Monetary policy, ‘The government’s policy relating to the money supply, bank interest rates, and borrowing’ (Collin: 130), is another tool available to the government to control inflation. Figure 4 shows, that by increasing the interest rate (r), from r1 to r2, the supply of money (ms) is reduced from Q1
The monetarist including Milton Friedman surely agreed that the demand for money depends on interest rate, they also sure that Fiscal policy at least government
Monetary Policy is the procedure by which the financial expert of a nation, similar to the national bank or cash board, controls the supply of money. Regularly focusing on a inflation rate or interest rate to guarantee value solidness and general trust in
(1) Explain what the Stable-Monetary-Unit Assumption is (10 points) and (2) provide an example of its application. (10 points)
Basically, in the monetary policy, there are two broad categories. These are the expansionary and contractionary. On the general view, the expansionary policy functions to increase the money supply. This is mostly with the view of reducing the unemployment levels in the country. On the other hand, the contractionary monetary policy serves to slow the rate at which the money supply grows. This is usually in an effort to reduce inflation rates in the country. For these policies to work, however, they must be implemented. For these, there are generally about three ways of implementing the policies. These are termed as tools and they basically include the open market operations, the discount rate and the reserve requirements(Langdana, F. K. p.67)
d) What two assumptions are included in calculating the maximum change in the money supply
For as long as money has existed, governments have sought to control its supply for their own benefit. The ancient Romans, for instance, regularly debased their coins so that, by the end of the 3rd century AD, the actual content of silver had declined to less than 5% purity. The debasement of and inflation of the money supply has historically been a tool of governments to expand their power. In conventional economics, which this paper will assume as a positive background in defending the feasibility of a sound money amendment, the result is a redistribution of real wealth from savers to the government, the banking and finance system, and other
In order to fully grasp the meaning of this statement an understanding of the money supply is necessary. The money supply is defined as the sum of the total circulation of money in the economy including deposits at chartered banks. Monetary economists share the view that there is a direct relationship between the money supply and the average price level of the economy; primarily, an increase in the money supply will cause prices (inflation) to rise. “At the end of 1969 money supply stood at about $28 billion. By the end of  the supply had soared by more than 70 percent to about $48 billion” (Corcoran, 1974). It is this rapid increase in the money supply that resulted in inflation rates as high as 10% in 1974. Table 1 contains data on the percentage increase in the money supply and the percentage increase in the Consumer Price index (CPI) from 1962 to 1973. “The Consumer Price Index (CPI) is an indicator of changes in consumer prices experienced by Canadians. It is obtained by comparing, over time, the cost of a fixed basket of goods and services purchased by consumers” (Statistics Canada, 2015). The table depicts a link between money supply and prices; where the change in the growth of the money supply in one year has an effect on the CPI the following year. For example, the rate
IS-LM model can be used to show the effect of expansionary and tight monetary policies. A change in money supply causes a shift in the LM curve; expansion in money supply shifts it to the right and decrease in money supply shifts it to the
Central banks use a money based policy to minimize inflation. They have diverse ways that they do this. For example, the most common way is by raising the rates of the interest and selling securities through open operations in the market. The use of a multiplication of related money within a policy to lower unemployment and avoid the period where people and businesses make less money. The lower the rates of interest will only buy securities from different banks and cause liquidity to increase. In a perfect world, a money based policy should work beside with the national government's policy. However, it rarely works this way. That's because government leaders get re-elected for decreasing taxes and expanding spending. This would mean rewarding people that actually vote and obtain series of actions to reach a goal of contributors that result in a direct, but in an upsetting way. As a result, a policy like a Monetary Policy is usually involves expansion related topics. However, to avoid a great inflation, the policy must be serving to severely limit or control
Friedman Rule was proposed by Milton Friedman in 1969. This rule is about monetary policy. “Money” is anything that generally accepted as payment for goods and service, but it is costless to provide. So, money is valuable for consumers and businesses (Rognlie,2011).
1) The choice of the average inflation rate and a corresponding average rate of money growth in the medium term; and
This essay will explain and illustrates the key mechanism behind the money multiplier and explore how monetary authorities can influence its size and affect the money supply in the economy. Firstly, an introduction on money measure will be presented. Secondly, the mechanism behind money multiplier will be presented by using equations to explain the cyclical changes in the multiple factor. Thirdly, the examination of the money multiplier in the current economic climate will be put forward. Fourthly, an explanation on the open market operation, discount window and the reserve ratio will be presented to convey the influence in the size of money supply. Finally, this essay will conclude with an overview of the essay.
In Friedman’s monetarist construct of money has two side that is highly active. One of the side is money is being the cause of all failures and asymmetries in the economy (in the short term). The other side is neutral which money is influencing only the price level (in the long term). The nominal quantity of money is determined by its supply. On the other hand, the real volume of the money stock is expressed in the amount of goods and services that can be acquired for a given nominal amount of money and is conditioned by the demand for money, which is directly related to the price level.
| Advocates of active monetary and fiscal policy view the economy as inherently unstable and believe that policy can manage aggregate demand, and thereby, production and employment, to offset the inherent instability. When aggregate demand is inadequate to ensure full employment, policymakers should boost government spending, cut taxes, and expand money supply. However, when aggregate demand is excessive, risking higher inflation, policymakers should cut government spending, raise taxes, and reduce the money supply. Such policy actions put