...Chapter 15 Monetary Policy Xingfei Liu, Ryerson University Interest Rates and Monetary Policy 15 LEARNING OBJECTIVES LO15.1 Discuss how the equilibrium interest rate is determined in the market for money. LO15.2 List and explain the main functions of the Bank of Canada. LO15.3 List and explain the goals and tools of monetary policy. LO15.4 Describe the overnight lending rate and how the Bank of Canada directly influences it. LO15.5 Identify the mechanisms by which monetary policy affects GDP and the price level. LO15.6 Explain the effectiveness of monetary policy and its shortcomings. LO15.7 Describe the effects of the international economy on the operation of monetary policy. 2 15.1 The Market for Money and the Determination of Interest Rates 3 KEY GRAPH - The Demand for Money, the Supply of Money, and the Equilibrium Interest Rate FIGURE 15-1 (a) Transactions demand for money, Dt (c) Total demand for money, Dm and supply (b) Asset demand for money, Da Rate of interest, i percent 10 7.5 Sm 5 + 2.5 = 5 0 Dt 50 100 150 Da 200 Amount of money demanded (billions of dollars) 50 100 150 200 Amount of money demanded (billions of dollars) Dm 50 100 150 200 250 300 Amount of money demanded and supplied (billions of dollars) ...
Words: 2538 - Pages: 11
...FED: Tools That Change the Money Supply Maggie Ensor Principles of Macroeconomics: ECO 203 Melvin Landry December 10, 2012 In this writing, I intend to inform you of the three tools used by the FED, to manipulate the direction of the economy. Further, I will explain how the FED can use these tools to influence, and better yet, get the economy out of a recession. First, to explain this properly, I need to define to you, Monetary Policy. Monetary policy refers to what the FED does to influence the amount of money and credit in the U.S. economy. What occurs with money and credit affects interest rates, and affects how the U.S economy performs. [2] www.federalreserveducation.org The goals of monetary policy are to promote maximum employment and stable prices; in doing so, supporting conditions for long-term economic growth and long-term maximum employment. [2] Alright, now that you understand monetary policy, I can explain to you, the three tools of monetary policy that the FED uses to manipulate the money supply in the U.S. economy. The first tool we will discuss is, “open-market operations.” Open-market operations are made up of the buying and selling of government securities from large banks and security dealers, thereby increasing the money supply in the hands of the public. [3] http://www.investopedia.com In an open-market, the FED doesn’t determine, by itself, which securities it will do business with. The choice comes from the open-market in which various...
Words: 1098 - Pages: 5
...Contents Introduction 1 I. Structure of State Bank in Vietnam 2 1. History of State bank in Vietnam 2 2. Structure of State Bank in Vietnam 3 II. Operation of State Bank in Vietnam: 9 1. Monetary tools that State Bank use to moderate the Economics: 9 1.1. Open-market operation: 9 1.2. Discount, rediscount tool: 10 1.3. Required reserve: 11 1.4. Frame of interest rate 12 1.5. Selective credit control: 13 1.6. Imposing credit limit: 13 1.7. Supply fiat money: 13 2. How State Bank in Vietnam applied these tools in its activities ? 14 2.1. 2008 Monetary policies 14 2.2. Monetary policies in 2009 15 2.3. 2010 monetary policies 16 3. Comparison between State Bank of Vietnam and Federal Reserve (FED) 17 Conclusion 21 Reference 22 Introduction The State Bank of Vietnam is the central bank in Vietnam, which is a state agency management of currency in Vietnam. This is the agency responsible for issuing currency, managing monetary policy and advise the relevant currency for the government such as issuing currency, exchange rate policy, interest rate policy, management of foreign exchange reserves, the draft bill on banking and credit institutions, to consider the establishment of banks and credit institutions, management of state-owned commercial banks. Established in 1951 under the name National Bank and renamed in 1960, the State Bank of Vietnam has gradually grown and developed, contributing important role in building and...
Words: 4834 - Pages: 20
...Monetary Policy Exercise Part I: The Three Main Tools of Monetary Policy 1. How would the Fed use the three monetary policy tools to pursue an expansionary policy and a contractionary policy? Monetary Tool Expansionary Policy Contractionary Policy Open Market Operations Discount Rate Reserve Requirement________________________________________ 2. Circle the correct symbol (⇑ for increase or ⇓ for decrease). What would happen to the money supply and interest rates if the Fed… a. purchased government securities on the open market? Money Supply ⇑ ⇓ Interest Rates ⇑ ⇓ b. raised the discount rate? Money Supply ⇑ ⇓ Interest Rates ⇑ ⇓ c. lowered the reserve requirement? Money Supply ⇑ ⇓ Interest Rates ⇑ ⇓ 3. With an easy money policy (expansionary monetary policy), the equilibrium supply of money(increase/decrease) while interest rates ________________. The (higher/lower) interest rates should cause investment expenditures to __________, this change in investment spending will cause Aggregate Demand to (increase/decrease). Therefore, an easy money policy is consequently appropriate for countering a(an) _______________ gap. 4. If a bank received a deposit of $10,000 when the reserve requirement is 25%,how much… a) will it hold as required reserve? __________ b) will it have in excess reserves? __________ c) is the money multiplier? __________ d) will total deposits in the entire banking system rise? __________...
Words: 556 - Pages: 3
...Contents 3 1. Introduction 4 2.1. Expansionary Monetary Policy 5 2.2. Contractionary Monetary Policy 6 2. Overview of the United States Monetary Policy 7 2.1 Overview of Recent United States Monetary Policy 8 3. Recent (2011) Direction of Monetary Policy 10 4. Market Reaction to Monetary Policy 12 5. Conclusion 15 6. Reference List 16 1.0 Introduction In macroeconomics, monetary policy is an importance tool to Central Bank and is a policy set by the members of Central Bank. It is an economic strategy chosen by government that authorizes Central Bank to regulate and influence the economic activity by controlling the monetary base flow into national economy. The goals of monetary policy are to promote growth of the economy, stability of prices and reduce unemployment rate. Monetary policy can be classified into two categories, namely expansionary monetary policy and contractionary monetary policy. Although, the objective for the two policies is the same, they adopt different approaches in reaching this objective. Expansionary monetary policy is used when a country is facing a recession in the economy business cycle, whereby it increases the money supply in economy system to meet its objectives. In contrast, where there is a peak in the economy business cycle, central bank will use contractionary monetary policy to reduce the money supply in economy system...
Words: 3702 - Pages: 15
...EFFECT OF MONETARY POLICY ON THE ECONOMY OF PAKISTAN Submitted To: Sir Ahsan Shakil GROUP MEMBERS: ZIAD ASGHAR B-16703 WALEED BIN AAMIR B- 18992 SAIF UD DIN AHMED B-18993 EFFECT OF MONETARY POLICY ON THE ECONOMY OF PAKISTAN What is Monetary Policy? Monetary policy is how central banks manage the money supply to guide healthy economic growth. This policy is adopted by the central bank of an economy in order to control and regulate the money supply often altering or interest rate to ensure price stability and general trust in the currency. It also deals with the both the lending and borrowing rates of interest of the banks. Objectives of Monetary Policy: 1) Price Stability or Control of Inflation: Monetary policy is better suited to the achievement of price stability that is, containing inflation. Price stability means reasonable rate of inflation. 2) Economic Growth: It is the most important objective of a monetary policy. The monetary policy can influence economic growth by controlling real interest rate and its resultant impact on the investment. 3) Full Employment: Full employment has been ranked among the foremost objectives of monetary policy. It is an important goal not only because unemployment leads to wastage of potential output, but...
Words: 936 - Pages: 4
...CONTENTS A. GENERAL OF MONETARYPLICY | 2 | 1. Concept | 2 | 2. The purpose of monetary policy | 2 | a. Price stability | | b. Ensure full employment | | c. Economic Growth | | 3. Tools of monetary policy | 3 | a. Open market operation | | b. Obligatory reserves | | c. Rediscount policy | | 4. Types of monetary policy | 4 | B. MONETARY POLICY IN VIETNAM (2008-2012) | 5 | 1. Monetary in 2008-2009 | 5 | 2. Monetary in 20010 -2011 | 11 | 3. Monetary in 2012 | 12 | A. GERNERAL OF MONEYTARY POLICY 1. Concept Monetary policy is one of economic policy that is proposed and implemented by the central bank with aims to stabilize prices, promote economic growth and create jobs in the society. Essence of monetary policy is specified measures to impact on the money supply in the economy. 2. The purpose of monetary policy Purpose of monetary policy is price stability, promote economic growth and create jobs in the society. These targets are close relationships; support each other, not separated. However, to achieve these goals in a harmonized manner, the central bank should coordinate monetary policy with other policies, such as fiscal policy, income policy, etc... a. Price stability Price stability is the primary objective of monetary policy and long-term goals, the empirical process showed stable to stable prices, the value for money, stable currency value is stable the purchasing power...
Words: 3879 - Pages: 16
... On “Monetary Policy of Bangladesh” Course Code: MBA 510 Course Title: Macro Economics Submitted to: Professor Abdul Bayes Department of Business Administration East West University Submitted by: Minhajul Abedin ID: 2013-1-95-019 Section: 01 Date of submission: 24 august, 2013 Monetary Policy of Bangladesh Decisions regarding the monetary policy are very important for any country in today’s world. To control the supply of money by targeting a rate of interest, and to promote the economic growth and stability, a good control over the monetary policy is a must for every country. Bangladesh is a developing country and its monetary policies are generated by the central bank of the country. Though the land size of Bangladesh is not that big but in terms of total people, it is a big country relative to other countries. As a developing country it is undertaking so many developments and business projects both publicly and privately. The monetary policy of Bangladesh is playing a pivotal role to control the money supply of the country which in turn is promoting the overall economic growth of the country. This essay briefly discusses about some of the activities of the central bank related with the monetary policy of Bangladesh along with some other primary things which are related to the basic monetary policy. In this essay the “Monetary Policy of Bangladesh” will be presented by following this sequence, 1. A brief overview of monetary policy 2. Objectives...
Words: 3405 - Pages: 14
...PTER 16 Tools of Monetary Policy Roadmap 2 Market for reserves and federal funds rate Demand and Supply (Partial) Equilibrium Comparative Static Analysis Introduction to monetary policy tools Conventional tools Unconventional tools Hyung Sun Choi, Kyung Hee University Market For Reserves & Federal Funds Rate 3 Demand and Supply in the Market for Reserves What happens to the quantity of reserves demanded by banks, holding everything else constant, as the federal funds rate changes? Fed Funds Rate: the interest rate on overnight loans of reserves from one bank to another. The primary instrument of monetary policy Hyung Sun Choi, Kyung Hee University Demand for Reserves, 4 d R Rd = required reserves + excess reserves Since the fall of 2008 the Fed has paid interest on reserves at a level set at a fixed amount below the federal funds rate target. Excess reserves are insurance against deposit outflows The cost of holding these is the interest rate that could have been earned minus the interest rate on reserves, ior Hyung Sun Choi, Kyung Hee University When the federal funds rate is above ior as the federal funds rate decreases, the opportunity cost of holding excess reserves falls and the quantity of reserves demanded rises Downward sloping demand curve that becomes flat (infinitely elastic) at ior 5 Hyung Sun Choi, Kyung Hee University Supply in the Market for...
Words: 1254 - Pages: 6
...of the term paper Monetary Policy Reason of publishing 04 Types of Monetary Policy 05 Monetary Policy in Bangladesh 06 Tools & Strategy of Monetary Policy 06 Major tools used by Bangladesh Bank 07 Policy Target 12 Limitations of Monetary Policy 13 Findings of the study Chapter-03 03 Scope & Objective of Monetary Policy Chapter- 02 03 14 Conclusion 14 Bibliography 14 Chapter- 01 Introduction “Monetary policy is the process by which the monetary authority of a country controls the supply of money, often targeting a rate of interest for the purpose of promoting economic growth and stability. The official goals usually include relatively stable prices and low unemployment. Monetary theory provides insight into how to craft optimal monetary policy. It is referred to as either being expansionary or contractionary, where an expansionary policy increases the total supply of money in the economy more rapidly than usual, and contractionary policy expands the money supply more slowly than usual or even shrinks it. Expansionary policy is traditionally used to try to combat unemployment in a recession by loIring interest rates in the hope that easy credit will entice businesses into expanding. Contractionary policy is intended to slow inflation in hopes of avoiding the resulting distortions and deterioration of asset values. In this report I tried to show that how monetary policy is related to the economy...
Words: 3927 - Pages: 16
...Monetary Policy After the IT bubble which is ended in late 2001, the recovery in the US is quite slow and economists are worry about the possible coming decline in inflation. The US started to take the aggressive monetary policy. According to chart 1, we can figure out that the target federal funds rate decline during this period. In the meantime, the low interest rate trigged the investment. A good case in point is the housing market. From the chart 2, we noticed that the housing price rising quickly during the late 1990s. Prices grew at a 7 to 8 percent annual rate in 1998 and 1999, and in the 9 to 11 percent range from 2000 to 2003. On the other hand, the most rapid price gains were in 2004 and 2005, when the annual rate of house price appreciation was between 15 and 17 percent. All of this is the blasting fuse of the real estate bubble. So for this reason, many people blame the 2008 crisis for the monetary policy which is taken after the IT bubble. However, if we put two charts together, in chart 3, we can figure out some confliction between the federal funds rate and the housing price, especially during the 2004 and 2005. It seems like there is no relationship between the monetary policy and the crisis in 2008. All of this can be tell by the “Greenspan Conundrum”. The main point here is that comparing with the federal funds rate, the housing prices rely more on the long-term mortgage rate. During this year, the shot-term improved interest rate don’t generate higher long...
Words: 2416 - Pages: 10
...Canada responsible for conducting fiscal and monetary policy, name the Department of Finance and the Bank of Canada. What are the roles of each and what are each responsible for obtaining? What are the responsibilities of each institution and what tools do they have at their disposable to impact the economy? Can you say that their objections are in tandem with one another or due they sometimes conflict? Please explain. tools available to the Federal government in managing the economy -- Fiscal and Monetary Policy Legislative Overview In Canada, the monetary policy is conducted by the Bank of Canada in which the government owned organization function with considerable independence from the federal government but is accountable to the parliament. Monetary policy in Canada is set by non-elected officials at Bank of Canada. Other decisions regarding the level of government revenue and expense is part of fiscal policy which is made by the Government of Canada with the approval of the parliament of Canada, as result monetary and fiscal policies are governed independent of each other (Frigon, 2010). The role of monetary policy is to preserve the value of capital by keeping inflation low, stable and foreseeable. This allows Canada to make spending and investment decisions with confidence, encourages long-term investment in Canada and contributes to better job openings and greater productivity with a better standard of living. Monetary policy in Canada has three characteristics: *...
Words: 1686 - Pages: 7
...In a free market society where firms and households shape the economy, government intervention can significantly contribute to economic stability and improve current economic outcomes. The successful use of government policy tools is evident through an examination of environmental economics, monetary policy and the labour market. With regards to the environment and the labour market, the government have made use of taxes, permit trading systems, general regulations and transfer payments to influence economic outcomes in each of these respective fields. By studying monetary policy it is also apparent that control over the interest rate mechanism is another effective tool used by policymakers to enhance the present and future economic circumstances of a nation. As society continues to expand, the quality of the environment is beginning to deteriorate. Governments to prevent this from occurring and to avoid market inefficiency, can help the economy through policy tools such as enforcing taxes and regulating pollution permit trading systems. As shown in Figure 1 below, market equilibrium (Me) on its own is inefficient because it does not take into consideration the negative externalities that arise during production and does not account for a lack of incentive by firms to incorporate additional production costs. The implications of market failure will mean that a society will not be allocative efficient and as a result output will be greater than it what it should be (Q0 instead...
Words: 1261 - Pages: 6
...RBI & Its Monetary Policies Table of Contents NO. | Particulars | 1. | Introduction of RBI | 2. | Monetary policy | 3. | Monetary policy objectives | 4. | Monetary policy functions | 5. | Operations of Monetary policy * Quantitative credit control * Selective or qualitative methods | 6. | Operating procedures of Monetary policy * Liquidity adjustment facility (LAF) * Market stabilization scheme | 7. | Monetary policy tools | 8. | Recent changes in Monetary policy | 9. | Evaluation of Monetary policy | 10. | Limitations | 11. | Conclusion | 12. | Bibliography | 13. | | 14. | | 15. | | 16. | | INTRODUCTION OF RBI The central bank of the country is the Reserve Bank of India (RBI). It was established in April 1935 with a share capital of Rs. 5 crores on the basis of the recommendations of the Hilton Young Commission Reserve Bank of India was nationalized in the year 1949. The general superintendence and direction of the Bank is entrusted to Central Board of Directors of 20 members, the Governor and four Deputy Governors, one Government official from the Ministry of Finance, ten nominated Directors by the Government to give representation to important elements in the economic life of the country, and four nominated Directors by the Central Government to represent the four local Boards with the headquarters at Mumbai, Kolkata, Chennai and New Delhi. Local Boards consist of five members each Central Government...
Words: 6452 - Pages: 26
...p ter 17 Tools of Monetary Policy In the chapters describing the structure of the Federal Reserve System and the money supply process, we mentioned three policy tools that the Fed can use to manipulate the money supply and interest rates: open market operations, which affect the quantity of reserves and the monetary base; changes in discount lending, which affect the monetary base; and changes in reserve requirements, which affect the money multiplier. Because the Fed’s use of these policy tools has such an important impact on interest rates and economic activity, it is important to understand how the Fed wields them in practice and how relatively useful each tool is. In recent years, the Federal Reserve has increased its focus on the federal funds rate (the interest rate on overnight loans of reserves from one bank to another) as the primary indicator of the stance of monetary policy. Since February 1994, the Fed announces a federal funds rate target at each FOMC meeting, an announcement that is watched closely by market participants because it affects interest rates throughout the economy. Thus, to fully understand how the Fed’s tools are used in the conduct of monetary policy, we must understand not only their effect on the money supply, but their direct effects on the federal funds rate as well. The chapter thus begins with a supply-and-demand analysis of the market for reserves to explain how the Fed’s settings for the three tools of monetary policy determine the federal...
Words: 9295 - Pages: 38
