Monetary Policy

Monetary policy

Monetary policy refers to the tools used by the government to regulate money supply in the economy in terms of solving macroeconomic challenges facing the country. Therefore Monetary policy can help the government to solve the following problems in Kenya:

1. Controlling inflation by increasing interest rates

2. Generating employment by reducing reserve margin requirement or reducing interest rate.

3. Correcting balance of payment

4. To equate the distribution of National income

5. To achieve economic growth and development

6. To eradicate poverty

7. Using selective monetary method to solve natural calamities

Roles of monetary policy

1. Neutrality of money

Money is considered to be a passive factor or perfect elastic which means money is not supposed to influence economic activities such as production of goods and services, generating employment, economic efficiency in terms of allocating resources but money is only supposed to be used as a medium of exchange.

2. Price stability

In any economy price is always dictated by the forces of demand and supply and therefore due to the failures of market mechanism there is a need for government to intervene in terms of using monetary policy to maintain price stability.

3. Exchange rate stability

Types of exchange rates

Fixed exchange rate

Free floating exchange rate

Dirty managed exchange rate

4. Full employment

It is the dream of all countries to use monetary policy n order to achieve full employment whereby RNI will increase. Full employment is a macroeconomic dream whereby the factors of production have been put into the fullest use therefore additional investment in the economy will give zero output which means that whenever a country attains full employment then aggregate supply becomes perfect inelastic.

5. Economic growth

It refers to:

Increase in RNI (output of goods and services)

Increase in per capital income

Increase in per capital...