prevent financial crises and systemic risks.
6. Lender of Last Resort: Central banks act as lenders of last resort to provide emergency funding to banks facing liquidity crises, preventing banking panics.
7. Implementing Government Policy: Central banks may assist the government in implementing its economic policies by facilitating the financing of government activities.
8. Controlling Money Supply: By adjusting the money supply through open market operations, reserve requirements, and discount rates, central banks can influence the availability of credit and money in the economy.
9. Conducting Open Market Operations: Central banks buy and sell government securities in the open market to influence the money supply and interest rates.
10. Setting Interest Rates: Central banks often set short-term interest rates, which can affect borrowing costs for individuals and businesses.
In summary, monetary policy is a critical tool for central banks to influence economic conditions, promote stability, and achieve specific economic goals, primarily focusing on controlling inflation and supporting economic growth and employment.