Please enable JavaScript.
Coggle requires JavaScript to display documents.
Monetary Policy (Introduction to interest rates (Liquidity Preference…
Monetary Policy
Introduction to interest rates (Liquidity Preference Theory)
Liquidity Preference = preference for holding money over other kinds of assets (demand for money)
Transactionary
Money needed to facilitate payment for daily transactions of goods and services
more is needed if:
prices rise
less use of credit cards and cheques
paid less regularly
Precautionary
Money held as a precaution for unexpected items of expenditures
more will be held if income rises
Speculative
Money held instead of investing it in bonds or other assets
more will be held if:
low i/r
value of bonds or other assets expected to fall
Change in supply
Change in the level of MS
Independent of i/r
Change in liquidity preference/demand
Business and consumer expectations
:arrow_down: transactionary and speculative demand :arrow_down: i/r
Economic growth
:arrow_up: transactionary demand :arrow_up: i/r
Changes in government expenditure
:arrow_up: G :arrow_up: i/r
:arrow_up: costs of borrowing for private sector
welfare loss to society, less allocative efficiency
Expectations of changes in the exchange rate
determines speculative money flows between countries that can affect MS in the country
Openness of the economy
may restrict the ability of government to influence domestic i/r
Nominal vs real interest rate
Real i/r = Nominal i/r - inflation rate
Real i/r better measure of effects of C and I on:
real return on savings
cost of borrowing
Interest rates are the price of money (for borrowing and lending)
cost of borrowing for borrowers
rate of return on savings to those who save
Limitations
Interest-elasticity of Liquidity Preference
Interest-elasticity of MEI
Business expectations
Size of multiplier
Workings
Targets
i/r
MS
Transmission Mechanism
Instruments
Introduction to monetary policy
demand management policy
to influence level of economic activity in pursuit of the government's economic objectives
manipulation of interest rates OR money supply to change AD
Expansionary :arrow_up: AD
:arrow_down: i/r
:arrow_up: profitability of I
:arrow_up: C to buy g/s
:arrow_up: MS
excess at current rates
pressure to :arrow_down: i/r
:arrow_up: money to spend
Contractionary :arrow_down: AD
opposite of :arrow_up: AD
Objectives:
stability in price level
high level of employment
sustained economic growth
In Singapore