April 5: Monetary Policy
Macrobite 3
Understand movements of prices
in short and medium run
Observe inflation rate
Check basket of goods
Take note of country
monetary policy
Monetary Policy Expansionary and contractionary monetary policy
Change in money supply in
order to achieve a goal
Interest rate
Control inflation
Money Supply Central Bank Role Money
Expansionary M1 Sole issuer of currency Anything that is generally accepted in payment
for goods or services or in repayment of debts
Aims to boost the Narrow money Monitors, supervises and regulates
performance of the economy financial institutions It is a medium of exchange
Most liquid of all - can be used
Lowering directly for transactions Implements monetary policy A unit of account
interest rate
Currency in circulation + demand deposits Manages both domestic and Put a price to a commodity and to a service
More investors (checking accounts) + e-wallets international reserves
Fair and easier for comparison
Contractionary Demand deposits Lender of last resort
Used to store value
Increasing interest rate to Money that can be withdrawn Goals of central bank
Why do we need money?
control the flow of money and to on demand anytime Price stability
control inflation as well Transaction demand
M2 Keep inflation at bay
We use it for our
Broad money by setting a range
daily transaction
Close substitute for Create conditions for economic growth
Demand for money
transaction money Keep investor and lender confidence depends on your income
M1 + saving deposits + time deposits Maintain an exchange When income increases, demand
Can't use time deposits rate stability for money also increase
and savings deposits Through interest rate Precautionary demand
M3 that it implements
For emergency purposes
Domestic liquidity Serves as financial intermediaries
When income increase,
when the central bank implements
Less liquid of all precautionary demand increase
monetary policies
Treasury bills Speculative demand
Certificates Interest rate
of deposits We know that money
m2+ deposit substitutes creates future value
Interest rate go higher, transaction
demand for money goes lower
Money Supply
(MS)
m1+m2+m3
In equilibrium, MD = MS