Expansionary policy is traditionally used to try to combat unemployment in a recession by lowering interest rates in the hope that easy credit will entice businesses into expanding. (‘easy monetary policy’)Contractionary policy is intended to slow inflation in order to avoid the resulting distortions and deterioration of asset values. (‘tight monetary policy)
Example of expansionary policy application
Example of contractionary policy application
Or you can say the sum of bank deposits at the central bank plus vault cash
Bank reserve ratios are central bank regulations that set the minimum reserves that a commercial bank must hold as a percentage of its deposits and notes.For example, let’s say that the amount of money in your bank’s savings and current account is $10,000.If the CB sets the ratio at 10%, then your bank must hold at least $1,000 in reserves.Maintaining a $1,000 reserve means that your bank can generate income by lending up to $9,000.
Raising the Reserve Ratio --Banks must hold more reserves --Banks decrease lending --Money supply decreasesRaising reserve requirements forces banks to withhold a larger portion of their funds, thereby reducing the money supply, while lowering requirements works the opposite way to increase the money supply.
Lowering the Reserve Ratio--- Banks may hold less reserves--- Banks increase lending--- Money supply increases
A decrease in the discount rate makes it cheaper for commercial banks to borrow money, which results in an increase in the supply of money in the economy. Conversely, a raised discount rate will make it more expensive for the banks to borrow, and would thereby decrease the money supply.
Indonesia's Central bank discount rate equals to 6.37 % with a global rank of 57 compared to United States' Central bank discount rate which equals to 0.50 % with a global rank of 140.
Main objective of nominal anchor: to achieve price stability
When you have a time-inconsistency problem it means that you find yourself unable to consistently follow a good plan over time.For example, let’s say my new years’ resolution is to restrict my spending, by stop buying things I don’t really need.However, on January 2nd, Marks & Spencer held a massive sale, all things 80% off. At that time, it seemed like a good bargain, so it was a sound decision to buy as many clothes as I can, since the sale was only for a limited time. However, I don’t really need all those tank-tops and blazers. In the long run, they probably fill up my wardrobe, and I have to pay extra for the laundry. Not to mention my new years’ resolution failed completely.This happens with monetary policy makers too, because in the short run, expansionary policy would produce higher growth and employment. However, one thing we all should know, is that businesses adjust their wage and price expectations upward to reflect the expansionary policy.
Monetary policy presentation.ppt
What is monetary policy?
“…the process by
authority of a
the supply of
Nominal Anchor in Price Stability
Nominal anchor uses a certain
nominal variable which ties down
the price level.
For example: maintaining an
inflation rate between 2% - 4 %
might be an anchor.
This problem arises
because policy makers are
always tempted to pursue
monetary policy that is
because it would boost
“…does not mean that
unemployment is at zero”
“…ensuring that resources
are not idle”
interfere with the
Stability of Financial
“…stability makes it
easier for businesses to
Stability in Foreign