inflation

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(b) Assess how monetary policy can be used to maintain a target of low inflation and currency stability in emerging markets?
According to Jahan (2012), monetary policy is the manner where the monetary authority uses to control the supply of the currency. The monetary policy objective of controlling the interest rate also takes an important role when government and monetary authority are dealing with the inflation (Shen, 2013, pp.199). The monetary authority usually is central bank with a certain degree of independent from the government. However, the central bank in a developing country is not independence from the government. Government influences and controls their central bank via controlling over monetary policy (King and Governor, 1999, pp.1-2).There are different types of monetary policy such as inflation targeting, price level targeting, monetary aggregates, fixed exchange rate, gold standard and mixed policy (Baiden, 2012, pp.2012-2014). The major implement is controlling the amount of base money in circulation via buying and selling the financial assets. Controlling inflation, currency stability and promote economic growth is the objectives of monetary policy in China and other developing countries (Shen, 2013, pp.199).
The inflation targeting policy and price level targeting policy
Money demand
The monetary policy targets to dampening inflationary pressures. Inflation targeting policy advocates that central bank uses interest rate changing toward the ‘target’ inflation rate in order to control the price level (Jahan, 2012). In other words, inflation targeting is to keep the CPI (Customers Price Index) in a desired range. The price level targeting policy is similar with the inflation targeting policy, which ensures the price level on aggregate is constant (Baiden, 2012, pp.2012-2013). Interest rates and inflation rates have a negative correlation (Jahan, 2012). Thus central bank raises its interest rate will lead to decrease in the money in circulation

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