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Monetary policy - Research Paper Example

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Class: Date: Central bank is a government institution charged with the responsibility of controlling interest rates, issuance of the new currency, regulation money supply in the economy and to oversee the operation of commercial banks in a country…
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Monetary policy
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Monetary policy

Download file to see previous pages... It lays a vital role in opening up the financial market of a country. It also has supervisory powers, aimed at limiting banks and financial intermediaries from reckless behaviour. In developed nations Central banks are independent so that they operate under rules made to help them operate in a political free management (Kurgan and Wells 387). Therefore, this paper aims at obtaining a deep analysis on the role of central bank in use and implementation of monetary policy to stabilize the economy. This will be with respect to the great depression of 1929 to early 1940s. Monetary policy is the mean through which the monetary tools of a country control the flow of money. It mostly focuses on the rate of interest with an aim of promoting economic growth and stability. It is key role is to sustain, stable prices and maintain low levels of unemployment. Monetary policy can either be expansionary of contractionary. Expansionary policies increase the supply of money in the economy while the contractionary measurers reduce the total money supply to the economy (Bofinger, Reischle and Schachter 123). Expansionary policy is theoretically used to control unemployment in a recession by lowering interest rates in the view that easy credit will motivate businesses into expanding. Contractionary policy is intended to slow inflation in a view of curbing the resulting deterioration and distortions of asset values. The Monetary policies advocated by the central bank helps in fostering the growth of financial market by encouraging open market operations. It is the most used tool by the central bank of each country to correct any economic disorder or to set the pace of a country economic growth (Bofinger, Reischle and Schachter 170). Economic depression is an economic slowdown where the gross domestic product is expected to decline at around 10%. To give rise to greet economic depression, the gross domestic product was believed to have declined by at least 33% per annum. This is the worst in history so far. Economic depression is characterized by; reduced consumption by individuals and the government, increased liquidation of the banking system or narrowing of financial market to the extent that it cannot allocate capital inflow to various sectors of the economy, high levels of unemployment expressed in two digits, insolvency of economic driving companies, a reduction in the wage rate for example, during the great economic depression it reduced sixty percent and acute shortage of money supply in the economy. Thus, depression can be defined as a recession that lasts longer and has a massive decline in business activity thus a slowdown in economic growth (Bofinger, Reischle and Schachter 213). Central bank and monetary policy with respect to the great depression of 1929 to early 1940s can be analyzed from different views. The great depression lasted for 10 years. This occurred when the shares traded in a day tripled followed by a drastic fall in price by about 24%. The great economic depression was characterized by an increased rate in unemployment which increased by 22% of the total country workforce. The total gross domestic product reduced by half as the price fell by 10%. The depression also caused farmers to lose their farms, and this made them together with the unemployed to move to urban areas in search of daily earnings, this lead to development of shanties thus creation more problems. There were massive bank failures and ...Download file to see next pagesRead More
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