Monetary Instruments and Economic Growth

This article depicts the influence of monetary authorities on macro variables. The main objective of the paper is to enhance the economic growth. Money supply, Inflation, Interest rate, exchange rate, economic growth, GDP, Monetary policy are the variables used in the research paper, it is important from the theoretical and empirical points of view. Paper shows need of future evolution of economy through effective monetary policy. In this respect, central bank plays an important role to stabilize the economy through the effective use of monetary instruments. In this research independent variable monetary policy variables (Money supply, interest rate, inflation) and dependent variable was GDP. Current interest rate is 6.00 and previous is 6.50 and the Pakistan inflation rate continues to fall (trading economics). It is desirable to keep the inflation below than 6%, central bank should concentrate on the police which would helpful for the achievement of sustained economic growth. Low inflation is helpful for minimizing the uncertainties in the financial market which in turn boost the investment in the country (Nasir Iqbal). Interest rate and exchange rate have negative relationship with the demand for goods as an increase in interest and exchange rate leads to decline in demand for goods . This would create overproduction and unemployment in the economy. Interest rate should be lower with the increase in money supply leading to more consumption and more borrowings. People would like to invest in businesses, provide employment, raise the income and living standard of the people leading to increase in output of the economy. While in a long run increase in money supply would lead to higher prices. Interest and inflation have negative relationship as increase in interest rate result decrease in inflation. On the other hand decrease in interest rate result in increase in inflation. Central bank should establish the interest rate in a way to keep the economy in balance by the decrease interest rate to enhance economic growth. To sum up, the studies investigates the effects of tight and easy monetary policy. And the prime objective of economic policies to increase the welfare of the public and promote the price stability. Goal of monetary policy are usually contribute to economic growth and stability, lower unemployment to maintain predictable exchange rates with other currencies. Two types of policies used to control the money supply. Contractionary policy leads to rise in the price level. Expansionary monetary policy expected to reduce the price level. Government should implement the expansionary policy to combat the unemployment in recession.