Study Unit 13 Monetary Policy
Contents
A. Options for Holding Wealth Physical Assets Financial Securities Liquid Money – Cash
Page
230 230 231 231
B.
Liquidity Preference and the Demand for Money
232
C.
Implications of the Interest Sensitivity of the Demand for Money Interest Rates and Demand for Goods and Services Classical and Monetarist View The Keynesian View of Interest Rates and Expenditure Implications of the Differences
234 234 235 235 235
D.
Changes in Liquidity Preference
237
E.
The Quantity Theory of Money and the Importance of Money Supply The Money Equation Diagrammatic Representation of the Quantity Theory of Money
238 238 238
F.
Methods of Controlling the Supply of Money Interest Rate Control Control over Banking Ratios Direct Controls over Banks Control of Government Borrowing
Objectives
The aim of this unit, in conjunction with Study Unit 12, is to explain and evaluate the effectiveness of monetary policy in a closed and open economy and discuss the possible impact of monetary policy on business decision-making. When you have completed this study unit and Study Unit 12 you will be able to: demonstrate an understanding of the relationship between the banking system and the creation of money identify the components of the high-powered money stock and explain why these have a magnified impact on the money supply explain the quantity theory of money and its role in explaining the rate of inflation discuss the components of monetary policy and explain how they work evaluate the factors that determine the effectiveness of monetary policy compare and contrast the relative effectiveness of fiscal and monetary policy.
