ECN 204 Chapter Notes - Chapter 12: Open Market Operation, Keynesian Economics, Fiscal Policy
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Week 10 – CECN 2014
Tools of monetary policy
1. Bank rate (BR)
- MSS = lower BR
- MSS = Raise BR
2. Cash reserve ration (CRR)
- MSS = lower CRR
- MSS = raise CRR
3. open market operations (OMO)
- central bank buys/ sells government bonds
- MSS = CB buys bonds
- MSS = CB sells bonds
4. Deposit Switching (DS)
- MSS = CB switches govt deposits to banks
- MSS = CB switched government from deposits to itself
5. Moral suasion
- MSS = CB encourages banks to lend
- MSS = CB discourages banks to lend
Keynesian theory: interest rates
Liquidity preference theory
Interest: price of money -> demand for money – L1 or L2
-> supply for money (controlled by CB)
demand for money = L1 + L2
goals: find equilibrium interest rates
Demand for money
L1: transactions demand for money - day to day transactions
- income (y) (+)
- price level (P) (+)
is autonomous to interest rate
L2: speculatives/ asset demand for money – idle balances
- interest rates (roi) (-)
equilibrium interest rates
How do changes in money supply affect GDP?
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