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ultimate objectives
, 
the authorities will set 
intermediate objectives 
for monetary policy. 
In the UK, the ultimate objective of monetary policy in recent years has been principally to reduce the 
rate of inflation to a sustainable low level. The intermediate objectives of monetary policy have related to 
the level of interest rates, growth in the money supply, the exchange rate for sterling, the expansion of 
credit and the growth of national income. 
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CHAPTER 3
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THE MACROECONOMIC ENVIRONMENT 
 
77 
10.2 The money supply as a target of monetary policy 
To monetarist economists, the 
money supply
is an obvious intermediate target of economic policy. This 
is because they claim that an increase in the money supply will raise prices and incomes and this in 
turn will raise the demand for money to spend. The current trend is to call this 
quantitative easing
,
 
a 
policy
 
whereby a government prints more money in order to stimulate the economy. 
When such a policy is first introduced, the short-term effect would be unpredictable for three reasons. 
(a) 
The effect on interest rates might be erratic. 
(b) 
There might be a time lag before anything can be done. For example, it takes time to cut 
government spending and hence to use reduction in government borrowing as an instrument of 
monetary policy. 
(c) 
There might be a time lag before control of the money supply alters expectations about inflation 
and wage demands. 
Growth in the money supply, if it is a monetary policy target, should therefore be a
 medium-term target
.
10.3 Interest rates as a target for monetary policy 
The authorities might decide that