1. Tools of macroeconomic policy & Central banking
Handout!

2. Tools of macroeconomic policy: Monetary and fiscal policy
= A government policy on taxes and public spending.
Monetary policy
= The central bank’s policy on controlling the money supply.
Fiscal
monetary

3. What can these two policies be used for?
Macroeconomic policy can be expansionary (1) or restrictive (2). Decide which definition is which policy: [ ] increases the total supply of money in the economy, used to combat unemployment in a recession. [ ] decreases the total money supply in order to combat inflation.

4. What can these two policies be used for?
Macroeconomic policy can be expansionary (1) or restrictive (2). Decide which definition is which policy: [1] increases the total supply of money in the economy, used to combat unemployment in a recession. [2] decreases the total money supply in order to combat inflation.

5. RB, p. 62/I.2 Which terms are defined here?
The total amount that different sectors of the economy spend in a given period.
A situation in which all available labor resources are being used in the most economically efficient way. It is the highest amount of skilled and unskilled labor that could be employed within an economy at any given time.
An amount produced or manufactured during a certain time
An economic system with no barriers to free market activity.

6. RB, p. 62/I.2 Which terms are defined here?
The total amount that different sectors of the economy spend in a given period. – aggregate demand
A situation in which all available labor resources are being used in the most economically efficient way. It is the highest amount of skilled and unskilled labor that could be employed within an economy at any given time. – full employment
An amount produced or manufactured during a certain time – output
An economic system with no barriers to free market activity. – open market

7. RB, p. 62/I.2 Which terms are defined here?
Minimum amount of cash or cash-equivalents (a percentage of deposits) that banks and other depository institutions are required by law to keep on hand, and which may not be used for lending or investing.
The interest rate charged to commercial banks and other depository institutions for loans received from a central bank’s discount window.

8. RB, p. 62/I.2 Which terms are defined here?
Minimum amount of cash or cash-equivalents (a percentage of deposits) that banks and other depository institutions are required by law to keep on hand, and which may not be used for lending or investing. – reserve requirements
The interest rate charged to commercial banks and other depository institutions for loans received from a central bank’s discount window. – discount rate

9. RB, p. 62/ I Find answers in text:
When should a loose/tight monetary policy be used?
What should be done?
How?
Do: RB, p. 63/ II
Reading the text on p. 63 and filling in the table in tsk II was their homework, so hopefully you can have a discussion with them on this text.

10. below its full-employment potential stimulate economy: ↓ to increase
MONETARY POLICY
PROBLEM
GOAL
MEASURES
EXPANSIONARY (LOOSE)
economy in recession:
below its full-employment potential
stimulate economy: ↓
to increase
borrowing & spending
to encourage output
increasing money supply:
-lowering reserve requirement
-dropping discount rates
-buying more bonds
-lower interest rates
 people will spend

11. RESTRICTIVE (TIGHT) Overheating economy:
MONETARY POLICY
RESTRICTIVE (TIGHT)
PROBLEM
Overheating economy:
too much pressure on production capacity, rising prices
GOAL
cool economy:
to lessen loan availability →lower investments
→ to reduce aggregate demand
MEASURES
to reduce aggregate demand
reducing money supply:
-raising reserve requirement
- increasing discount rates
- selling bonds ↓
- higher interest rates
- less available loans  less investment

12. RB, p. 63/ III Practice presenting:
e.g.
If the economy IS INRECESSION/OVERHEATING, the central bank should STIMULATE/ COOL IT.
This can be done by LOWERING/RAISING the reserve requirement, DROPPING/ INCREASING the discount rate, or by BUYING/SELLING bonds on the open market.