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Monetary policy

A confusion about the monetary curve.

 

When an economy is facing a recession, AG falls, which implies the demand of money also falls, entails that the Money demand shifts to the left and the interest rate will fall. 

 

In that case, the economy is operating on it own and there is no need for central bank to reduce the interest rate by increasing money supply. No point of of shifting the money supply curve to maintain low interest rate to stimulate consumption. 

 

I know there must be something wrong in my head, but plzzzzzz help.

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Just a note here: the discount rate (set by the Central Bank) only changes when the Central Bank changes it. Although commercial banks set their own interest rates, they are closely related to the discount rate (the rate at which the CB gives loans to commercial banks). That said, changing the interest rates (through monetary policies of the CB) is not really happening without a CB.

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Just a note here: the discount rate (set by the Central Bank) only changes when the Central Bank changes it. Although commercial banks set their own interest rates, they are closely related to the discount rate (the rate at which the CB gives loans to commercial banks). That said, changing the interest rates (through monetary policies of the CB) is not really happening without a CB.

And the way  they change the interest rate is by controlling the supply of money in an economy?? 

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No. One of the ways they control the money supply is by setting the interest rate. 

 

And one more thing: really get hold of the Pearson book. I think it does a great job at explaining things (this too). 

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Btw it's good you don't have econ among your list of the things you hate :) Good news!

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Btw it's good you don't have econ among your list of the things you hate :) Good news!

Haha, forgot to add that ! :lol:

 

I actually don't really get it , and i will try to get the pearson baccalaureate book pdf. 

 

If you don't mind , please answer me this question. do the changes in money supply affect the interest rate or the changes in interest rate affect the money supply? As in the cambridge book, it says the central bank reduces its interest rate via shifting the money supply to the right, which is an expansionary policy.

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The changes of interest rate affect the money supply. Tools for changing the money supply are: changing the discount rate, buying or selling (govt) bonds, changing the reserve requirement.

 

An expansionary monetary policy might include any of the following:

  • decreasing the discount rate
  • buying bonds
  • decreasing the reserve requirement
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But I should also add that if the money supply changes (for whatever reason) that will also have an effect on interest rates. As the interest rate is the opportunity cost of holding money/the amount paid for using money, it is understandable that when the money supply is low interest rates will likely go up (since borrowing money should be more expensive given its low supply) whereas when money supply is up interest rates will likely be cut (since borrowing money should not be that expensive as there is plenty of it).

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But I should also add that if the money supply changes (for whatever reason) that will also have an effect on interest rates. As the interest rate is the opportunity cost of holding money/the amount paid for using money, it is understandable that when the money supply is low interest rates will likely go up (since borrowing money should be more expensive given its low supply) whereas when money supply is up interest rates will likely be cut (since borrowing money should not be that expensive as there is plenty of it).

Now it makes sense. I am gonna to do my commentary on macro and i will sketch a graph of the bank increasing the money supply via buying bond, as well as the AD AS model. Now i have more like a vivid plan in my head !! :D  THxxxxx

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Good stuff. Is this a practice commentary or a real one?

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Good stuff. Is this a practice commentary or a real one?

It is the real one... I am now petrified .

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Deadline? Is this the draft version? Send it over to hello@econdaddy.com and I'll have a look at it free of charge this time.

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Deadline? Is this the draft version? Send it over to hello@econdaddy.com and I'll have a look at it free of charge this time.

Is it allowed to do that ? I don't want to plagiarise or do anything of that sort. I think i am good and i would rather do the commentary utterly on my own, but i will be delighted if you can still help me with my questions in the future. ^_^ Thxx in advanced .

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Good attitude, I like that!

 

But I should also add that I would never do the job instead of a student, so by no means would proof reading a commentary (and giving advice on how to improve it) count as plagiarism. I'm a 100% against plagiarism too.

 

Good luck with it!!!

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Good attitude, I like that!

 

But I should also add that I would never do the job instead of a student, so by no means would proof reading a commentary (and giving advice on how to improve it) count as plagiarism. I'm a 100% against plagiarism too.

 

Good luck with it!!!

Haha, Thank you . Nice to meet you anyway. :lol:  good luck with u too.

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