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Monetary Policy, Demand-Side Policy
(AD), Central Bank (CB)
Commercial…
Monetary Policy
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2 Types
Expansionary/Reflationary
- ↑ AD & total spending
- ↓ unemployment
- out of recession
↓ interest rate
- ↓ return on savings
- ↑ spending
- ↑ inv
- out of recession
↑ money supply
- NOT printing money
- ↑ money in circulation
(credit creation)
- Use OMO
Credit Creation Process
- Making credit (loan) from deposits made into Commercial Banks
- ↑ credit created, ↑ money supply in econ from the initial deposit
- money supply
= 1/rate*initial dep
Open Market Operation
- Buying & selling bonds by CB
- Buyers withdrawing from CoB ↓ CoB liquid assets
- Lending limited
- Money supply ↓
- So CB should buy back bonds
- So CoB can lend more
↓ foreign ER
- CB has to devalue currency
- X more P competitive
- M more expensive
- ↑ AD
Contractionary/Restrictive
- ↓ Inflation (Demand-Pull)
- ↓ econ activity
- ↓ AD
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- Control AD
- Implemented by Central Bank
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Gov decisions on:
- What ER system
- What rate to set
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