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Monetary Policy - Coggle Diagram
Monetary Policy
Aims
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Low Unemployment
Lower interest rates mean that the cost of borrowing is lower. When it's easier to borrow money, people spend more money and invest more. This increases aggregate demand and GDP and decreases cyclical unemployment. This uses expansionary monetary policy
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Tools
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open market operations
Open market operations refers to the Federal Reserve buying and selling U.S. Treasury securities, on the open market in order to regulate the supply of money that is on reserve in U.S. banks. The Fed purchases Treasury securities to increase the supply of money and sells them to reduce long-term interest rates.
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Quantitative easing
a central bank purchases longer-term securities from the open market in order to increase the money supply and encourage lending and investment. Buying these securities adds new money to the economy.
Expansionary
An expansionary policy aims to increase spending by businesses and consumers by making it cheaper to borrow.
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Effect
An expansionary monetary policy reduces the cost of borrowing. Therefore, consumers tend to spend more while businesses are encouraged to make larger capital investments.
Contractionary
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Effect
Contractionary monetary policy decreases the money supply in an economy. The decrease in the money supply is mirrored by an equal decrease in the nominal output.
Effectivness
Constraints
limited scope of reducing intrest rates, when close to zero
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Strengths
incremental, flexible and easily reverssable
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the decisions are made by experts in finance, banking, and monetary policy, not politicians. the decision makers are independent of political pressures.
