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Chapter 7

9.3 Monetary policy

 Monetary policy refers to the management of the money supply, via

– Changing interest rates (in some countries,, such as the UK, interest rates
are set by the central bank (i.e. the Bank of England in the UK). In other
countries, rates are directly set by the government.

– Directly affecting the money supply using open market operations

– Indirectly affecting the money supply using banks’ reserve requirements

 Monetary policy can be expansionary or contractionary

– Expansionary – e.g. cut interest rates to combat unemployment

– Contractionary – e.g. raising interest rates to combat inflation

 Open market operations refer to a Government buying/selling bonds

– E.g. issuing Government bonds reduces the money supply

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