COURSES : ECONOMICS
LECTURER : BODE RILEY
CREDIT HOURS : 3 CREDIT
SEMESTER/SESSIONS : 4 SEMESTER, 2022/2023 SESSIONS
Classical economic theory and its impact on monetary policy
Classical economic theory is a theory that was first put forward by Adam Smith in
the 18th century. This theory assumes that markets work efÏciently and that
prices and production will naturally balance. Classical economic theory also
assumes that monetary policy can only have a temporary impact on the economy
and that markets will always adjust to achieve long-term balance.
The impact of classical economic theory on monetary policy is that the
government does not have to intervene too much in the market. Instead, the
market must be allowed to work naturally and monetary policy must be adapted
to existing market conditions. Therefore, the monetary policy advocated by
classical economic theory is usually very minimal and limited to maintaining the
stability of the value of money.
In practice, monetary policy based on classical economic theory can have a
significant impact on the economy. One of the impacts is the occurrence of
interest rate fluctuations. High interest rates can discourage people from
borrowing money, which in turn can slow down economic growth. On the other
hand, low interest rates can trigger inflation because people are more inclined to
spend their money than to save it.
Monetary policy based on classical economic theory can also exacerbate
economic inequality. This occurs when tight monetary policy stifles economic
growth and only benefits the wealthier groups. Tight monetary policy can
exacerbate economic inequality by reducing benefits for the poorer groups and
widening the gap between the rich and the poor.
In conclusion, classical economic theory can have a significant impact on
monetary policy. Although this theory assumes that markets will always reach
equilibrium, in practice, markets often do not work efÏciently and governments
must get involved in regulating markets. Therefore, monetary policy must be
applied wisely and must take into account factors such as economic inequality
and economic growth.
