Question

What are the objectives of Monetary Policy? Explain.

Answer 1

The specific objectives of monetary policy are Objectives of monetary policy:

1. Neutrality of Money
2. Stability of Exchange Rates
3. Price Stability
4. Full Employment
5. Economic Growth
6. Equilibrium in the Balance of Payments

1. Neutrality of Money:

1. Economists like Wicksteed, Hayek, and Robertson are the chief exponents of neutral money.
2. They hold the view that monetary authority should aim at the neutrality of money in the economy.
3. Monetary changes could be the root cause of all economic fluctuations.
4. According to neutralists, the monetary change causes distortion and disturbances in the proper operation of the economic system of the country.

2. Exchange Rate Stability:

1. Exchange rate stability was the traditional objective of the monetary authority.
2. This was the main objective under Gold Standard among different countries.
3. When there was disequilibrium in the balance of payments of the country, it was automatically corrected by movements.

3. Price Stability:

1. Economists like Crustave Cassel and Keynes suggested price stabilization as a main objective of monetary policy.
2. Price stability is considered the most genuine objective of monetary policy.
3. Stable prices repose public confidence.
4. It promotes business activity and ensures equitable distribution of income and wealth.

4. Full Employment:

1. During the world depression, the problem of unemployment had increased rapidly.
2. It was regarded as socially dangerous, economically wasteful, and morally deplorable.
3. Thus, full employment was considered as the main goal of monetary policy.

5. Economic Growth:

1. Economic growth is the process whereby the real per capita income of a country increases over a long period of time.
2. It implies an increase in the total physical or real output, production of goods for the satisfaction of human wants.
3. Monetary policy should promote sustained and continuous economic growth by maintaining equilibrium between the total demand for money and total production capacity and further creating favorable conditions for saving and investment.

6. Equilibrium in the Balance of Payments:

1. Equilibrium in the balance of payments is another objective of monetary policy which emerged significantly in the post-war years.