This document discusses different types of macroeconomic policy used by governments, focusing on monetary policy. It explains that monetary policy uses interest rates and the money supply to influence aggregate demand and the economy. A lower interest rate stimulates consumption and investment, while a higher rate restricts borrowing and spending. The central bank implements monetary policy through open market operations and quantitative easing to adjust the money supply and interest rates. The goal is to control inflation, economic growth, unemployment and the balance of payments. Fiscal and exchange rate policies are also briefly covered.

1. UNIT 5 : GOVERNMENT MACRO
INTERVENTION (MONETARY POLICY)
AS LEVEL ECONOMICS
TEACHER : MR. ANANG SETIAWAN

2. LEARNING OBJECTIVES
You will learn about :
• Types of policy: fiscal, monetary and supply side policy
• Policies to correct balance of payments disequilibrium
• Policies to correct inflation and deflation

3. MONETARY POLICY
• Monetary policy : the use of the rate of interest or
money supply or exchange rates to control the
economy
• Controlling the rate of interest in order to control
inflation
• Low interest rates  stimulate consumption and
investment  economic growth
• A cut in interest rates  lead to expansion in
aggregate demand.

4. MONETARY POLICY
A rise in interest rates means that it is more
expensive to borrow :
• Consumers can afford to borrow less money 
leading to their consumption being restricted.
• Consumers with existing loans have to pay more
interest  spend less on other goods and services.
• Firms are less likely to invest as it costs more to
borrow  some projects are no longer
economically viable as the return on them is less
than the rate of interest.

5. MONETARY POLICY
• A rise in interest rates will lead to a fall in
aggregate demand from AD1 to AD2  a fall in the
real GDP and a decline in inflation.
The result :
• A fall in inflation
• An improvement in the balance of payments
• Less imports are bought
• But a decline in economic growth and a rise in
unemployment

6. MONETARY POLICY
• Monetary policy  controlled by the central bank
• 2 other ways in which the central bank can influence the money supply and
thus interest rates : by the use of open market operations or through
quantitative easing
• Open market operations : the buying and selling of government bonds to either
increase or decrease the money supply.
• Quantitative easing: where a central bank buys financial assets from banks and
other private sector businesses with new electronically created money

7. MONETARY POLICY
Open market operations :
• If the central bank wants to reduce the money supply  sell bonds 
banks, financial institutions and individuals buy these bonds  the money
goes to the central bank  reduce the supply of money in circulation 
helping to control inflation

8. MONETARY POLICY
Note :
• Both fiscal and monetary policies are demand-side policies affecting
aggregate demand. Generally they are used together. E.g. raise interest
rates and taxes.
• The difference is that while Keynesians would give priority to fiscal policy,
monetarist would emphasise the primacy of monetary policy.

9. MONETARY POLICY
Exchange rate policy
• A form of monetary policy and is often associated with fixing the currency
to another currency such as the $, the euro or the yen.
• Exchange rate policy : the use of exchange rate to control the economy
• Exchange rate policy operates by either changing the rate of interest. E.g.
lowering the rate of interest rate will lead to fall in the exchange rate.

10. FISCAL POLICY
Case Study p.127
Singapore’s exchange rate policy
Textbook p.124-127

11. RESOURCES
• Economics for Cambridge international AS and A Level, Oxford University Press
• Cambridge International AS and A level Economics 2nd edition, Terry Cook
• Cambridge International AS and A level Economics 2nd edition, Collin Bamford and Susan Grant
• https://www.economicshelp.org/