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Review for Rules for monetary policy questions - Coursework Example

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The rule for monetary policy based on money growth simply means using the amount of money circulating in the economy to control other economic factors like the price levels and the gross domestic product. The money growth rule revolves around either the contraction or expansion…
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Review Coursework for Rules for monetary policy questions
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Monetary policy Task Why have rules for monetary policy based on money growth been unsuccessful in recent years? The rule for monetary policy based on money growth simply means using the amount of money circulating in the economy to control other economic factors like the price levels and the gross domestic product. The money growth rule revolves around either the contraction or expansion of the amount of money circulating in the economy. For instance, a contractionary policy would involve the selling of government bonds in the open market. On the other hand, an expansionary policy would involve the purchase of the government bonds on the open market. More money in an economy stimulates economic growth. However, the excessively high level of money circulating in the economy induces inflation. Conversely, the excessively low level of money circulating in the economy kills economic performance and induces deflation. Since the association between the money supply and other economic indicators such as the gross domestic product and prices level or inflation has become irregular, the money growth based policies have been unsuccessful (What is money supply? Is it important?, 2014).
Why don’t policymakers want to adopt rules for monetary policy?
Adopting rules for the monetary policy is like suggesting that the economy regulators clearly understand all the variables within the economy and how they affect one another. The center stage for the formulations of rules for monetary policy is the interest rates and the economic output. It is currently clear that the performance of an economy is influenced by the performance of other institutions like the financial market, the capital market, and the financial institutions. These players add to the list of factors to be considered when formulating rules for monetary policy. The regulators have not been able to understand fully how the financial markets affect the economy, thus, controlling an unclear situation could cause damages. Therefore, the policy makers are reluctant to adopt rules for monetary policy (Swanson, 2014).
Swanson, A. (2014). What the US could gain and lose from monetary policy rules. Retrieved from
What is money supply? Is it important? (2014). Retrieved from Read More
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