Interest Rates And Monetary Transmission Flashcards
1
Q
Define the role of the central bank
A
Acts as a banker to commercial banks and is responsible for setting interest rates and controlling inflation
2
Q
What’s are the 3 ways the central bank control money supply
A
Reserve requirements: minimum ratio of cash reserves for banks
Discount rate: high interest rates discourage commercial banks from investing therefore keeping reserves high
Open market operations: buying and selling of financial securities
3
Q
Define money market equilibrium
A
When money supply = money demand
(Money supply assumed constant as set by CB)
(Money demand downward sloping because high i/r results in low demand for money)