Unit 4

A central bank's actions and communications to manage the money supply

• - Manage inflation

• - Reduce unemployment

• - Promote moderate long-terms interest rate

Expansionary monetary policy is used when the economy grows too slowly or unemployment is high. The centre bank increases money supply by lowering interest rate, reducing reserve requiment or buying government bonds, thereby boosting aggrerate demand, growth, and job, as long as inflation under control

Used to cool an overheating economy

• - Reserve requiment

• - Discount rate

• - Open market operation - primary tool

When the central bank wants to increase aggrerate demand, it should adopt expansionary policy by lowering interest rates, reducing reserve requiment, or buying gov bonds to increase the money supply and stimulate spending and investment.

raising reserve requiment

increasing discount rate

selling bonds