Monetary Policy Flashcards
What is the money supply?
Money supply includes all the money in the economy.
How is the money supply measured?
It can be measured in different ways
a narrow measure may just look at all the notes, coins, and current accounts
broader measure may also include money in savings.
What is monetary policy?
- Decisions made on the money supply, the rate of interest, and the exchange rate.
- Its aim is to influence aggregate demand.
- Normally carried out by the central bank.
How do you change the money supply?
Print more money
Buyback government bonds
Encourage commercial banks to lend more
What happens when you change the interest rates?
Increasing the interest rate will lower aggregate demand.
Why does aggregate demand decrease after increasing interest rates?
Why?
• Households or firms who have borrowed money will have to pay higher interest and have less money to spend.
• They will also be less likely to take out new loans.
• Increases the incentive to save money.
What is the foreign exchange rate?
• Foreign exchange rate: The price of one currency in terms of another currency.
Why would the government want to change the foreign exchange rate?
A government may try to influence its exchange rate to rise or fall. For example, they may want to encourage exports by making their currency’s exchange rate fall.
Example: China, who artificially influences their exchange rates and keeps it low.
Expansionary Monetary Policy
Increase the money supply or lower interest
rates in order to increase aggregate demand
leading to economic growth and reduced unemployment.
Contractionary Monetary Policy
Decrease the money supply or increase
interest rates to lower aggregate demand and
slow down rising prices.
