Monetary Policy Flashcards
(13 cards)
Define monetary policy
Covers decisions on the money supply, the rate of interest and the exchange rate taken to influence aggregate demand
Define money supply
The money supply consists of all the money in an economy at any time
What type of institution is responsible of conducting monetary policy
A central bank
What does the money supply consist of?
- Notes
- Coins
- Bank accounts
Define expansionary monetary policy
-increase in the money supply or the rate of interest designed to increase aggregate demand ?
(Reduce the rate of interest or increasing the money supply)
Define contractionary monetary policy
-cuts in the money supply or growth of the money supply or raise in the rate of interest designed to reduce aggregate demand
(Reduce aggregate demand and the upward pressure on prices)
Possible reason why the expansionary monetary policy may be used
If the government wants to increase the ECONOMIC GROWTH or reduce UNEMPLOYMENT
What could happen if there is a rise in employment
Economic growth and an improvement in the balance of payment will be experienced
What the contractionary monetary policy be used for
Slow down economic growth and reduce inflation
(But at the cost of possible unemployed resulting from the fall in out put)
What is the cost of borrowing money
Interest rate
(The interest on borrowing is higher that the interest on deposit)
Some effects of high and low interest rates
• Will discourage borrowing therefore investments
• Encourage people to save rather than consume
(Fall in consumption also discourages firms from investing and producing more)
• Encourage borrowing and investments
• Encourage people to consume rather than save
The intentions of monetary policy
- To maintain price stability
- Low unemployment
- Economic growth
How the money supply can be increased
• by printing out more money
• by buying back government bonds
• encourage commercial banks to lend more
( -buying back gov bonds gives commercial banks more money to lend to their customers.)
