Monetary policy is an important topic in macroeconomics, it’s essential for every individual to understand it in order to predict the up and down in the economics conditions. Monetary policy is owned by the central bank of the country, bank uses it as a tool to control the economic conditions of the country. If country is facing high inflation rate then central bank acts to control the inflation by moving up the rate of interest. Monetary policy mange the money supply, more the supply of money greater the inflation in the country and money value devalue.
Generally monetary policy deals with the money management; the standard was introduced in 19th century when the gold standard takes birth. During the recession period in the country unemployment increase, to reduce unemployment central bank of the country lowers the rate of interest. Lower the rate of interest more will be the investment and more chances of employment, increasing the supply of money in the country is called expansion on the other hand to control inflation interest rate is raised, low investment and employment but country is able to stable the inflation rate.
The tight money concept was applied in 1991 when USA faces recession to control the inflation rate. State Bank of Pakistan increases the interest rates to control the inflation. Inflation for a small period is normal, central bank apply monetary policy to less the flow of money for the temporary period but if the inflation resist for the long time then central bank have to continue the policy for large span period and nation will face the symptoms in the form of unemployment and high price commodities.
According to Federal Reserve ban of Sans Francisco
“U.S. monetary policy affects all kinds of economic and financial decisions people make in this country—whether to get a loan to buy a new house or car or to start up a company, whether to expand a business by investing in a new plant or equipment, and whether to put savings in a bank, in bonds, or in the stock market, for example. Furthermore, because the U.S. is the largest economy in the world, its monetary policy also has significant economic and financial effects on other countries. “