Submitted by: Submitted by carolinegitau
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Category: English Composition
Date Submitted: 11/08/2012 03:46 AM
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...