Overview of Monetary Policy

What are demand-side policies?

• They aim to shift aggregate demand in an economy

• There are two categories of demand-side policies - monetary and fiscal policy

What is monetary policy?

• Monetary policy involves adjusting interest rates and the money supply so as to influence AD

  • Central Banks are usually responsible for setting monetary policy

  • Central Bank committees usually meet 4-8 times a year to set policy

What are the goals of monetary policy?

It is used to help the government achieve their macroeconomic objectives.

• A low and stable rate of inflation

• Low unemployment

• Reduce business cycle fluctuations

• Promote a stable economic environment for long-term growth

• To control the level of exports and imports

What are nominal interest rates?

• The nominal interest rate is the headline rate presented by commercial banks

• There has been no adjustment to the interest rate based on the rate of inflation

What are real interest rates?

• The real interest rate is the nominal interest rate minus the rate of inflation

What is expansionary monetary policy?

• Used to generate further economic growth

• Policies include reducing interest rates, increasing QE, or depreciating the exchange rate