Objectives of Monetary Policy

In Simple Words
The government wants the value of its currency to remain stable relative to other countries' currencies. This was the oldest and most traditional objective of monetary policy.​
Under the Gold Standard
Countries once followed a system called the Gold Standard, where a currency's value was directly tied to gold.
The golden rule was: "Expand currency and credit when gold is coming in; contract currency and credit when gold is going out."

Why It Matters

• Unstable exchange rates cause gold to flow in or out, leading to an unfavourable Balance of Payments​
• Stable exchange rates are essential for smooth international trade​
• Therefore, the prime objective of monetary policy is to maintain stability in the external equilibrium of the country.

In Simple Words
The government wants prices to remain stable — not rising too fast (inflation) or falling too sharply (deflation).
When Did This Become Important?
This objective was highlighted during the twenties and thirties of the twentieth century.​
Who Supported It?
Economists Gustav Cassel and John Maynard Keynes suggested price stabilisation as a main objective of monetary policy.​

Why Stable Prices Are Good
According to the source, stable prices:​

• Repose public confidence — people trust the economy
• Eliminate cyclical fluctuations — no extreme booms or busts
• Promote business activity — companies invest without fear
• Ensure equitable distribution of income and wealth
• Create a general wave of prosperity and welfare in the community

 Think of it this way: If your school canteen changed prices every single day — sometimes doubling, sometimes halving — you would never know how much money to bring. Price stability gives everyone — students, businesses, governments — the same certaint

In Simple Words
The government wants everyone who is willing to work to have a job. This became a top priority after the devastating unemployment of the Great Depression.​

Background — The World Depression
During the world depression, the problem of unemployment increased manifold. It was regarded as:​

• Exchange stability: To maintain stable exchange rates and ensure balance in foreign trade and balance of payments.
• Price stability: To control inflation and deflation so that prices remain stable and public confidence is maintained.
• Full employment: To reduce unemployment by regulating credit and encouraging investment and economic activity.