what: monetary policy
HOW:
- Define the money supply and monetary policy
- Describe the instruments of monetary policy (changes in the interest rate and the money supply) including how it can effect the foreign exchange rate market.
- Effects of monetary policy on government macroeconomic aims
- Analyse how monetary policy measures may be used by government to achieve its macroeconomic aims.
Figure 1: The effective Federal Reserve interest rate and the utilization of monetary policy 2000 to 2020.
Figure 2: International Central Bank interest rates.
ACTIVITY 1: Watch the following videos that deal with ideas key to understanding and evaluating monetary policy. Take notes on the following:
- What is defined as money?
- How does modern fractional banking operate?
- Why is a central bank often referred to as the lender of last resort?
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What is money?
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How does modern fractional banking operate?
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Why is a central bank often referred to as the lender of last resort?
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ACTIVITY 2: As you can see from ACTIVITY 1, modern banking is a particularly complex economic system and it needs to be understood in order to understand how monetary policy works and be able to evaluate the effectiveness of using monetary policy during different phases of the business cycle.
1. What is the 'Money Supply'?
2. How can the size of the 'Money Supply' in the economy be altered through policy?
3. Who is responsible for deploying monetary policy?
i) Who has this role in the EU, USA, UK?
4. What impact will this have on the economy during different phases of the business cycle?
5. What is loose monetary policy and when is this used?
6. What is tight monetary policy and when is this used?
2. How can the size of the 'Money Supply' in the economy be altered through policy?
3. Who is responsible for deploying monetary policy?
i) Who has this role in the EU, USA, UK?
4. What impact will this have on the economy during different phases of the business cycle?
5. What is loose monetary policy and when is this used?
6. What is tight monetary policy and when is this used?
Fig. 3 - Tight monetary policy to close an inflationary gap.
Fig. 2 - Incremental changes in the interest rate of major industrial economies.
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Complete the exam style questions open book. Focus on the skill of interpreting and understanding the question, answer the question accurately ensuring that you use specific and detailed knowledge from the textbook. This will mean that you use key terms carefully and explain them!
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| monetary_policy_27.pdf |
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Read either the extract from Friedman's NY Times obituary or the full text in the link below...Milton Friedman is generally regarded as the father of modern monetary economics.
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| milton_friedman_and_monetarism.docx |
Milton Friedman, Free Markets Theorist, Dies at 94
The only economic lever that Mr. Friedman would allow government to use was the one that controlled the supply of money - a monetarist view that had gone out of favor when he embraced it in the 1950s. He went on to record a signal achievement, predicting the unprecedented combination of rising unemployment and rising inflation that came to be called stagflation.
