Ib macroeconomics SL - monetary policy

Monetary policy

The use of interest rates and other monetary tools by a central bank to influence the level of aggregate demand and economic activity in an economy.

Central bank

The institution responsible for conducting monetary policy, regulating the financial system, and serving as a banker to commercial banks and the government.

Interest rate

The price of borrowing money or the return on savings, usually expressed as a percentage per year.

Expansionary monetary policy

A decrease in interest rates and/or an increase in the money supply aimed at increasing aggregate demand to close a deflationary (recessionary) gap.

Contractionary monetary policy

An increase in interest rates and/or a decrease in the money supply aimed at decreasing aggregate demand to close an inflationary gap.

Base rate

The interest rate set by the central bank that serves as a benchmark for other interest rates in the economy.

Money supply

The total amount of money circulating in an economy, including cash, deposits, and other liquid assets.

Transmission mechanism

The process by which changes in interest rates affect aggregate demand and output through effects on consumption, investment, and net exports.

Inflation targeting

A monetary policy framework in which the central bank sets an explicit target for the inflation rate and adjusts interest rates to achieve it.

Deflationary spiral

A situation where falling prices lead to lower consumer spending and investment, causing further decreases in aggregate demand and prices.

Liquidity trap

A situation in which interest rates are very low and savings rates are high, making monetary policy ineffective in stimulating aggregate demand.

Monetary policy lag

The delay between a change in monetary policy and its observable effects on the economy.

Time lags (policy)

The period between the implementation of a policy and the resulting changes in economic variables; monetary policy often experiences long time lags.

Financial stability

The condition in which financial institutions and markets operate smoothly without excessive volatility or risk of crisis.