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Inflation and Economic Stability

In: Business and Management

Submitted By sikenyi
Words 1276
Pages 6
Importance of Monetary Policy for Economic Stabilization!
Monetary policy is another important instrument with which objectives of macroeconomic policy can be achieved. It is worth noting that it is the Central Bank of a country which formulates and implements the monetary policy in a country. Like the fiscal policy the broad objectives of monetary policy are to establish equilibrium at full-employment level of output, to ensure price stability and to promote economic growth of the economy.
Monetary policy is concerned with changing the supply of money stock and rate of interest for the purpose of stabilizing the economy at full-employment or potential output level by influencing the level of aggregate demand.
More specifically, at times of recession monetary policy involves the adoption of some monetary tools which tend the increase the money supply and lower interest rates so as to stimulate aggregate demand in the economy, on the other hand, at times of inflation, monetary policy seeks to contract the aggregate spending by tightening the money supply or raising the rate of interest.
It may however be noted that in a developing country such as Kenya, in addition to achieving equilibrium at full employment or potential output level, monetary policy has also to promote and encourage economic growth both in the industrial and agricultural sectors of the economy.
Thus, in the context of developing countries the following three are the important goals or objectives of monetary policy:
 To ensure economic stability at full-employment or potential level of output;
 To achieve price stability by controlling inflation and deflation; and
 To promote and encourage economic growth in the economy.
The role of monetary policy in achieving economic stability at a higher level of output and employment will be discussed below and its role in promoting economic growth...

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