Monetary Policy. Monetary policy are the manipulation of the money supply and interest rate by the central bank to influence the borrowing of money and.

Slides:



Advertisements
Similar presentations
MACROECONOMICS What is the purpose of macroeconomics? to explain how the economy as a whole works to understand why macro variables behave in the way they.
Advertisements

1 MACROECONOMICS AND THE GLOBAL BUSINESS ENVIRONMENT Monetary Policy 2 nd edition.
Interest Rates in the Classical Model Nominal vs.. Real Interest Rates Real interest rate =Nominal rate - Inflation rate  = r- 
The influence of monetary and fiscal policy
The Fed and The Interest Rates
Free Response Macro Unit #5. 1) The Bank of Redwood has 1,000,000 in total reserves and the reserve ratio is 20%. Draw a correctly labeled T-account which.
The transmission mechanism of monetary policy Banco Central do Brasil conference: “One year of inflation targeting” 10th July 2000 Alec Chrystal Bank of.
Monetary Policy. What is Monetary Policy? Monetary policy is the manipulation of the money supply, interest rates or exchange rates to influence the economy.
Chapter 11 An Introduction to Open Economy Macroeconomics.
Introduction Macroeconomics is the study of the structure and performance of national economies and of the government policies used to influence economic.
Chapter 5: Monetary Theory and Policy. 1-2 Chapter 5: Monetary Theory and Policy Chapter Outline: Monetary Theory. Economic Indicators Monitored by the.
Money and Stabilization Policy. Monetary Policy In the US (and Euroland and Japan and most OECD economies), the central bank sets monetary policy by picking.
Ch 13. Money And The Economy. Money And The Price Level  Do changes in the money supply affect the price level in the economy?  The equation of exchange.
Economics - Notes for Teachers
GDP = C + I + G + NX MV = P Q (= $GDP)
GDP: Spending Y = C + I + G + NX
Copyright © 2009 Pearson Addison-Wesley. All rights reserved. Chapter 3 Spending, Income, and Interest Rates.
Macroeconomic Policy and Floating Exchange Rates
Mr. Sloan Riverside Brookfield High school.  2 Hours and 10 Minutes Long  Section 1-Multiple Choice ◦ 70 Minutes Long ◦ Worth 2/3 of the Score  Section.
Chapter 14: Monetary Policy  Objectives of U.S. monetary policy and the framework for setting and achieving them  Federal Reserve interest rate policy.
INFLATION THE UK ECONOMY (MACROECONOMICS) TOPIC 2.
Chapter 13 and 15.  Altering the money supply and interest rates to manipulate the economy. Chapter 13.
Monetary Policy  When the RBA, on the governments behalf, influences the cash rate and subsequently general interest rates.  Main macroeconomic tool.
Macro Chapter 10 Dynamic Change, Economic Fluctuations, and the AD-AS Model.
Spending, Income, and Interest Rates Chapter 3 Instructor: MELTEM INCE
The subject of Microeconomics Theoretical relationship between prices, wages, interest Theory of the consumer behaviour Theory of the firm (costs, prices,
IN THIS CHAPTER, YOU WILL LEARN:
Offensive Defensive Monetary Policy
Module 31 Monetary Policy & the Interest Rate
Monetary Policy. Purpose Monetary policy attempts to establish a stable environment so the economy achieves high levels of output and employment. How.
Ch. 14: Money and the Economy Del Mar College John Daly ©2003 South-Western Publishing, A Division of Thomson Learning.
33 Monetary Policy McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved. 15.
WEEK VIII Central Bank and Monetary Policy. W EEK VIII Modern monetary policy: inflation targeting Costs of inflation: Shoe-leather costs:    i  :
14-1 Copyright © 2012 Pearson Prentice Hall. All rights reserved. C H A P T E R 14 The Federal Reserve and Monetary Policy Copyright © 2012 Pearson Prentice.
Monetary Policy AS Economics. What is monetary policy? Controlling the macro-economy through changes in monetary variables such as – Money supply – Interest.
Macroeconomics - the story so far (from G11) - What do you remember?
16 Interest Rates and Monetary Policy McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.
The Federal Reserve System. FEDERAL RESERVE SYSTEM n The Federal Reserve System is charged with using monetary policy to control the money supply n Regulating.
Interest Rates and Monetary Policy Chapter 34 McGraw-Hill/IrwinCopyright © 2015 by McGraw-Hill Education. All rights reserved.
124 Aggregate Supply and Aggregate Demand. 125  What is the purpose of the aggregate supply-aggregate demand model?  What determines aggregate supply.
McGraw-Hill/Irwin Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 18: Spending, Output, and Fiscal Policy 1.Identify the.
Copyright © 2012 Pearson Addison-Wesley. All rights reserved. Chapter 3 Income and Interest Rates: The Keynesian Cross Model and the IS Curve.
Monetary Policy 2.5. Monetary Policy What is a central bank? How does the mechanism of monetary policy work? How does it affect the economy? Evaluation.
Macro Chapter 10 Dynamic Change, Economic Fluctuations, and the AD-AS Model.
Output, growth and business cycles Econ 102. GDP Growth Countries:  High savings rate have higher GDP/ cap.  high population growth rates have low GDP/
McGraw-Hill/Irwin Chapter 17: Interest Rates and Monetary Policy Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.
Monetary Policy Econ  Key player in the financial markets: CENTRAL BANKS: Every sovereign nation has a bank which is the ‘lender of the last.
Macroeconomic policies. Government macroeconomic policies In order to achieve its objectives, the government uses 2 main types of policies: Demand-side.
+ Demand-side Policies: Monetary Policy Part I IB Economics – Mr. Padula April 2012.
Chapter 11 - Monetary Policy and the Fed Read pages I The Goals and Outcomes of Monetary Policy A)Goals of Monetary Policy Goals are not easy.
Introduction to Fed Tools and Monetary Policy Money and Banking Econ 311 Instructor: Thomas L. Thomas.
Monetary Policy Ch. 15 What’s the relationship between money supply, interest rates, and aggregate demand? How can the Fed use its control of the money.
13a – Fiscal Policy This web quiz may appear as two pages on tablets and laptops. I recommend that you view it as one page by clicking on the open book.
Chapter 7 Fiscal Policy and Monetary Policy
Where You Are! Economics 305 – Macroeconomic Theory
Ch. 14, Macroeconomics, R.A. Arnold
The Short – Run Macro Model
Introduction to Macroeconomics
Monetary Policy A brief introduction.
Week 11 Monetary and fiscal policy
Macroeconomic 2.3.
Macroeconomic 2.3.
Introduction to Macroeconomics
Economics - Notes for Teachers
Introduction to Macroeconomics
Macroeconomic Policy A- Monetary Policy Goals- The goal of monetary policy in A/a is to keep inflation (as measured by % growth in the CPI) between 2 and.
Macroeconomics Macroeconomics deals with the economy as a whole. It studies the behavior of economic aggregates such as aggregate income, consumption,
Macroeconomics Macroeconomics deals with the economy as a whole. It studies the behavior of economic aggregates such as aggregate income, consumption,
Aggregate Supply & Demand Model
Presentation transcript:

Monetary Policy

Monetary policy are the manipulation of the money supply and interest rate by the central bank to influence the borrowing of money and thereby the level of AD What is: – Central bank? – Money? Any medium that is acceptable as payment for goods and services – Interest rate? It is the price/cost of borrowing money which depends on length of time of borrowing, size of loan, inflation rate, etc. (risk and uncertainty involved with time) – The interest rate is determined using the usual Demand and Supply for the money/loanable funds market

Nature of work of financial analysts and central bank officials

Increasing the MONEY SUPPLY Quantitative Easing and ways of influencing amount of lending done by BANKS Equation: MV ≡ PT ( or PQ or PY or Nominal GDP) SO will an increase in M  increase in P? YES if…………………………………………………

Equilibrium Interest Rate and Money Supply

Monetary base in Japan

Short Term Interest Rate (for lending)

How interest rate affects AD Changes in interest rates ultimately affect two of the four components of aggregate demand – Consumption (C): e.g. large purchases that require borrowing like cars, houses, university tuition, etc. – Investment (I): e.g. building a new factory, purchasing a very expensive inventory and machine that will likely to increase future production

Which D-side policy is more effective? Fiscal Policy – Pro: can pull economy out of recession (e.g. Great Dep ‘30; – ability to target sectors (e.g. spending on education, infrastructure) with some supply side effects – Con: time lags; hard to forecast and calculate their impacts;; hard to target and fine tune as AD determined by multiple factors; – crowding out Monetary Policy – Pro: quick implementation; independence from political constraints; no crowding out; can adjust interest rate incrementally and flexibly – Con: time lags; effective on inflation but not so during recession (pulling on a string) ; international impacts (effects on exchange rates, access to foreign lending);

Summarising It is not a simple and easy task to achieve the desirable macro-economic outcomes During the 1980s a lots of economists studied macroeconomic dynamics and management But inflation/deflation, unemployment, inconsistent GDP growth persist Moreover, financial crisis on the scale of the 1930s Great Depression continues to happen i.e. the recession after the Lehman Shock

To sum, Is it such an easy task? Not quite so … One intervention has multiple/multivariate channels & mechanisms in affecting the various demand components. Like a big “Knot”…human behavior is complex and dynamic! – Ceteris paribus is critical! But in the dynamic reality, hard to make such assumption and therefore hard to predict and forecast and it can get out of control! The multiplier effect – The national income will/should increase more than how much the government will spend as the increase in spending circulates the economy The two schools of thought – Quite different on the implications on price and real GDP level (monetarist believe no effects on real GDP, only on avg prices) We considered only the Demand Side, also need to consider the Supply Side Policies