Economic Policy-Fiscal and monetary policy Free Essay, Term Paper and Book Report
One of the functions of a Central Bank or a Reserve Bank is to ensure the health of the economy of the country. It does so by setting monetary policies, managing foreign exchange and reserves, setting interest rate and money supply to mange inflation among others. However the function that a central bank is most associated with is setting monetary policies. It mainly influences the economy of a country by controlling the money supply, and one of its main policy instrument is interest rate. Interest rates set by the central bank affects the borrowing by commercial bank and other market institutions, hence affecting the other interest rates in the market. In this essay we will discuss how a very low or near zero interest rates affects monetary policy, and examine the emphasis such low interest rate then puts on fiscal policy to drive the economy.
Lets start by looking at how interest rate (i) affects monetary policy. To have an equilibrium in the market the money supplied must equal the money demand of the market. This equilibrium condition can also be understood in term of supply......
Word Count: 1424
Page Count: 5.6 (250 words a page / double spaced)
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