1 / 7

2.4Di How Monetary Policy Works

2.4Di How Monetary Policy Works. Pages 181 + 233-235. Recall Monetary Policy…. It occurs when the government attempts to control the money supply in order to influence interest rates (r): One of two types of __________-________ policy

odette-everett
Télécharger la présentation

2.4Di How Monetary Policy Works

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. 2.4Di How Monetary Policy Works Pages 181 + 233-235

  2. Recall Monetary Policy… • It occurs when the government attempts to control the money supply in order to influence interest rates (r): • One of two types of __________-________ policy • Expansionary monetary policy - Increase the money supply, which results in lower r, thus increasing C, I and X • Thus AD… • Contractionary monetary policy- Decrease the money supply, which results in higher r, thus decreasing C, I and X • Thus AD… • What 3 macro-objectives are affected by this policy?

  3. Enter: the central bank • Owned and operated by central government of a country. (The Reserve Bank of New Zealand (RBNZ), the FED, etc.) • It is designed to oversee the banking system to promote safe and sound banking practices. • It acts as a banker’s bank, making loans to banks and as a lender of last resort. • It is the central government’s bank. • Some have the sole macro-objective to keep inflation between 1 – 3% in the medium term. • Other central banks may do this more implicitly, or also have other macro-objectives simultaneously. • Stablising exchange rates • Stablising growth rates

  4. Money supply Equilibrium interest rate Money demand M1 Quantity fixed Quantity of M1 by the Reserve Bank Money Monetary Policy in Action Interest rate r1 r2 0

  5. MS’ r’ PL’ AD’ 2. The higher interest rate discourages investment, exports and consumption. 3. AD will decrease and shift to the left, reducing inflationary pressure 1. Reserve bank decreases MS, which results in a higher interest rate How Contractionary Monetary policy works interest MS Price Level LAS AS PL Inflationary gap r AD Real GDP

  6. Evaluating monetary policy Since 1990 CPI inflation has averaged around 2.5%. This compares with averages of around 12% in the 1970s and 11% in the 1980s.

  7. The pros: • Simple and cost effective to administer • “transparent” process is seen as fair • A powerful way to control growth • Quite successful in most countries The cons: • Time lags of 12-18 months makes timely implementation difficult to determine (based upon previous year’s indicators) • Time lags make size of impact difficult to predict • Other factors influencing I, C will interfere with the impact (i.e. what if confidence is TOO low or high?) • Contractionary policy is always unpopular(of course)

More Related