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Explain the variables affected by monetary policy to determine monetary policy effects on country economic position.



Specify the variables which are being affected by monetary policy.

Monetary policy influences the following variables
1) Inflation.
2) Unemployment 
3) GDP and
4) interest rate

Monetary policy also has an important influence on inflation. When the interest rate is reduced, it results in stronger demand for goods and services tends to push wages and other costs higher, reflecting the greater demand for workers and materials that are necessary for production. Federal Reserve has influenced the federal funds rate Interest rate--the rate that banks charge each other for short-term loans. 

So it also affects other short-term interest rates that influence borrowing costs for firms and households. As well as long term interest rate such as corporate bond rates and residential mortgage rates. As a result these changes in financial conditions affect economic activity and GDP. E.g. when interest rates go down, it also affects GDP because when the interest rates go down then goods and services produces in the country increases and firms are in a better position to purchase items to expand their businesses, such as property and equipment.

Firms respond to these increases in total (household and business) spending by hiring more workers, boosting production which decreases Unemployment rate, in this way unemployment decreases which increases more spending, These linkages from monetary policy to production and employment don't show up immediately and are influenced by a range of factors, which makes it difficult to measure the effect of monetary policy on the economy.

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