This is concerned with any one of the following forms.
- controlling the supply of money
- controlling interest rates
- Rationing the amount of credit granted by banks
The rise in the aggregate expenditure in the economy and the demand. If the Government increased the supply schedule will move to the rise which means it will increase. But on the other hand if the Government decreases the interest rates then the firms and the companies will invest more money into the business and which will lead to the less employment. It would be cheaper for the companies to buy machinery and other borrowings so this way the expenditure will increase.
On the other hand if there are majority of people are house owners and if government increase the interest rates then it will be harder for the people to pay for the mortgages. Hence the every ones house hold disposable income will decrease which means they will not be able to spend more money on the everyday expenditures.
Although monetary policies are demand side macroeconomic policies. They work by stimulating or encouraging expenditure on merchandise and services. Economy large recession and booms reflect fluctuation in aggregate demand rather than in the economy productive capacity.
Monetary policy including using interest rates and other monetary instrument to influence the stage of consumer spending and aggregate demand. There is some example to use monetary policies such as the bank should raise the base rate. This base rate trends to impact all the other interest rate in the economy. However if the commercial bank have to borrow from bank therefore if the base rate increase commercial banks tend to put up their own borrowing and saving rates. Higher interest rate tend to decrease aggregate demand however borrowing make more expensive therefore firms and consumers are discourage from investment and expenditure.
But saving money is get more eyes catching because firms and consumer are more likely to keep savings money in the bank weather then expenditure. Number of decrease disposable income. Consumer with a variable mortgage will see a increase in monthly mortgage interest payment. However they have less income to spend.
Therefore exchange rates more impact by increase interest rate. the exchange rate tend to appreciate because of more money flows taking benefits of benefits saving rates in that country. But appreciation exchange rates will also helping decrease inflationary pressure. And import will be cheaper and there will be less demand for export. But turn down In aggregate demand the decline in competitiveness may give confidence firms to be extrawell-organized and cuts price.