Monetary policy is no doubt seems to be a simple idea but in fact it becomes complex and complicated when it comes to describe its impacts on the inflation and economy of the country as a whole.
Definition of Monetary Policy:
Monetary policy can be defined as mechanism which regulates the rates of interest and money supply in the country. These regulations are done by the central bank so that the currency could be stabilized and inflation can be controlled. In the United States of America, FRB (Federal Reserve Board) controls the monetary policy.
Meaning of Inflation:
Inflation is defined in many ways but usually inflation means a continuous increase in the prices of consumer goods. In other words, it can be said so, if the purchase power for the dollar continuously decreases, it is also called inflation. All this inflation either in form price increase or in the form of less purchasing power is caused due to monetary inflation levels. This happens when the government infuses a lot of extra currency in the supply of money. When the currency increases too much in the country but the production of goods is unable to meet the requirements, then it gives birth to price hike and monetary inflation takes place that is not healthy for the nation.
Influences of monetary policy on inflation:
It is very certain that monetary policy only work when the spending on services and goods by the customers are discouraged. This is done in order to level the influences of recessions and economic boosts. We can explain this better with an example. If the monetary policies are enforced in a way to increase the daily wages and prices of the goods much faster then it will ultimately increase the overall output of certain products and it will surely decrease the unemployment. The federal does tries hard to raise the demands with help of the monetary policies. This is done in order to increase the production levels of different goods and to boost up the money lending beyond real capacities. It is done in order to decrease the supply of currency in the country which will ultimately lower down the price hike.
Inflation with the help of monetary policy can be influenced by increasing the people’s hopes in monetary markets. When these markets get clear idea that the Federal Reserve is unable to focus on the inflation rate, they start adding their risk premiums in the rates of interests. This can be said in other words as, the financial markets increase the interest rates on their own and they do not wait for the actions from the federal. They do so in order to follow the mechanism of safety which can be compromised in future with the changes in the monetary policy and price hike (inflation).
Time required for changes to take place:
When some changes are made in the monetary policy, they do not have an immediate impression on economy and as well as on the inflation. The effects take utmost two years or at least 3 months to influence the manufacturing yield. While in case of inflation, the effects can take up to three years or more in order to influence the rate of inflation.