WHAT IS MONERARY POLICY ?

 

 we get going in the different types of monetary let's just get this straight in our heads monetary policy is one of the two tools the government has to manage the economy one of two one of two one of two one of two what's the other the other is called fiscal policy and if you don't understand what fiscal policy is or if you want a little brush-up on it check out the  international economics development economics and theory of the firm which means it's perfect for any of you out there studying economics in any setting whether they're bi ba PA level university or whatever okay so fiscal policies the other tool monetary policy is the other okay so monetary policy is one of the two tools that the government has to manage the economy okay there are two types of monetary policy the first is called expansionary fiscal policy I'm sorry in Spanish nari monetary policy which is where the government is trying to increase economic activity in a particular country increase growth right contractionary monetary policy is designed to decrease the pace of the economy because an economy that's moving too fast is an economy that will lead to inflation which means wages won't be able to keep up and therefore people become unhappy so the government must do the prudent thing which is actually slow the economy down okay who makes the decision unlike fiscal policy central bank's control the decision-making power of monetary policy okay so what do they do well everything in twos right expansionary monetary policy contraction of his monetary policy well the two types of monetary policy the two things they can do that would fall under the category of monetary policy here are interest rates and money supply okay money supply does not mean they print up money and then they have more no it's way more sophisticated ways of managing the circulation of cash that's available at any given moment in an economy okay so let's say the so so the government can manipulate interest rates to either increase right oops wrong color to either increase economic activity or decrease economic activity okay so think about it what would happen if they want what if they if the government wants to increase economic activity they are going to reduce interest rates right because money will become cheaper and more will flow through the economy if the government wants to decrease economic activity right they are going to raise interest rates okay so there's a there's a negative relationship there right interest rates in order to increase the connectivity right they want to cut interest rates make them smaller make money cheaper some more businesses will invest to decrease economic activity the government could increase interest rates and that means would be less money available out there and it would slow down so what does that mean well let's say that the interest rates are currently at 3% and the government cuts them to two what does that mean money got cheaper so there'll be more money bought just supply and demand stuff if the interest rates are three percent and the government does what raises interest rates to four percent what happens ah money got cheaper what happens I'm sorry the money got more expensive what happens to anything that's more expensive there's less of it demanded and the economy would slow down okay the other thing is the money supply right and the money supply if the government wants to increase wrong color increase economic activity right what are they going to do to the money supply they're gonna make more money available what if they want to decrease economic activity they are going to decrease the money supply because the money supply is quite literally the amount of cash that is available in the economy and the government's do this in pretty sophisticated ways one of the things is open market operations which is a government actually goes out there and offers bonds and then in exchange for selling bonds they get cash and they take it out of the economy or they do the opposite they go out there and buy their own government bonds back by using dollars and therefore the dollars are there more dollars in circulation and the money supply would increase there's often something called the required reserve ratio which is the amount of money banks must keep in their vaults at all times usually it's around 20 percent of all deposits must be kept in the vault at all times if they do if they do expansionary wait for it it wait for it expansionary monetary policy by increasing the money supply what would they do well expansionary they want more money out there so they are going to decrease the required reserve ratio to say ten percent and now ten percent more money will flow in the economy okay so money supply is pretty sophisticated stuff it's not often times it's not even covered in introductory level economics classes and if you're an ID student out there it is not covered anywhere in the IB curriculum if you're a university student ap student a level student it may or may not be depending on your program alright so there you have it there are two different kinds of monetary policy expansionary contractionary right expansionary to increase contract to decrease the two things that they do the two options they have in monetary policy are increasing or decreasing interest rates and increasing and decreasing the money supply once you get this in your mind you realize it's not really that complicated income and when you when you understand money supply along with this I'm sorry monetary policy along with fiscal policy and then you are fully informed economists because those are all of the tools that the governments have to manage the economy fiscal policy check out that article  and monetary policy