This chapter covers the objectives and tools of monetary policy, explaining the mechanisms of open market operations, the demand for money, and the role of central banks in controlling interest rates. It discusses the relationship between interest rates, spending, GDP, inflation, and public debt. The chapter highlights the impact of monetary policy on the economy, including how changes in rates influence consumption, investment, and overall economic growth.

1. 1
3
CHAPTER
MONETARY POLICY

2. Objectives
After studying this chapter, you will able to
 Explain what an open market operation is, how it works, and how it changes
the quantity of money
 Explain what determines the demand for money
 Explain how the Fed influences interest rates
 Explain how the Fed’s actions influence spending plans, real GDP, and the
price level

3. Monetary Policy
Maintaining the
Monetary System
Full Employment
Inflation in Check
Sustainable Growth
Goals

4. Who is Responsible
for the Monetary
Policy
A CENTRAL BANK is the public
authority that regulates a
nation’s depository institutions
and controls the quantity of
money.
It is an independent authority in
most of countries of the world

5. Interest Rate
Demand for Money
Is inversely related to the change
in interest rate
Increase in interest rate decrease
consumption and investment
and increase saving.
Supply for Money
Is not related to the change in
interest rate
Transactions
Speculation

6. Altering Interest Rate
Recession decreases interest rate
Inflation Increase in interest rate

7. Recession decreases interest rate
Inflation Increase in interest rate
Public Debt Cost
Exchange rate
Deficit --- Borrowing = Public Debt
CBE decrease in interest rate  Cost of public debt to decrease
EGP/$
Increase in Interest rate Exchange Dollar to pound  Supply of
Dollar to increase - Price of dollar against the pound will decrease

8. Revenues (Taxes)
Expenses
EGP 10 Billion
Bonds

9. Buyer
Seller

12. Monetary Policy Tools
Required Reserve Ratio
The central bank sets required reserve ratios,
which are the minimum percentages of deposits
that depository institutions must hold as reserves.
Recession
1 Discount Rate
Required Reserve Ratio
Increase Loans
Money Supply
2
Increase Demand and Decrease
Interest Rate
GDP and increase Inflation
3

13. Inflation
Discount Rate
Required Reserve Ratio
Decrease Loans
Money Supply
Decrease Demand ; Increase in Interest Rate
GDP ; and decrease Inflation rate
3

14. Reserve
Access Reserve
EGP 1,000,000
Reserve Ratio
10%
Reserves
EGP 100,000
Access Reserves
EGP 900,000
Deposit Multiplier = 1/ Required Reserve Ratio

15. Monetary Policy,
Real GDP,
and the Price Level
Figure 13.11 summarizes
these ripple effects.
EGP 5000
EGP /
ER Price in
Europe
Sold Trips
EGP10
/
€ 500 1000
EGP20
/
€ 250 2000
EGP 50
/
€ 100 7000
Expansionary
Policy
Contractionary
Policy
Recission Inflation

16. Inflation Rate
• Watch the interest
rate closely
• If interest rates are
expected to
decrease
• Make loans in
variable rate
• Make deposits on
fixed rate
• Interest rate is
important to evaluate
business opportunities
Monetary Policy
What in it for me?

17. THE END
1
3
CHAPTER
MONETARY POLICY