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Monetary Policy 1

The document discusses monetary policy and its objectives. It defines monetary policy as the macroeconomic policy set by central banks to manage money supply, interest rates, and achieve goals like inflation control, economic growth, and stability. It also defines money supply as the total stock of currency and deposit money circulating in an economy. Broad money supply includes currency as well as checking and savings deposits. Central banks can influence monetary conditions and aggregate demand through various monetary measures like increasing money supply via purchasing government bonds or encouraging bank lending, or raising interest rates.

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Hasan Shoaib
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39 views9 pages

Monetary Policy 1

The document discusses monetary policy and its objectives. It defines monetary policy as the macroeconomic policy set by central banks to manage money supply, interest rates, and achieve goals like inflation control, economic growth, and stability. It also defines money supply as the total stock of currency and deposit money circulating in an economy. Broad money supply includes currency as well as checking and savings deposits. Central banks can influence monetary conditions and aggregate demand through various monetary measures like increasing money supply via purchasing government bonds or encouraging bank lending, or raising interest rates.

Uploaded by

Hasan Shoaib
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPTX, PDF, TXT or read online on Scribd
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MONETARY

POLICY

Section : 4
Chapter : 4.4

ARJUMAND ANSARI
Objectives Of The Lesson
01 Define The Monetary Policy

02 Define The Money Supply

03 Analyse Monetary Measures

04 Discuss the effects of monetary policy on


Government Macro-economic Aims
THE MONEY SUPPLY
The money supply consists of all the money in an economy at any
one time.

There are number of measures of money supply:


One count notes, coins and current accounts held at commercial
banks and concentrates on money that is primarily used as a
medium of exchange. These measures is known as a narrow
measure.

The best known broad measure includes not only notes, coins and
current accounts but also deposit accounts. This measures include
money used for a number of purposes, primarily medium of
exchange and store of value.
Definition: The total stock of money circulating in an economy is the money
supply. The circulating money involves the currency, printed notes, money in
the deposit accounts and in the form of other liquid assets.
THE MONETARY POLICY

Monetary policy is the macroeconomic policy laid down by


the central bank. It involves management of money supply
and interest rate and is the demand side economic policy
used by the government of a country to achieve
macroeconomic objectives like inflation, consumption,
growth and liquidity.
THE MONETARY POLICY
CHANGES IN THE MONEY SUPPLY
A central bank may increase the money supply by printing
more money, buying back government bond or encouraging
commercial banks to lend more.
Printing more money is also referred as ‘resorting to the
printing press’.
Buying government bonds gives commercial bank more
money to lend to their customers.
Encouraging commercial banks to lend money or removing
any restrictions on bank lending may also result in more
borrowing to spend on consumers or capital goods.

Impact: If the money supply is increased, there is likely to be


an increase in consumer spending and investment. Such a
rise in aggregate demand is likely to increase output.
Important Term

A government bond is a type of debt-based investment, where you loan


Government money to a government in return for an agreed rate of interest. Governments
Bonds use them to raise funds that can be spent on new projects or infrastructure,
and investors can use them to get a set return paid at regular intervals.

When you buy a government bond, you lend the government an agreed amount of money for an
agreed period of time. In return, the government will pay you back a set level of interest at regular
How it periods, known as the coupon. This makes bonds a fixed-income asset.
works Once the bond expires, you'll get back to your original investment. The day on which you get your
original investment back is called the maturity date. Different bonds will come with different
maturity dates - you could buy a bond that matures in less than a year, or one that matures in 30
years or more.

Say, for instance, that you invested A$10,000 into a 10-year government bond
Example with a 5% annual coupon. Each year, the government would pay you 5% of
your A$10,000 as interest, and at the maturity date they would give you back 50%
your original A$10,000.
THE MONETARY POLICY
CHANGES IN THE RATE OF INTEREST
When a central bank alters the rate of interest it charges to
commercial bank, those banks are likely to raise the rate
they charge to their customers.
IMPACT: Such a rise in the rate of interest is likely to
reduce aggregate demand by lowering consumer spending
and investment. It will do this in three ways:
1. Any household or firm who have borrowed in the past
will have to pay more interest on their loans. This will
reduce the amount of money they have to spend.
2. It will make borrowings more expensive for households
and firms to finance their spending as they will have to
pay more for any new loans they take out.
3. Higher interest rate will increase the incentive to save.
THE MONETARY POLICY
CHANGES IN THE EXCHANGE RATE
A government may instruct its central bank to change
directly the country’s foreign exchange rate or to try
influence it to move in a particular direction. A government
may want the price of the exchange rate to fall, for example:
encourage a rise in exports.
Thank you
Any Questions!

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