Monetary System and Monetary Policy

Monetary System and Monetary Policy The monetary system is a system that regulates the currency used and how the currency is used in a country or region. Monetary policy, on the other hand, is government or central bank policy concerning regulation and control of the supply of money, interest rates and other financial instruments with the aim of achieving certain objectives in the economy such as controlling inflation, stabilizing exchange rates or driving economic growth. In the monetary system, currency is generally issued by the central bank and used as a means of payment in economic transactions. The central bank is responsible for maintaining exchange rate stability and maintaining monetary policy that is in line with economic objectives. In the modern monetary system, most financial transactions are carried out electronically through the banking system and financial markets. Monetary policy involves decisions about interest rates, bank reserves, and other financial instruments that can affect the money supply and currency exchange rates. The general objective of monetary policy is to maintain economic stability, especially in terms of inflation and economic growth. Central banks can take actions to raise or lower interest rates, issue government bonds or securities, and introduce bank reserve requirements to influence the amount of money circulating in the market. An example of monetary policy is raising interest rates to reduce inflation, or lowering interest rates to stimulate investment and economic growth. The central bank can also intervene in the market to influence currency exchange rates in an effort to increase the country's export competitiveness. Overall, the monetary system and monetary policy are very important in governing a country's economy. Appropriate monetary policy can help control inflation, stimulate economic growth, and maintain currency exchange rate stability. Problems example: For example, the Central Bank of a country lowers its benchmark interest rate from 5% to 4%. What will happen to the money market and goods market in the short term? Discussion: The reference interest rate is the interest rate set by the Central Bank of a country. Monetary policy through the reference interest rate can affect the economy in the short and long term. In this case, a reduction in the benchmark interest rate from 5% to 4% could affect the money market and goods market in the short term. In the money market, lower interest rates can make loans cheaper for banks and consumers. Therefore, a reduction in the benchmark interest rate can increase the availability of cash and can increase economic activity. However, if too much money is available in the market, this can increase inflation. In the goods market, lowering the benchmark interest rate can lower borrowing costs for producers. This can increase the production and demand for goods and services, and help economic growth in the short term. However, if inflation increases due to an increase in the amount of money circulating in the market, the cost of production will also increase. As a result, the costs incurred by consumers to buy goods and services will also increase. So, in the short term, lowering the benchmark interest rate could increase the availability of cash and economic activity. However, if inflation increases, it can trigger an increase in production costs and consumer costs. Therefore, monetary policy must be carefully managed so as not to cause long-term economic problems.