Monetary policy

It is given great notice by each country’s government and special bodies are appointed to achieve these goals. In general, these organizations are called central bank and typically serve a role of supervising the smooth operation of the financial system as well as monetary policy. They are generally given liberty to avoid interference of ruling government that can misuse it. It is said to be easy, loose or expansionary when the quantity of money in circulation is being rapidly increased and short-term interest rates are thus being pushed down. Monetary policy is called tight or contraction when the quantity of money available is being reduced and short-term interest rates are thus being pushed to higher levels.

The primary instrument of monetary policy is typically a short term interest rate. Interest rates on loan contracts or debt appliances such as treasury bills, bank certificates of deposit, or commercial paper having maturities less than one year often called money market rates are short term interest rates. In the future, the amount of goods and services the economy produces and the number of jobs it generates both depends on factors other than monetary policy. These include technology and people's preferences for saving, risk, and work effort. So, utmost output and employment mean the levels consistent with these factors in the long run. Currently all central banks in industrialized countries adopt monetary policy through market-oriented instruments geared to influencing short-term interest rates as operating targets. They do so mainly by determining the conditions that stabilize supply and demand in the market for bank reserves

Factors to be considered
Money Stock:
It is the total money available in a particular economy at a particular point in time.
Various sorts of things may be serving as money at the same time in any particular economy, exact definition and measurement of the money stock presents some serious practical problems for the policy maker who needs to use manipulation of the growth of the money stock as a tool of economic policy.

Open market operations
Sales or purchases of government debt devices such as treasury bonds, treasury bills, treasury notes on the open financial markets by a nations central bank (in the U.S., the Federal Reserve) as part of its efforts to control the size of the money supply and the levels of interest rates. Central bank verdict to buy up government debt instruments make for an expansionary monetary policy, while sales of government debt instruments by the central bank represent a contractionary monetary policy.

Also a well functioning good and labor market form an important factor of competitiveness within the single monetary policy. Fiscal policy, also plays as an instrument of growth policy, through its effect on national saving by means of the structural budget deficit, through incentive effects on work, saving and investment via tax rates and tax structure, and through public investment in human capital and physical infrastructure.

Price stability is the unique objective for monetary policy for long term. The upsetting effects of price instability in the economy are felt in the form of Business Cycles. When there are rapid changes in the price level there are fluctuations in the level of economic activities also. Price stability means that the average price as found by the wholesale or Consumer Price index fluctuate within a narrow range. Both rise in price level and drop in price level cause disturbances and have bad effects on the economy. A monetary policy may reduce short-term interest rates by flooding the banks and financial markets with funds providing loan and yet at the same time may in fact raise longer-term interest rates by prompting fears among lenders that inflation will soon be speed up.

Sadly, medium and long-term interest rates have much more pressure on the rate of growth of the economy and on levels of unemployment than short-term interest rates do, because major new investment spending like research and development for new products or the construction of whole new factories are long-term projects that require financing, and they are less likely to be undertaken. Monetary policy should therefore very carefully plan and efficiently worked out since it decides the economic growth of a country.