UNIT 12 Monetary Policy

Reserve requirementDiscount rate Open market operations The central bank’s control over the supply of money Expansionary monetary policy Restrictive monetary policy...  Expansionary MP

UNIT 12: MONETARY POLICY

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Giảm bớt Khoản chi tiêu

Dự trữ bắt buộc Chứng khoán Thị trường sơ cấp

Tổng cầu

Hạn chế Tài sản

Reserve requirement

Discount rate

Open market operations The

central bank’s control over the supply of money

Expansionary monetary policy

Restrictive monetary policy

 Firstly, it talks about quantitative tools of

monetary policy

There are 3 tools of monetary policy:

1. Reserve requirement:

 the reverse requirement is the percentage

the Fed sets as the minimum amount of

reserves as bank must have

The reserve requirement play a central role in how much money banks have to lend out

1. Discount rate: it is the rate of interest the

Fed charge for those loans

2. Open market operations: it means the Fed’s

buying and selling Gov securities

 Secondly, the central bank’s control over

the supply of money There are two kinds of monetary policy.

 Expansionary MP:

o It may be used to increase money supply by reducing reserve requirement, discount rate and buying more bonds It will result in a

rightward shift of the aggregate demand.

 Restrictive:

o it may be used to cool an overheating

economy by increasing reserve

requirement, discount rate and selling more bonds it will curtail investment,

consumption, and even Gov expenditure.

III Short Questions

1 What is Monetary Policy?

Monetary Policy is a

government policy related to a nation’s money supply by each country’s Central Bank.

2 How many tools of monetary policy?

There are 3 tools of monetary policy:

Reserve requirement

Discount rate

Open market operations.

3 What is called reserve

requirement?

Reserve requirement is the percentage the Fed sets as the minimum amount of reserves as bank must have.

4 What determines the amount

banks hold as reserves?

It is the Fed's reserve

requirements.

5 What is the central role of the

reserve requirements?

The reserve requirement play

a central role in how much money banks have to lend out.

6 What is the discount rate?

The discount rate is the

interest rate that the Fed charges when it lend money to the bank.

7 What are open market

operations?

It is the Fed’s buying and

selling government security.

8 How can the Central Bank shift Aggregate demand?

By making more or less

money available, the Central Bank can shift aggregate demand.

9 What can the Central Bank do to reduce aggregate demand?

They can increase reserve

requirements, raise discount rate

or sell bonds.

IV LONG QUESTIONS

1 what are the quantitative tools of monetary policy? The quantitative tools of monetary policy include reserve requirement, discount rate and open market operations.

By changing the reserve requirements, discount rate the Fed can increase or decrease the money

borrow from the Fed and vice versa.

For day – to – day Fed operations, the Fed used a third tool: open market operations

To expand the money supply, the Fed buys bonds

To contract the money supply, the Fed sells bonds.

2 What is the difference between

monetary policy and fiscal policy?

There are several differences

here.

Monetary policy controls a nation's

money supply which is supervised by

each country's Central Bank while fiscal policy is related to government's

revenue and spending which is in the

hand of Ministry of Finance.

3 main tools of monetary policy are

reserve requirements, Discount rate and open market operations On the other

hand, fiscal policy uses taxation and

government spending as its 2 main

tools.

3 What is the relationship between

monetary policy and fiscal policy?

They have an interdependent and

complement relationship since they are

many overlapping issues between the two

fields

For example, if Gov decide to institute

expansionary fiscal policy, they reduce taxes

or increase their expenditure, so that a large amount of money will be supplied and

aggregate demand will rise consequently As

a result, Gov have to use restrictive

monetary policy to reduce the inflation rate

4 What is the difference between

expansionary monetary policy and

restrictive monetary policy?

There are some differences here.

 Expansionary monetary policy is used

to increase the amount of money

supply, whereas restrictive one is used

to decrease it.

Expansionary one can increase bank lending capacity while restrictive one will decrease it.