what: monetary policy
HOW:
- Describe the role of central banks as regulators of commercial banks and bankers to governments.
- Explain that central banks are usually made responsible for interest rates and exchange rates in order to achieve macroeconomic objectives.
- Explain, using a demand and supply of money diagram, how equilibrium interest rates are determined, outlining the role of the central bank in influencing the supply of money.
- Explain how changes in interest rates can influence the level of aggregate demand in an economy.
- Explain the mechanism through which an easy (expansionary) monetary policy can help an economy close a deflationary (recessionary) gap.
- Construct a diagram to show the potential effects of an easy (expansionary) monetary policy, outlining the importance of the shape of the AS curve.
- Explain the mechanism through which a tight (contractionary) monetary policy can help an economy close an inflationary gap.
- Construct a diagram to show the potential effects of a tight (contractionary) monetary policy, outlining the importance of the shape of the AS curve.
- Explain how central banks of certain countries, rather than focusing on the maintenance of both full employment and a low rate of inflation, are guided in their monetary policy by the objective to achieve an explicit or implicit inflation rate target.
- Evaluate the effectiveness of monetary policy through consideration of factors, including the independence of the central bank, the ability to adjust interest rates incrementally, the ability to implement changes in interest rates relatively quickly, time lags, limited effectiveness in increasing aggregate demand if the economy is in deep recession and conflict among government economic objectives.
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. Watch the Video by Mr Bish below to pull all the strands together and help you gain the knowledge required to turn this topic into an interesting and creative infographic.
Fig. 3 - Tight monetary policy to close an inflationary gap.
ACTIVITY 3: CREATING AN INFOGRAPHIC ON THE BANKING SYSTEM AND MODERN FRACTIONAL BANKING. To summarize and organize your understanding and knowledge of this area you are going to produce an infographic. Your info graphic should include the following information:
Hints and tips for creating great infographics can be found on the following economics page:
- What is defined as money for the purposes of Economics?
- How does modern fractional banking work?
- What are the 4 roles of the central bank of a country?
- How are interest rates determined? You will need economic diagrams (graphs) for this as well as an explanation.
- How is monetary policy used to solve a recessionary gap or an inflationary gap?
- How effective is monetary policy, what are the limitations of monetary policy?
- A bio of Milton Friedman the father of modern monetary theory?
Hints and tips for creating great infographics can be found on the following economics page:
2.B.ELASTICITIES
Definition: Elasticity is a measure of the responsiveness of the quantity demanded or supplied of a good or service, to changes in any of the factors that determines it. WOULD A SLAVE REDEMPTION OR GUN BUY BACK SCHEME PROGRAM BE SUCCESSFUL? 1.) Read the article below:a.) What is a commodity?b.)
The following are generally regarded as the main factors when evaluating monetary polcy:
The independence of the central bank
The ability to adjust interest rates incrementally
Limited effectiveness in increasing aggregate demand if the economy is in deep recession
Time lags
Conflict among government economic objectives (inflation/unemployment, balance of payments, risk of capital flight)
The ability to adjust interest rates incrementally
Limited effectiveness in increasing aggregate demand if the economy is in deep recession
Time lags
Conflict among government economic objectives (inflation/unemployment, balance of payments, risk of capital flight)
Fig. 1 - The impact of the interest rate on the price mechanism.
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Fig. 2 - Incremental changes in the interest rate of major industrial economies.
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remembering milton friedman - an obituary (New york times 2006)
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.
| 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.
monetary policy simulation
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