Central Banks and Monetary Policy Flashcards
What are the functions of Cb’s?
Monopoly on printing money
Providing loans during times of stress
Manage Payment System
Oversee Commercial banks and Financial Institution
What does it mean to have the monopoly on the issuance of money?
The bank can create money, generating trust in the economy. This allows for the central bank to control the availability of both credit and money through the monetary policy
.
Explain the providing of loans in time of stress
Thr CB can make loans when no one can, he is the Lender of Last Resort. This institution has the ability to ensure that banks and financial institutions can continue to operate and thus helps to make the more system stable
How does the CB oversee commercial and the finanacial system?
Agents need to be confident about that they are safe in investing and depositing. To achieve this security the financial systems need information . only the governments can manage information about where payments, investing etc. The institution that takes care of this duty is the Central Bank that makes the economy stable by mananging information.
What does it mean to manage the payment system?
The central bank is in the perfect place to manage interbank payments and transfers. After all, people require cheap and easy ways to pay each other. In the same way, banks require a cheap and easy to transfer funds
The CB does not…
Control the government budget ;
Control the securities market
Control stock market
Define monetary policy
Actions taken by the central bank to influence the availability and cost of money and credit by controlling some measure of the money supply and/or level of interest rates. Nowadays it clearly seems to be the best way to influence prices.
What is it used for? Give examples
It is used to stabilize economic growth and inflation. For example, an expansionary monetary policy means that interest rates will be lower thus increasing GDP and inflation in the Long-Run. A contractionary monetary policy mean the opposite.
What are the objectives of central banks?
Low and stable Inflation High and Stable Growth(high employment) Stable financial markets and institutions Stable interest rates Stable exchange rates
Can all the objectives be achieved? Why?
No, they cannot. There are trade off’s, for example: a stable inflation implies lower Growth in the short-run.
Explain how high inflation for long-period limits growth
Well to start, the CB has the function of keeping the prices stable. So when the inflation rises for long-period the CB is at fault. Inflation enhances the function of money as means of transaction and unit of account. Also, it makes the money a worse way to store value.
Prices give all information on how to allocate resources. So when there is a general increase in prices, we may lose the reason why a specific price as increases. Thus the quality of the information is put at risk and the systematic risk increases. This makes choices less efficient thus limiting growth.
Low information is the base for economic sustained growth. However low inflation can lead to deflation and a drop in prices, which makes harder to pay debts, thus making them harder to pay, preventing borrowers from obtaining loans
Explain how a central bank achieves high and sustainable growth and it’s effects
By keeping the prices stable the CB fosters m max growth, employment, a stable and efficient monetary system. The preservation of stable prices means low and stable inflation. The max of growth dampens fluctuation over business cycles. By adjusting the interest rate the central bank manages to moderate the business cycles and keep the economy stable. However, the Long-Run potential output depends on several factors. So by decreasing the interest rates, the decrease in GDP can be moderated and by increasing the interest rates the boom in GDP can be moderated as well. Thus stability in the Long-Run leads to higher growth, high employment and stability in the financial system. which is vital for economic growth .
What do you mean with financial Stability?
It is very important for markets to work smoothly and in an efficient way. If not people will opt for low-risk options and intermediation stops. Meaning savers will not want to lend and borrowers will pay. So the financial system collapses and with it the entire economic activity. The CB must control the systematic risk and prevent this from happening
How do interest rates and exchange rates relate to economic stability?
The CB try to keep interest rates and exchange rates stable. Has we saw stable interest rates and stable exchange rates are means to achieve goals of high growth ect. If interest rates increase there is a drecrease in spending , a decresing in bond consumption and a decrease in borrowin and vice-versa. This means that a volatile i lead to a volatile output. Alsso a high interest rate make Long Term bond and borrowing riskier , making harder financial decisions and the economy less efficient has a hole. The control of the interest rates prevent this scenarios by making them more stable.
The effect of exchange rates depends on how open is the country to the outside
What is the difference between Hiearchical and Dua mandates?
The hierarchical Mandate focus on only one goal. For exemple the ECB focuses on price stability . This objective is not practiced without regart for the rest of the economy, but it only worries with outher goals afte this is insured. The Dual mandate focuses on more that one goal (FED).
