The Keysian Theory Monetary Policies Flashcards
What are three limitations associated with fiscal policies?
- costly to borrow money
-can leave too much debt - Mpc is low during recession - reduces the Keynesian multiplier
Who sets the monetary policy ?
Central banks
How do central banks control the liquidity?
By the amount of money print
How is the value of money measured?
Scarcity
What affects the demand for money?
Interest rates
High interest rates = less likely to borrow money
Who has the power to print money?
Central banks
What is the equilibrium interest rate?
Where the two lines cross
Monetary supply and monetary demand cross
What is the fact of the central bank increasing the money supply?
Reduces interest rate in equilibrium
What is the difference between expansionary and contractionary monetary policies?
Expansionary - more money supply to reduce interest rates
Contractionary - less money supply to increase interest rates
What are open market operations?
Exchanges between the central banks and other financial institutions
What would the central bank do if they want to increase or decrease money supply?
Increase- buy bonds and shares
Decrease- sell bonds and shares
What is the link between recessions and interest rates?
Reducing the interest rates central banks encourages entrepreneurs to invest more
What effect does expansionary and contractionary policy have on the autonomous expenditure?
Expansionary - increases autonomous expenditure and in turn y
Contractionary - decrease autonomous expenditure and in turn y
How does quantitative easing work?
CB increases money supply
Reduces interest rates on bonds bought
What are a few limitations of monetary policies?
Makes decisions for the whole of the euro area
You cannot go below zero
