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Monetary Policy Econ

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6 views11 pages

Monetary Policy Econ

Uploaded by

usman.9508
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPTX, PDF, TXT or read online on Scribd
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USING

MONETARY
POLICY TO
ACHIEVE
LOW
E C O N O M I C S
P R E S E N T A T I O N

INFL ATION
by: eman, eshyl, usman,
hayyan
Definitions

Inflation: The continued rise in the overall price of goods and services,
leading to a decrease in the value of money when making purchases.

Monetary Policy: Measures a central bank takes to manage the money


supply and interest rates to meet economic objectives such as stable
inflation and maximum employment.
Diagra
m
Real world
example
2021-2023:
The U.S. Federal Reserve in response to the high inflation

After the COVID-19 pandemic:


1. Global supply chains were disrupted
2. Demand increased
3. Fiscal stimulus
> led to a sharp rise in inflation.
2022: U.S. inflation reached its highest levels in over 40 years, peaking at
9.1%.
Response of The Fed:

• began raising interest rates aggressively in March 2022.


• the federal funds rate was increased from 0% to 5% by mid-2023.
• also removed some of the excess money supply that had
accumulated during the pandemic.

Impact of these actions:

+
• Inflation reduced gradually (fell to 3% by mid-2023)

-
• However, higher interest rates slowed economic growth
• Led to increased borrowing costs for consumers & businesses.
General Strengths of Monetary Policy Reducing
Infl ation
• Centeral banks, like the Federal Reserve or the State Bank of
Pakistan, can use interest rates to directly influence inflation.
Raising rates discourages borrowing and spending, which reduces
Market economic
demand and helps cool-off inflation. system

• Monetary policy decisions are usually made by central banks,


Command
independent of political influence, allowing for more consistent and
economic system

long-term focused strategies without short-term political pressures.


• Central banks can adjust monetary policy relatively quickly in
response to inflationary pressure, either by increasing interest rate,
Centrally planned
modifying reserve requirement, or system
economic using open market operations
General Strengths of Monetary Policy Reducing
Inflation
• Central banks can influence inflation expectation. By
maintaining credibilit, they can convince the public and
markets that inflation will be kept in check, which helps
stabilises prices in long run.
• Since many currencies are interrelate, monet policy changes,
particularly in large economie, can have global effect, helping
to control inflation pressures that might arise from global
demand or supply shock.
Monetary Policy Limitations in reducing
Inflation
• The effects of monetary policy changes, such as interest
rate hikes, are not immediate. It can take months or even
years for theses changes to folly work through the economy
and impact inflation.
• Monetary policy is a broad tool that affects the entire
econom. It may not be effective at targeting inflation in
specific sector.
• If inflation is driven by supply-side factors like, rising oil
price, monetary policies may have limited effectivenes, as
raising interest rates cannot directly address these issues.
Monetary Policy Limitations in
reducing Inflation
• Tightening monetary policy to reduce inflation can slow down
economic growth, increase unemployment, and even trigger
recessions if applied too aggressively.
• In an interconnected global economy, the success of domestic
monetary policy can be undermined by external factors, such
as global commodity prices or foreign exchange rates, which
are beyond the control of a central bank.
• If the central bank lacks credibility or consistency, its actions
may not have the desired effect on inflation expectations,
reducing the effectiveness of monetary policy interventions.
Evaluation of the view that monetary policy is the best way to
reduce inflation.

+
• the central bank making such decisions means more consistent and
long-term focused strategies without short-term political
pressures.
• raising interest rates discourages borrowing and spending, which
reduces demand and helps to cool off inflation.

-
• effects of monetary policy changes e.g. interest rate hikes are not
immediate.
• if inflation is driven by supply-side factors (e.g., rising oil prices, global
supply chain disruptions), monetary policy may have limited
effectiveness, as raising interest rates cannot directly address these
issues.
• tightening monetary policy to reduce inflation can slow down
economic growth, increase unemployment, and even trigger
recessions if applied too aggressively.
Thank
You! :)

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