Monetary Policy
<ul><li>A tool used by governments to affect the economy </li></ul><ul><ul><li>Monetary policy is geared towards influenci...
<ul><li>Monetary policy  is the behavior of the Central Bank of an economy concerning the money supply. </li></ul>
The role of Banks in Monetary Policy <ul><li>Banks are an essential tool in affecting monetary policy </li></ul><ul><li>Ba...
The Demand for Money <ul><li>The main concern in the study of the demand for money is: </li></ul><ul><ul><li>How much of y...
<ul><li>Spread of banking habits </li></ul><ul><li>Financial Sophistication </li></ul><ul><li>Illegal and black money tran...
The Total Demand for Money <ul><li>The quantity of money demanded at any moment depends on the opportunity cost of holding...
Why People hold Money <ul><li>Transaction Motive </li></ul><ul><li>Precautionary Motive </li></ul><ul><li>Speculative Moti...
Money demand <ul><li>How much money do firms and households desire to hold at a specific point in time, given the current ...
The Determinants of Money Demand:  Review <ul><li>Money demand is a  stock variable , measured at a given point in time. <...
Money Multiplier <ul><li>m=(C/D+1 ) / {(C/D)+ (R/D)} </li></ul>
Interest Rates and Money Supply <ul><li>Changes in money supply affect interest rates </li></ul><ul><ul><li>An increase in...
Monetary Policy <ul><li>Tight monetary policy  refers to policies that contract the money supply in an effort to restrain ...
Monetary Stimulant <ul><li>Broad Money growth vs Interest rates </li></ul>
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Monetary policy 2 0810

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Monetary policy 2 0810

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

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