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Monetary Policy, Screen Shot 2022-04-20 at 10.35.50 PM, Screen Shot 2022…

- - - - Increased- less money supply- less economic growth so there will be contractionary monetary policy which would increase interest rates causing less consumption and investment which does reduce economic growth and creates unemployment but helps fight inflation
      - decreased- more money supply- more economic growth- increase in AD through expansionary monetary policy which leads to a fall in interest rates thus increase in consumption and investment
- - - - China is discussing cutting reserve ratios so that money supply increases
        
        They predicted a 10 basis-point cut to policy interest rates and a 50 basis-point RRR reduction
        
        Monetary policy is used to help restabalize the economy
- - - - To increase AD the central bank lowers the base rate of interest
      - Reduce cost of borrowing—> increases consumption and investment—> increase in AD
      - Reducing reserve requirements making money supply more available
      - Economic outcomes:
        
        Inflationary pressures: injection of additional money to the economy will cause a rise in price level.
        
        Impact on exports and imports: Higher money supply means that the value of the local currency decreases. This makes it harder for people to import from other countries but it makes it easier to export since their exports becomes more attractive to foreign countries
        
        Increase in output as shown in the graph from Y1 to Y2- increase GDP- economic growth
        
        Unemployment decreases: more money supply, borrowing money is cheaper meaning that investment in caresses, especially capital investment does create new job opportunities and does increase AD of labor.
        
        It is important to realize that contractionary monetary policy helps specifically cyclical unemployment by decreasing interest rates and increasing money supply to increase demand.
        
        This reduces fluctuations in the business cycle because the rise in AD by rising consumption and investment lead to expansionary periods ??
      - Strengths of monetary policy:
        
        It’s quick to put in place
        
        There is no political intervention (no political process for changes to occur- it can imply policies even if they are politically unpopular)
        
        There is no crowding out since interest rates are lowered without the government's extensive borrowing that crowds out private investment
        
        The ability to make small changes: (It is more precise since its a percent target- fine Turing because of the quickness and the lack of political pressures)
      - Limitations:
        
        Government pressures
        
        Time lags: It’s quick to implement but sometimes slow to actually have an effect in AD
        
        Ineffectiveness when interest rates are low: As interest rates are being cut at some point they will reach 0 and there will be no room for further cuts
        
        Lower consumer and business confidence: Interest rates may be lower and consumption and investment might not be in caressed because of lower business and consumer confidence (this usually happens during a recession)
    - - Reducing money supply by raising the reserve requirements (raising the reserve requirements money supply or money available to be loaned by private banks will decline)
        Highering interest rates: short-term
        
        Economic outcomes:
        
        fighting inflation: reducing money supply reduces inflation since AD decreases
        
        —> For demand-pull inflation caused by an increase in AD the central bank should use this policy to reduce AD
        
        —> For cost-push as well in an indirect way this policy can be used. Policy makers don't really have control over cost of production but demand side policies can help indirectly
        
        Slowing economic growth: Investments decrease and consumption decreases
        
        Increased unemployment: economic slowdown- lower production- less AD of labor- less hiring people
        
        Fighting the money supply discourages business expansions reducing exports and decreasing consumer spending lowering imports. Less money supply means higher value of the currency in foreign exchange markets. This reduces exports since they are less attractive to the foreign market. Imports however become less expensive
        
        Leads to recessionary periods in the business cycle (fluctuations in the business cycle)