Unit 3.5 - Demand Management (demand-side policies): Monetary Policy
What you need to know and understand:
Key concepts:
Concepts to understand:
- Monetary policy
- Control of money supply and interest rates by the central bank
- Control of money supply and interest rates by the central bank
- Goals of monetary policy
- Low and stable rate of inflation
- Inflation targeting
- Low unemployment
- Reduce business cycle fluctuations
- Promote a stable economic environment for long-term growth
- External balance
- Low and stable rate of inflation
- The process of money creation by commercial banks [HL only]
- Tools of monetary policy [HL only]
- Open market operations
- Minimum reserve requirements
- Changes in the central bank minimum lending rate (base rate/discount rate/refinancing rate changes)
- Quantitative easing
- Open market operations
- Demand and supply of money—determination of equilibrium interest rates [HL only]
- Real versus nominal interest rates
- Expansionary and contractionary monetary policies to close deflationary/recessionary and inflationary gaps
- Effectiveness of monetary policy
- Constraints on monetary policy, including:
- limited scope of reducing interest rates, when close to zero
- low consumer and business confidence
- limited scope of reducing interest rates, when close to zero
- Strengths of monetary policy, including:
- .incremental, flexible and easily reversible
- short time lags
- .incremental, flexible and easily reversible
- Strengths and limitations in promoting growth, low unemployment, and low and stable rate of inflation
- Constraints on monetary policy, including:
Key concepts:
- Scarcity
- Choice
- Efficiency
- Equity
- Economic well-being
- Sustainability
- Change
- Interdependence
- Intervention
Concepts to understand:
- Government intervention attempts to achieve macroeconomic objectives through a choice of policies.
- Political, economic, social and environmental factors are interdependent and will influence the effectiveness of government policies.