Notes for 3.5.1 Monetary policy - IB | RevisionDojo
3.5.1 Monetary policy Notes
Definition
Monetary Policy
Monetary policy refers to the adjustments of the interest rates and the availability of money in the economy set by the centralbank.
Centralbanks use monetarypolicies to reach macroeconomic objectives. These policies can include:
Control the money supply
Adjustment of interest rates
Note
Monetary policy is a demand-side policy, as it affects the aggregate demand of an economy by influencing the interest rates and money supply.
Role of Central Bank
The central bank is a financial institution that is responsible for:
Regulating the country's financial system and commercial banks.
Supervising and monitoring commercial banks to ensure rules are being followed.
Carrying outmonetary policies.
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Questions
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Question 1
Recap question
A major commercial bank is engaging in excessively risky lending practices. Which institution and role should step in to correct this behavior?
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Note
Monetary policy is a crucial tool used by governments to manage their economies. It involves controlling the supply of money and the cost of borrowing money (interest rates) in an economy.
Monetary policy refers to the actions taken by a country's central bank to control the money supply and interest rates.
It aims to achieve specific economic goals like stable prices, low unemployment, and economic growth.
Think of monetary policy like a thermostat for the economy - adjusting the money supply and interest rates to keep economic conditions just right.
DefinitionMonetary PolicyThe process by which a central bank controls the money supply and interest rates to achieve economic objectives.
AnalogyJust like how a thermostat maintains a comfortable room temperature by adjusting heating or cooling, monetary policy maintains economic stability by adjusting money supply and interest rates.
