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How central banks effects major macroeconomic variables by effective conduct of monetary policy.

· Discuss how central bank affects major macroeconomic variables by effective conduct of Monetary Policy.


The objective of CENTRAL BANK monetary policy is to achieve the targets of inflation and growth .
CENTRAL BANK formulates the country’s monetary policy to manage growth of the country. Monetary policy decisions affect the level of economic activity in the economy and the inflation rate. 

Some of the major macroeconomic variables affected by CENTRAL BANK are as following:


  • The first variable is the interest rate which affects aggregate demand such as consumption and investment in an economy. 


  • The second, credit variable, involves not only affecting the ability of firms to borrow money it also affects the ability of banks to lend money. These factors are clearly influenced by the structure of the financial system and its regulation.  


  • The third variable of monetary policy focuses on asset prices such as the market value of bonds and equities and prices of real estate. A policy which changes the nominal interest rate affects the consumption of households. 


  • Fourth variable is change in the interest rate also affects the exchange rate that affects the foreign financial flows, net exports and thus aggregate demand. Moreover, exchange rate changes lead to changes in the domestic price of imported consumption goods and imported production inputs affecting inflation directly.
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