Monetary Policy On Income Inequality Analysis
The Impact of Monetary Policy on Income Inequality
Introduction:
Monetary policy is a widely implemented method of controlling inflation. Economists argue that the use of monetary policy and the subsequent changes in the interest rate have had a significant impact on income and wealth inequality among individuals. This critical analysis aims to analyse the impact of monetary policy on inequality by looking into the effects of expansionary and contractionary policy on income inequality.
Expansionary Monetary Policy:
Expansionary monetary policy (EMP) is a policy through which the central bank increases the money supply in an effort to boost economic activity in a country. The short and long-run effects of EMP are important in analyzing its effects on income inequality. EMP affects individuals differentially as individuals earn income from different sources.
Most individuals earn income through labour while some earn their income through the business and financial sector and these individuals tend to be wealthier (Amaral, 2017) . In the short run, EMP increases output and raises the inflation rate. Increased output has a direct effect on the poor as it raises average income and brings some individuals above the poverty line (Romer et …show more content…
Increased unemployment affects the poor more than it does the rich. This is because the poor are more likely to hold jobs where labour is expendable or are currently unemployed. Contractionary shocks tend to keep the unemployed out of jobs for longer as firms decrease their demand for labour (Amaral, 2017). The middle class and rich tend to hold permanent jobs that require highly skilled or qualified labour and are not laid off as quickly as people in unstable jobs. As a result, the brunt of the increased unemployment is taken by the
Introduction:
Monetary policy is a widely implemented method of controlling inflation. Economists argue that the use of monetary policy and the subsequent changes in the interest rate have had a significant impact on income and wealth inequality among individuals. This critical analysis aims to analyse the impact of monetary policy on inequality by looking into the effects of expansionary and contractionary policy on income inequality.
Expansionary Monetary Policy:
Expansionary monetary policy (EMP) is a policy through which the central bank increases the money supply in an effort to boost economic activity in a country. The short and long-run effects of EMP are important in analyzing its effects on income inequality. EMP affects individuals differentially as individuals earn income from different sources.
Most individuals earn income through labour while some earn their income through the business and financial sector and these individuals tend to be wealthier (Amaral, 2017) . In the short run, EMP increases output and raises the inflation rate. Increased output has a direct effect on the poor as it raises average income and brings some individuals above the poverty line (Romer et …show more content…
Increased unemployment affects the poor more than it does the rich. This is because the poor are more likely to hold jobs where labour is expendable or are currently unemployed. Contractionary shocks tend to keep the unemployed out of jobs for longer as firms decrease their demand for labour (Amaral, 2017). The middle class and rich tend to hold permanent jobs that require highly skilled or qualified labour and are not laid off as quickly as people in unstable jobs. As a result, the brunt of the increased unemployment is taken by the