Monetary economics

Chapter one
understand money and monetary policy

1. Money: Money is a widely accepted medium of exchange that facilitates transactions in an economy.
It can take various forms, such as physical currency (coins and notes) and bank deposits. The chapter
may discuss the functions of money, its characteristics, the types of money (e.g., fiat money, commodity
money), and its role in the economy.

2. Monetary Policy: Monetary policy refers to the actions taken by a central bank or monetary authority
to manage and control the money supply and interest rates in an economy. The primary objective of
monetary policy is to achieve price stability, promote economic growth, and maintain financial stability.
The chapter may explore the tools and instruments used in monetary policy, such as open market
operations, reserve requirements, and interest rate adjustments. It may also discuss the goals and
challenges of implementing effective monetary policy.

Chapter two
explain the rationale for the existence and economic role of Banks and non-Bank Financial institutions

1. Banks: Banks are financial institutions that play a crucial role in the economy. They serve as
intermediaries between savers and borrowers, facilitating the flow of funds in the economy. The chapter
may explain that banks provide various services such as accepting deposits, granting loans, issuing credit
cards, and offering other financial products. They earn profits by charging higher interest rates on loans
than they pay on deposits. Banks also provide payment services, manage risks, and contribute to
financial stability.

The rationale for the existence of banks is based on the following reasons:

- Pooling of Funds: Banks collect funds from depositors and pool them together to provide loans and
investments to individuals, businesses, and governments. This allows for efficient allocation of capital in
the economy.

- Risk Management: Banks specialize in assessing and managing risks associated with lending and
investments. They diversify their portfolios, conduct credit analysis, and provide risk mitigation services,
which helps reduce the overall risk in the financial system.
- Liquidity Provision: Banks offer liquidity to depositors by allowing them to withdraw funds on demand
while simultaneously investing in long-term projects. This maturity transformation function helps match
the needs of depositors and borrowers.

2. Non-Bank Financial Institutions: Non-bank financial institutions include entities like insurance
companies, pension funds, mutual funds, and hedge funds. These institutions also play a vital economic
role alongside banks. The chapter may explain that non-bank financial institutions provide services such
as risk management, asset management, and investment opportunities. They mobilize savings, invest in
various financial instruments, and contribute to the overall financial intermediation process.

The rationale for the existence of non-bank financial institutions is based on factors such as:

- Specialized Services: Non-bank financial institutions offer specialized services that may not be provided
by traditional banks. For example, insurance companies provide risk protection, while mutual funds offer
diversified investment portfolios.

- Market Efficiency: Non-bank financial institutions contribute to market efficiency by providing liquidity,
enhancing price discovery, and promoting competition in the financial sector.

- Investment Opportunities: These institutions create investment opportunities for individuals and
institutions by channeling funds into various sectors of the economy.

Overall, banks and non-bank financial institutions exist to facilitate efficient allocation of capital, manage
risks, provide liquidity, and offer a range of financial services essential for economic growth and
development.

Chapter three

familarize theory of Money, money demand and its determinants

1. Theory of Money: The theory of money explores the role and functions of money in an economy. It
examines how money is used as a medium of exchange, unit of account, and store of value. The chapter
may discuss different forms of money, such as cash and bank deposits, and their importance in
facilitating transactions and economic activity.

2. Money Demand: Money demand refers to the desire of individuals, businesses, and institutions to
hold money balances for various purposes. The chapter may explain that money demand depends on
several factors, including transaction motives, precautionary motives, and speculative motives.
3. Determinants of Money Demand: The chapter will likely discuss the determinants of money demand,
which can include:

- Income: As income increases, individuals tend to hold a larger amount of money to finance their daily
transactions and expenses.

- Interest Rates: Higher interest rates provide an opportunity cost of holding money rather than earning
interest through other assets. Therefore, as interest rates rise, the demand for money tends to
decrease.

- Price Level: When prices rise, more money is needed to conduct transactions, leading to an increase in
money demand.

- Financial Innovations: The availability of alternative payment methods, such as credit cards or
electronic transfers, can affect the demand for money.

chapter four

understand and demonstrate the money supply process,monetary base, the determinants of money
supply, how the behavior of the general public and the banking affect the money creation process

1. Money Supply Process: The money supply process refers to the mechanism through which the central
bank controls and influences the amount of money circulating in the economy. It involves various steps,
including the central bank's control over the monetary base and the actions of commercial banks.

2. Monetary Base: The monetary base, also known as high-powered money or central bank money,
represents the total amount of currency in circulation and reserves held by commercial banks. It
includes physical currency (coins and notes) and banks' deposits at the central bank.

3. Determinants of Money Supply: The determinants of money supply include factors that influence the
ability of commercial banks to create money through lending and deposit creation. These determinants
can include reserve requirements set by the central bank, the availability of excess reserves, and the
demand for loans.

4. Behavior of the General Public: The behavior of the general public affects the money creation process.
When individuals and businesses deposit money into banks, it increases the banks' reserves, allowing
them to lend out a portion of those reserves, thereby creating new money in the form of loans.
5. Behavior of Banks: Banks play a crucial role in the money creation process. They use the reserves they
hold to meet customer withdrawal demands while also making loans to borrowers. The chapter may
discuss the concept of fractional reserve banking, where banks are required to hold only a fraction of
their deposits as reserves and can lend out the rest.

Chapter five
understand the role of central bak in the financial system

1. Central Bank: A central bank is a financial institution that is responsible for managing a country's
money supply, controlling interest rates, and maintaining financial stability. It acts as the banker to the
government, commercial banks, and sometimes even to international organizations.

2. Functions of a Central Bank: The central bank performs various functions, including:

- Monetary Policy: The central bank formulates and implements monetary policy to achieve
macroeconomic objectives such as price stability, full employment, and economic growth.

- Currency Issuance: The central bank is responsible for issuing and managing the nation's currency,
ensuring its availability, authenticity, and integrity.

- Banker to the Government: The central bank acts as a banker and advisor to the government,
managing its accounts, handling government debt, and facilitating transactions.

- Lender of Last Resort: In times of financial crises or liquidity shortages, the central bank provides
emergency loans to commercial banks to maintain stability in the banking system.

- Financial Regulation and Supervision: Central banks often have regulatory and supervisory authority
over commercial banks and other financial institutions to ensure their safety and soundness.

3. Monetary Policy Tools: Central banks use various tools to implement monetary policy, including open
market operations (buying or selling government securities), reserve requirements (setting the minimum
reserves banks must hold), and interest rate policy.

4. Independence and Accountability: Central banks are often granted a degree of independence from
political interference to effectively carry out their responsibilities. However, they are also accountable to
the government and the public for their actions and decisions.

Chapter six
understand and compare ethiopian monetary policy with theories

Monetary policy refers to the actions taken by a central bank to manage and control the money supply
and interest rates in an economy. It is implemented to achieve macroeconomic objectives such as price
stability, low inflation, high employment, and economic growth.

In the case of Ethiopia, the specific details of their monetary policy would need to be examined to make
a direct comparison with theories. However, there are some general principles and theories that can be
applied to understand and evaluate monetary policy in any country.

1. Quantity Theory of Money: This theory suggests that changes in the money supply directly impact the
price level in the economy. In implementing monetary policy, the central bank needs to consider the
impact of money supply growth on inflation and adjust its policies accordingly.

2. Taylor Rule: The Taylor Rule is a monetary policy guideline that suggests a central bank should adjust
interest rates in response to changes in inflation and output gaps. By following this rule, central banks
can promote stability and balance in the economy.

3. Monetary Policy Transmission Mechanism: This theory focuses on how changes in monetary policy
affect various sectors of the economy. It analyzes the channels through which changes in interest rates,
money supply, and credit availability impact consumption, investment, and other economic variables.

To understand and compare Ethiopian monetary policy with these theories, you would need to examine
the specific policy tools used by the central bank, their approach to inflation targeting or exchange rate
management, and the effectiveness of their policy in achieving macroeconomic goals.