Monetary policy can be aimed at price stability alone or more. Central banks’ control of money has the potential to impact and stabilize AD. By having the right level or growth of AD this should lead to an appropriate amount of output with low and stable inflation. Central banks use a number of different tools but they all boil down to injecting just the right amount of money into the economy so that interest rates and loans are just right for the economy. Because monetary policy can have important impacts on the economy, most business planners keep a constant eye on central banks and their actions. Many of us try to predict what these central banks will do next. Once central banks act, we then try to understand and predict just how much and how fast their policies will affect interest rates, AD, output, and inflation. Predicting central bank actions and impacts is never easy because these predictions are impacted by so many things. So we try but we realize that all of our own planning relies on our best educated guesses about money and monetary policy.
Chapter: Aggregate Demand Topic No.