MacroeconomicsI_working_version (1)

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Chapter 10
11.1.2. Monetary Policy
Monetary policy presents an instrument, which government or the central bank uses to
control the nation’s money, credit, and banking system in a country. The main tool of
monetary policy is controlling the money supply. Changes in money supply affect various
financial and economic variables (interest rates, prices of stocks, bonds or exchange rates).
Central bank can increase money supply in order to improve economy’s performance.
Rising money supply lowers interest rates, which stimulates investment and consumption.
Accordingly GDP rises. Conversely, the central bank can reduce money supply, which
leads to an increase in interests, which in turn reduce investment, consumption and
accordingly GDP and inflation.
The issues from the area of monetary policy become very modern in these days. The
serious research of usefulness and impacts of a national monetary policy became up-to-date
due to forthcoming enlargement of European monetary union, which begun its history in
1999.
11.1.3. International Trade Policy
Globalisation and internalisation have become very frequent terms in modern age. The
economies become more closely linked; therefore policymakers pay more attention to
international economic policy. The traditional approach in this field is the trade policy
consisting of tariffs, quotas, and other devices that restrict or encourage imports and
exports. These measures are established to protect domestic market and support exporters.
However, it should be stressed that the opposite efforts – removing of free trade barriers -
are obvious in these days over, particularly in Europe.
An exchange-rate management is the second set of policies included in a frame of
international economic policy. Exchange rate, which represents the price of its own
currency in terms of the currencies of other nations, is one of the key determinants of a
country’s international trade. There are different systems of exchange-rate management –
free float systems, managed float systems or fixed exchange rate systems. The choice of a
particular system reflects government approach to exchange rate controlling (i.e. fixed or
free).
11.1.4. Incomes Policies
The incomes policies are put in place when the threat of accelerating inflation is emerging.
The usual and traditional approaches to stable prices and lower inflation and stable prices
are through some restrictive steps of monetary and fiscal policy. However, these ways are
considered too costly in terms of reduced output and employment. Income policy represents
an alternative of slowing down inflation through influencing of the wage-price setting
process. It covers a range of measures from wage and price controls (as a strict measure in
inflationary times) to less drastic measures like voluntary wage and price guidelines. Such
policies controlling wages and prices are called incomes policies.