The graph shows current unemployment and inflation rates in the economy. Due to public pressure, policy makers at the Federal Reserve make a one-time decision to use monetary policy to lower unemployment to 3%, a level the American public will accept. In the diagram, adjust the short-run Phillips curve (SRPC) to show the long-term consequence of this choice. Then answer the questions that follow. By reducing the unemployment rate to 3%, how much does inflation increase? inflation increase = What is the value of the NAIRU in this economy? value of the NAIRU = % % Inflation rate (%) 10 9 8 7 6 5 4 3 2 1 0 0 1 2 LRPC 3 4 5 6 Unemployment rate (%) 7 8 SRPC 9 10
Monetary Policy and Equation of Exchange
The monetary policy has been defined as the policy that is used by the Federal Reserve (the central bank of the US) or the central bank (the central bank of India is RBI) along with the use of the supply of money to accomplish certain macroeconomic policies. Monetary policy is a supply-side macroeconomic policy that supervises the growth rate and money supply in the economy.
Monetary Economics
As from the name, it is very evident that monetary economics deals with the monetary theory of economics. Therefore, we can say that monetary economics, is that part of economics that provides us with the idea or notion of analyzing money as a holding with its function, which acts as the medium of exchange, the store of value through which the buying and selling are done and also the unit of account. It also helps in formulating the framework of the monetary policy of a bank in an economy which ultimately results in the welfare of the people residing in that particular economy. The monetary policy of an economy also helps to analyze and evaluate the financial health of it.
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