Question

Apply Concepts How might the proper use of monetary policy affect economic stability?

Answer 1

Answer:

Proper use of monetary policy positively affects economic stability.  

Explanation:

Monetary policy generally aims to achieve economic growth and stability. Monetary policy is very important to keep a check on the economy and prevent inflation. It was after the economic crisis in the US brought about by the Second World War, the importance of monetary policy was realised.  

Formulation of monetary policy is the function of Federal Reserve System or Fed which is the country’s central bank. Instruments used by Fed to control the supply of money are open market operations, discount rates and reserve requirements.

Fed buys and sells government securities in open market operations. Discount rate is the rate at which money is lent to commercial banks. Fed changes this discount rate according to the state of the economy. When the monetary policy is formulated properly economic stability can be achieved.