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There has been a major shift within macroeconomic policy over the years in terms of the relative importance given to monetary policy in both policy and theoretical terms. Monetary policy has moved away from attempting to control some monetary aggregate and instead monetary policy is now focusing on the setting of the interest rates. Monetary policy has no consistent definition from an economics point of view. It can be perceive as an action designed to manipulate the money supply, including bank credit. Economists believe that monetary policy is important, but evidence is illusive because the effects are neither well understood nor easily predicted. However over the years economists have argued that monetary policy is all but impotent. The aims of monetary policy continue to change over time but in the most obvious terms monetary policy strives to attain the best economic performance possible. The Federal Reserve System in the USA is responsible for conducting monetary policy. The United States aim is the attainment of maximum sustainable economic growth. Improved living standards and low unemployment are suppose to follow from low or no inflation. Economists have long recognized that cannot attain all the aims of monetary policy.
Economists contend that monetary policy only affects nominal variables and the enormous agreement that the main objective should be price stability. Whatever the aims are all states require monetary policy. The reason for this is that all modern money is fiat money. Fiat money is created by legally sanctioned methods. It has no backing in the sense that it can be converted into something else. This money must be controlled if economic dislocations are to be avo ...