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Goals of monetary policy are to promote maximum employment inflationstabilizing prices and economic growth If economists believe itspossibleto achieve all the goals at once the goals are inconsistent There arelimitations to monetary policyThe term maximum employment means that we should try to hold theunemployment rate as low as possible without pushing it below whateconomists call the natural rate or the full- employment rate Pushingunemployment below that level would cause inflation to rise and therebyruinthe other objective--stable prices economic growth which is ourobjectivesin the long runOverall financial stability will lead to a better balance betweenconsumptionand saving that will make resources available for investment purposesreducechanges in the economy created by the inflation in the past and by the reactions of savers as well as fostering high and sustainable economicgrowth and contribute towards an investor friendly environment that willattract foreign investors to the countryEvidence has suggested that economies perform better in terms of growthemployment and living standards in low inflation environments than theydowhen inflation is persistently high This evidence is a comparison acrosscountries over long periods The association between economic performancemeasured by growth of output or growth of productivity and inflation Thisindicates a negative relation that is the higher the inflation the lowertherate of real growthEvidence suggesting that low inflation promotes growth has motivatedrecent decisions by a number of central banks and governments most notablyNew Zealand Canada the United Kingdom and Sweden also have moved inrecent years to establish monetary policy with official low inflationtargetsDecisions to adopt a policy objective of low inflation suggest that otherpolicy-makers are reading the evidence pertaining to inflation and growthaswe areConsistent attempts to expand the economy beyond its potential forproduction will result in higher and higher inflation while ultimatelyfailingto produce lower average unemployment Therefore most economists wouldargue that there are no long-term gains from consistently pursuingexpansionary policiesMonetary policy can determine the economys average rate of inflation inthe long run And thats important for the economy because high inflationcan hinder economic growth For example
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