Answer to Question #233452 in Management for Genine Kriegler

Question

With the aid of a diagram, describe the traditional monetary policies that can be used to control inflation.

Answer 1

Traditional monetary policies include interest rate adjustment, open market operations and the establishment of bank reserve requirements. Includes quantitative easing, forward guidance, collateral and negative interest rates as well as non-standard monetary policies. Inflation is seen as a complex economic situation. If inflation is more than moderate, it can cause catastrophic economic situations; it should therefore be controlled.

Inflation is generally controlled by the Central Bank and/or the government. The main policy used is monetary policy. There are a variety of tools to control inflation including:

• Monetary policy – Higher interest rates reduce economic demand and reduce inflation and economic growth.
• Control of money supply – Monetarists argue there is a close link between the money supply and inflation, therefore controlling money supply can control inflation.
• Policy supply-side – policies to increase economic competitiveness and efficiency by lowering long-term costs.
• Fiscal policy – higher tax rates can reduce expenditure, demand and inflation.
• Loan controls – the attempt to control salaries might theoretically help reduce inflationary pressures.