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Monetary policy 2 0810
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Monetary policy 2 0810


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  • 1. Monetary Policy
  • 2.
    • A tool used by governments to affect the economy
      • Monetary policy is geared towards influencing interest rates
      • If government can affect interest rates, then the government can affect consumer and firm behavior
  • 3.
    • Monetary policy is the behavior of the Central Bank of an economy concerning the money supply.
  • 4. The role of Banks in Monetary Policy
    • Banks are an essential tool in affecting monetary policy
    • Banks lend money that they don’t have!
      • Loans made by banks are not backed 100% by reserves, so they are essentially minting their own currency
      • Reserve requirements set by the government determine the extent to which banks can mint their currency
    • Fewer required reserves means more currency and increased money supply (more loans means more available funds)
  • 5. The Demand for Money
    • The main concern in the study of the demand for money is:
      • How much of your financial assets you want to hold in the form of money, which does not earn interest, versus how much you want to hold in interest-bearing securities, such as bonds.
  • 6.
    • Spread of banking habits
    • Financial Sophistication
    • Illegal and black money transactions
    • Interest rates
  • 7. The Total Demand for Money
    • The quantity of money demanded at any moment depends on the opportunity cost of holding money, a cost determined by the interest rate.
      • A higher interest rate raises the opportunity cost of holding money and thus reduces the quantity of money demanded.
  • 8. Why People hold Money
    • Transaction Motive
    • Precautionary Motive
    • Speculative Motive
  • 9. Money demand
    • How much money do firms and households desire to hold at a specific point in time, given the current interest rate, volume of economic activity, and price level?
  • 10. The Determinants of Money Demand: Review
    • Money demand is a stock variable , measured at a given point in time.
    • Money demand is determined by
      • Interest rates (negative effect)
      • Aggregate output (positive effect)
      • Price level (positive effect)
  • 11. Money Multiplier
    • m=(C/D+1 ) / {(C/D)+ (R/D)}
  • 12. Interest Rates and Money Supply
    • Changes in money supply affect interest rates
      • An increase in money supply makes the economy feel wealthier by putting more money in the hands of consumers
      • An increase in money supply decreases interest rates
  • 13. Monetary Policy
    • Tight monetary policy refers to policies that contract the money supply in an effort to restrain the economy.
    • Easy monetary policy refers to policies that expand the money supply in an effort to stimulate the economy.
  • 14. Monetary Stimulant
    • Broad Money growth vs Interest rates