MONETARY POLICY

 FISCAL POLICY -Government spending -Changing the level of taxes

- INTEREST RATES: ⬆️economic activity ⬇️interest rate NEGATIVE RELATIONSHIP

Reduce the interest rate so money will become cheaper and more will flow through the economy and
more business will invest and vice versa.

- MONEY SUPPLY: ⬆️
️ E. activity ⬆️money supply (literal amount of cash available in the economy)

PRICE STABILITY

-Conversely, if prices rise substantially and unpredictably money buys fewer goods and services.

MONETARY POLICY and EXCHANGE-RATE REGIMES

*The policy you prefer depends a lot on how much import and export are of your GDP so if you don't
buy or sell things allowed from their country it's not going to affect you much but if you do the exchange
rate is super important

Hard pegs- No flexibility movement

Floating regimes- imply free movement of a currency’s price relative to other currencies.

1.fixed-exchange-rate - the government manipulates the value of a country's currency.

2. floating rates - changes based on market forces

3. managed float - no particular exchange rate

4. wider band system - exchange rate is allowed to float or fluctuate within a predefined band

5. crawling peg – the level of exchange rate or band can be adjusted periodically.

6. adjustable peg - Closest to a fixed-exchange-rate system, the exchange rate is fixed, but has the right
to change rate when necessary.

*Some countries go much further than fixing the exchange rate, so they adopt the currency of another
country. Which is called DOLLARIZATION.

Most economists believe that currency boards and dollarization are appropriate in only a very
limited number of developing countries that are small, very open to trade, and not vulnerable to large
commodity price swings.

SOURCES OF INFLATION

1. Demand-pull inflation – Cut Interest Rate, Money Supply

2. Cost-push inflation – For example, higher oil prices feeding through into higher costs.
3. Rising wages – ⬆️firm's costs ⬆️demand ⬆️price level
4. Devaluation – ⬆️cost of imported goods, ⬆️price level
5. Higher taxes- ⬆️prices ⬆️CPI.
6. Expectations of inflation – ⬆️expectations ⬆️demand wage ⬆️price level
*Changes in the M can occur either through expansion of DC or by monetary movements that lead to
changes in IR.
* Again, a small country with fixed exchange rates can do little to maintain its inflation rate below that of
the rest of the world.

CONTROLLING INFLATION THROUGH MONETARY POLICY

(1) OPEN-MARKET OPERATIONS – buying & selling

(2) INCREASES IN LEGAL RESERVE REQUIREMENTS OF BANKS

The amount of money banks must always keep in their vaults usually it's around 20% of all deposits. The
required reserve ratio for example declined to 10%, the 10% more will flow in economy.

(3) INCREASES IN REDISCOUNT RATES, bank borrowing less attractive.

(4) MORAL SUASION, or pressure under this, the commercial banks are advised by central bank to follow
its directives to restrict loans during inflation and to be liberal in lending during deflation.

(5) CREDIT CEILINGS - refers to central banks fixes credit quotas for different business activities

(6) RATES OF INTEREST

RESERVE REQUIREMENTS *Even small changes in the required ratio of reserves to deposits can have a
very disruptive impact on commercial bank operations, unless banks are given sufficient time to adjust.

CREDIT CEILINGS - the maximum amount that a person, company or entity can borrow.

INTEREST-RATE REGULATION AND MORAL SUASION

*Consists jawboning as it uses position to pressure someone to follow policy

INTERNATIONAL DEBT AND COMBATING RECESSIONS

A stimulus package is a coordinated effort to increase government spending—and lower taxes and
interest rates—to stimulate an economy and lift it out of a recession or depression.

Based on Keynesian economics principles, the goal is to increase aggregate demand through increased
employment, consumer spending, and investment.