Monetary Policy

• What is money supply?

  Amount of money in the economy at a particular point in time
• What is monetary policy?

  Use of interest rates, exchange rates and the money supply to control macroeconomic objectives and to affect level of economic activity
• Monetary policy measures:

  • Changes in interest rates - High interest rate = Reduce spending
  • Changes in money supply - Lend more money = Boost consumption and investment expenditure
  • Changes in foreign exchange rates
• What is contractionary monetary policy?

  Aims to slow down economic activity by increasing interest rates to cut spending and investment in the economy
• What is expansionary monetary policy?

  Aims to boost economic activity by expanding money supply and lowering interest rates
• Effect of monetary policy measures on macroeconomic aims:

  (low rates)

  • Economic growth - Economic growth, reduces cost of borrowing and boosts consumption and investment, discourage saving, encourages spending
  • Low unemployment - Creates more jobs
  • Stable prices - Increase productive capacity, higher consumption and investment expenditure
  • Balance of payment stability - Improves international competitiveness