Goals of monetary policy are to 'promote maximum employme

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					     Goals of monetary policy are to 'promote maximum employment, inflation (stabilizing prices), and e
conomic growth.' If economists believe it's possible to achieve all the goals at once, the goals are
 inconsistent. There are limitations to monetary policy.         The term 'maximum employment' means that w
e should try to hold the unemployment rate as low as possible without pushing it below what economis
ts call the natural rate or the full- employment rate. Pushing unemployment below that level would c
ause inflation to rise and thereby ruin the other objective--stable prices, economic growth, which i
s our objectives in the long run.       Overall financial stability will lead to a better balance between
 consumption and saving that will make resources available for investment purposes, reduce changes i
n the economy created by the inflation in the past, and by the reactions of savers, as well as foste
ring high and sustainable economic growth; and contribute towards an investor friendly environment t
hat will attract foreign investors to the country.       Evidence has suggested that economies perform be
tter, in terms of growth, employment and living standards, in low inflation environments than they d
o when inflation is persistently high. This evidence is a comparison across countries over long per
iods. The association between economic performance, measured by growth of output or growth of produc
tivity, and inflation. This indicates a negative relation; that is, the higher the inflation, the lo
wer the rate of real growth.          Evidence suggesting that low inflation promotes growth has motivated
recent decisions by a number of central banks and governments, most notably New Zealand. Canada, the
 United Kingdom and Sweden also have moved in recent years to establish monetary policy with officia
l low inflation targets. Decisions to adopt a policy objective of low inflation suggest that other p
olicy-makers are reading the evidence pertaining to inflation and growth as we are.             Consistent atte
mpts to expand the economy beyond its potential for production will result in higher and higher infl
ation, while ultimately failing to produce lower average unemployment. Therefore, most economists wo
uld argue that there are no long-term gains from consistently pursuing expansionary policies.              Monet
ary policy can determine the economy's average rate of inflation in the long run. And that's importa
nt for the economy, because high inflation can hinder economic growth. For example, when inflation i
s high, it also tends to vary a lot, and that makes people uncertain about what inflation will be in
 the future. That uncertainty can hinder economic growth in a couple of ways--it adds an inflation r
isk premium to long-term interest rates and it complicates the planning and contracting by business
and labor that are so essential to capital formation. High inflation also hinders economic growth in
   other ways. For example, because the tax system isn't in agreement with inflation, high inflation a
rbitrarily helps and hurts different sectors of the economy. In addition, it makes people spend thei
r time hedging against inflation instead of pursuing more productive activities.           Because the govern
ment can determine the economy's average rate of inflation, some commentators--and some members of C
ongress as well--have emphasized the need to define the goals of monetary policy in terms of price s
tability, which is achievable.     One kind of conflict involves deciding which goal should take preced
ence at any point in time. For example, the government needs to be careful to avoid letting short-ru
n temporary successes in preventing employment losses during recessions lead to longer-run failures
in maintaining low inflation. Another kind of conflict involves the potential for pressure from the
political arena. For example, in the day-to-day course of governing the country and making economic
policy, politicians may be tempted to put the emphasis on short-run results rather than on the longe
r-run health of the economy. The government is somewhat insulated from such pressure, however, by it
s independence, which allows it to achieve a more appropriate balance between short-run and long-run
 objectives.      When unemployment is high the policy that should take place is inflation should increa
se slightly to drive up prices in order to cause increases in output. When unemployment is below av
erage and nearing full employment the policy that should take place is to slightly lower the product
ivity of the workers and therefore cause a decrease in the output. This would slow the economy down
 and into the ideal condition of maximum employment. When the production is at its maximum and unemp
loyment at a minimum the government must raise the inflation rate in order to make sure that the sit
uation stays where it is. It must be sure not to raise inflation too sharply or else everyone will
be afraid to spend their money.        The belief that a 4% unemployment rate and stable prices are incons
istent is shaped by the widely accepted 'natural rate hypothesis.' It argues that monetary policy ha
s no effect on the economy's unemployment rate, which is often called the natural rate of unemployme
nt. The reason is that, in the long run, unemployment depends on so-called 'real' factors--such as t
echnology and people's preferences for saving, risk, and work effort; these factors are beyond the r
each of monetary policy. Most current estimates place the natural rate of unemployment in the range
of 5¾-6¾%.         Consistent attempts to expand the economy beyond its potential for production will resul
t in higher and higher inflation, while ultimately failing to produce lower average unemployment. Th
erefore, most economists would argue that there are no long-term gains from consistently pursuing ex
pansionary policies.goals monetary policy promote maximum employment inflation stabilizing prices ec
onomic growth economists believe possible achieve goals once goals inconsistent there limitations mo
netary policy term maximum employment means that should hold unemployment rate possible without push
ing below what economists call natural rate full employment rate pushing unemployment below that lev
el would cause inflation rise thereby ruin other objective stable prices economic growth which objec
tives long overall financial stability will lead better balance between consumption saving that will
 make resources available investment purposes reduce changes economy created inflation past reaction
s savers well fostering high sustainable economic growth contribute towards investor friendly enviro
nment will attract foreign investors country evidence suggested economies perform better terms livin
g standards environments than they when persistently high this evidence comparison across countries
over long periods association between performance measured output productivity this indicates negati
ve relation higher lower real evidence suggesting promotes motivated recent decisions number central
 banks governments most notably zealand canada united kingdom sweden also have moved recent years es
tablish monetary policy with official targets decisions adopt objective suggest other makers reading
 pertaining consistent attempts expand economy beyond potential production result higher higher whil
e ultimately failing produce lower average unemployment therefore most economists would argue there
long term gains from consistently pursuing expansionary policies determine economy average important
 because high hinder example when also tends vary makes people uncertain about what future uncertain
ty hinder couple ways adds risk premium term interest rates complicates planning contracting busines
s labor essential capital formation also hinders other ways example because system agreement with ar
bitrarily helps hurts different sectors addition makes people spend their time hedging against inste
ad pursuing more productive activities because government determine average some commentators some m
embers congress well have emphasized need define terms price stability which achievable kind conflic
t involves deciding which goal should take precedence point time example government needs careful av
oid letting short temporary successes preventing losses during recessions lead longer failures maint
aining another kind conflict involves potential pressure from political arena course governing count
ry making politicians tempted emphasis short results rather than longer health government somewhat i
nsulated from such pressure however independence allows achieve more appropriate balance between sho
rt objectives when should take place increase slightly drive prices order cause increases output bel
ow nearing full take place slightly lower productivity workers therefore cause decrease output this
would slow down into ideal condition maximum production minimum must raise order make sure situation
 stays where must sure raise sharply else everyone afraid spend their money belief stable inconsiste
nt shaped widely accepted natural hypothesis argues effect often called natural reason depends calle
d real factors such technology people preferences saving risk work effort these factors beyond reach
 most current estimates place range consistent attempts expand beyond potential production result wh
ile ultimately failing produce therefore argue there gains consistently pursuing expansionary polici
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