Monetary Policy

The state can influence the macroeconomy with the help of two main mechanisms, they are fiscal and monetary policy. The one that prevails depends, among other things, on the social system of the state. And, as world history shows, only those countries where a reasonable balance was achieved between these two mechanisms achieved a sufficiently long-term state of economic stability in different historical periods. The fiscal and monetary policy of the state in various macroeconomic models sometimes has an absolutely opposite significance for the development of the state itself.

For example, considering the classical model, we see that its creators assign a passive role to macroeconomic policy , since the economy is generally viewed as an internally stable system that, in the event of any upheavals, leads itself to a state of equilibrium.

Instruments that directly produce self-regulation of the economy are flexible prices and wages, interest rates on loans and deposits. Intervention of the state, in the opinion of the founders of the model under consideration, can only destabilize the state in the country, and for this reason should be minimized. And, therefore, monetary policy is estimated by them to be much higher than fiscal policy, since fiscal measures have a crowding effect and can contribute to an increase in the level of inflation in the country, which completely negates their positive effect.

Also, the classical model suggests that monetary policy directly affects the general demand, and, consequently, the gross national product.

In the concepts of economic neoclassicism, for example, the theory of rational expectations, their founders consider both wages and prices, as the quantities are absolutely flexible. And, consequently, the market can support the economy in a stable state even without the slightest interference from both the Central Bank and the government. Policies aimed at stabilizing the economy can only have an effect if the Central Bank and the government have more information about the shocks of aggregate supply and demand than ordinary agents of the economy.

In the Keynesian model, the basic one is the equation that determines the total costs, which, in turn, determines the size of the nominal gross national product. Also, this model considers fiscal policy of the state as a means with the greatest effect for stabilizing the macroeconomy as a whole, since the state's spending directly affects the size of aggregate demand, and also has a large multiplicative effect on the costs of end-users. At the same time, taxes are effective enough, both on the amount of consumption and on investment.

The Keynesian model considers this method of influence on the macroeconomy, as the monetary policy of the state is secondary in comparison with fiscal policy. This opinion is justified by the fact that the change in the mass of money does not directly affect the domestic national product, but first it changes the mechanism of investment spending that responds to the dynamics of interest rate changes, and the already increased volume of investment has a beneficial effect on the growth of the domestic national product.

Such a mechanism of monetary policy founders of this model are considered too complicated to effectively influence the main macroeconomic indicators of the state and the functioning of the market.