Tutorial: Economic Lyceum Topic: State Economic Policy Prepared by: Ing. Lenka Gabrielová Projekt Anglicky v odborných předmětech, CZ.1.07/1.3.09/ je spolufinancován Evropským sociálním fondem a státním rozpočtem České republiky.

M ACROECONOMIC POLICY - MONETARY

 It is a process in which the originator of monetary policy (the Central Bank) tries to use its tools to achieve predetermined goals.  Monetary policy is conducted by a central authority (the central bank or another institution).

 The goals are:  Stabilization of economic development, particularly the stability of the price level (‚the fight against inflation, or ‚healthy monetary development‘)  Economic growth support  Promoting employment  Balanced payment balance  Stability and liquidity of the banking sector  Exchange rate stabilization

 As ultimate objectives are considered low inflation, low unemployment and equal balance of goods and services.  The intermediate goals are money supply, interest rate and exchange rate.  The monetary policy is not able to simultaneously achieve all its ultimate goals.

 The major representative of monetary policy is the central bank (the Czech National Bank – in the Czech Republic), the various commercial banks are only the indirect representatives.  The Czech National Bank performs banking supervision – a check whether the commercial banks respect the conditions associated with the licence issued. If the banks have a high proportion of bad credits or if there is a suspicion of fraudulent management activities, the CNB may establish a system of receivership.  The central bank influences the price level stability by controlling the money supply or by changing interest rates.

 If there is money increase in the economy, the interest rate reduces; however, investments, consumption and sometimes net export increase.  If these components increase, the aggregate demand and GDP increase as well.  We will achieve lower unemployment and higher inflation and by means of depreciation there will be an improvement in the balance of goods and services.  Expansionary monetary policy will reduce unemployment and improve the balance of goods and services in the short period of time; as for the long term effect there is only an increase in inflation.

 If there is a lack of money in the economy, the interest rate rises; however, the investments and consumer expenditures are limited and they may affect a net export.  Aggregate demand decreases. The real GDP declines or reduces the growth rate.  This may result in the situation where the total price level can not move or fall = deflation.  Restrictive monetary policy will increase unemployment and the trade balance will be worse in the short term; the long-term consequence is only a reduction in inflation.

 Who leads the central bank? Is it more effective if the central bank is independent on the government or vice versa is it better if the activity of the central bank is under the supervision and control of the government? And why?  If the central bank reduces interest rates, will the investments increase or decrease? And what about consumption? Will it increase or decrease? Explain.

 HOLMAN, Robert: Ekonomie, 4. vydání, Praha: C.H. Beck 2005, ISBN 80B  KLIKOVÁ, Christiana, KOTKLÁN, Igor: Hospodářská politika, Ostrava, Institut vzdělávání SOCRATES, s.r.o., 2006, ISBN:  SLANÝ, Antonín a kolektiv: Makroekonomická analýza a hospodářská politika, Praha, C. H. Beck, 2003, ISBN:  VOSTROVSKÁ, Zdena, VORLÍČEK, Jan: Úvod do hospodářské a sociální politiky, Praha, VŠE, 2005