Monetary Policy and Fiscal Policy

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1.1 Introduction The central bank is not just a lender that the government go to as a last resort, but it takes part in the stabilisation of the economy using different policy instruments. Economic stabilisation is when the government and the central bank keep the economy growth stable, alongside unemployment and keeping price levels under control. The European central bank definition of economic stability "a condition in which the financial system – which comprises financial intermediaries, markets and market infrastructures – is capable of withstanding shocks and the unravelling of financial imbalances. This mitigates the likelihood of disruptions in the financial intermediation process that are severe enough to significantly impair the allocation of savings to profitable investment opportunities"(ECB (2011), Financial Stability Review). I will discuss how different stabilisation policy’s used by central banks, monitor the economy and adjust the fluctuating interest rate to control the aggregate demand in the economy. 1.2 Monetary Policy Monetary policy is a policy that changes the quantity of money in the interest rate. The objective of this policy is to maintain price stability, low inflation and to support and enhance the government economic aims which include the increase of economic growth and employment. It can also can prevent money itself becoming a major source of economic disturbance. In 2009 the Bank of England announced that it had started to inject money into the economy directly by purchasing financial assets when it was setting its bank rate. The injection of cash in the economy is quantitative easing. This is instigated by the Central bank taking permission from the treasurer by making lots of money and cre... ... middle of paper ... .../9356/monetary-policy/quantitative-easing-risks-vs-benefits/ [Accessed: 3 Mar 2014]. Riley, G. 2009. Revision - Automatic Stabilisers. [online] Available at: [Accessed: 3 Mar 2014]. Zhenyu, L. 2013. Podcast: Can consumption become a key driver for China's long-term growth? - People's Daily Online. [online] Available at: [Accessed: 3 Mar 2014]. Journals Conte, C. and Karr, A. R. 2001. An outline of the U.S. economy. [Washington, D.C.]: U.S. Dept. of State, International Information Programs. Joyce, M. 2012. The Economic Journal, 122 (54), pp. 271-288. Rangarajan, C. 1997. Role of Monetary Policy. Economic and Political Weekly, pp. 3325--3328. Summers, L. 1986. Journal of Money, Credit and Banking, 18 (4), pp. 415-429.

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