Monetary policy and its effects on country’s economy

Monetary policy is an essential tool for the economy of any country. With the help of monetary policy many economic issues including unemployment, inflation, currency exchange rate and others can easily be tackled by the government.

It involves the use of open market operations and interest rates to regulate a country's financial system.

Reserve Bank of India releases monetary policy after every two months. Important announcements like interest rates are included in this. It helps to control the financial system through the central bank of any country.

Aims of monetary policy-

Reduce inflation: Monetary policy is used to keep inflation under control. For this the central bank changes the interest rates to control the flow of money.

Unemployment: The aim of monetary policy is also to reduce unemployment. The central bank can reduce interest rates to enable the banks to take more money and low interest rates also encourages more loans and in turn results in more industrial activities generating more employment.

Exchange rates: The exchange rate of any country's currency is directly related to the monetary policy of that country. When the money flow increases, the currency exchange rate goes down and when money flow goes down then the currency exchange rate increases.

It is controlled in two ways in which open market operation is the first option in which the central bank buys and sells the bonds. The second is tweaking the interest rate.