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Attainment of Full Employment.
Full employment can be said to be consistent with the some little unemployment as potential workers search for employment. It is also argued that a certain amount of structural unemployment is acceptable since individuals without jobs may not have the skills needed by employers at least in the short run. Monetary policy can raise the level of employment by encouraging credit to labour intensive sectors like rural agriculture. In addition a policy that lowers the rate of interest constitutes expansionary monetary policy and it is likely to lead to increased investment and hence more employment opportunities.
Achievement of Price Stability.
This is they problem of avoiding inflation. Inflation reduces the ability of money to effectively perform its function, especially as a store of value and as a standard of deffered payments. Moreover price stability can be maintained by regulating money supply through the tools of Central Bank Such as discount rate, minimum reserve requirements and Open Market Operations. Price stability however does not mean absolutely no change in price i.e. a certain rate of inflation is inevitable.
A high degree of inflation has adverse effects on the account. First, inflation raises the cost of living of the people and hurts the poor most. It sends many people below the poverty line. It also makes the export costlier and therefore discourages them, on the other hand due to higher prices at home people are induced to import goods to large extent.
Thus inflation has adverse effects on the balance of payments. Thirdly when due to a higher rate of inflation value of money is rapidly falling, people do not have incentive to save. This lowers the rate of saving on which investment and economic growth depend. Fourthly, a high rate of inflation encourages businessmen to invest in the productive assets such as gold, jewellery, real estate etc.
To Attain Economic Growth.
This can be defined as a process where the real GNP per capital increases over a period of time. Monetary policy can contribute to this end by providing investment funds through cheaper credit and by mobilizing savings which can be used for investment. The investment funds can be allocated to those sectors with the highest rates of return. This better allocation of resources brings about increased output. Monetary policy can promote economic growth through ensuring adequate availability of credit and lower cost of credit. There are two types of credit requirements for businessmen i.e. Working capital for importing needed raw materials and machines from abroad. Secondly, they need credit for financing investment in projects for building fixed capital.
To Maintain Equilibrium in Balance of Payments, (BOP)
Until the early 90s, Kenya followed fixed exchange rate system and only occasionally devalued the shilling with the permission of the International monetary fund. The policies of floating exchange rate and increasing openness and globalization of Kenyan economy has made the exchange rate of the shilling quite volatile. The changes in capital inflows and capital outflows and changes in demand for and supply of foreign exchange, particularly the US dollars arising from the imports and exports causes great fluctuations in the foreign exchange rate of the shilling. In order to prevent large depreciation and appreciation of foreign exchange, the Central Bank of Kenya has to take suitable monetary measures to ensure the foreign exchange stability. When there is mismatch between demand for and supply of foreign exchange, external value of the shilling changes.
Kavungya answered the question on March 26, 2019 at 06:04