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Effects of change in Monetary Policy

Alternative monetary policy strategies Fed include:

  • The McCallum rule, talks about the growth rate of the monetary base. Its main drawback is that shifts in the demand for money can cause fluctuations in interest rates and aggregate demand.
  • A rule that targets the growth rate of the money supply may also present problems in that changes in both money demand and money velocity can cause volatility in aggregate demand and interest rates.
  • Keeping the foreign exchange rate with other countries’ currencies stable would cause the domestic inflation rate to match that of the other countries, over which the Fed has no control.
  • Inflation rate targeting is used by many central banks, the notable exceptions being those of the U.S. & Japan. The performance of strict inflation targeting, compared to the Fed’s method of monetary policy determination is still subject to debate.


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