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Monetary Policy | O Level Economics 2281 & IGCSE Economics 0455 | Detailed Free Notes To Score An A Star (A*)

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  • Money supply means how much money is available in the economy
    • Money supply can be controlled by the government
  • Interest rate
    • The cost one has to pay for borrowing money
    • Interest can be annual or monthly
    • If a person lends to the bank, he is paid interest as well.
    • Increasing the interest rate makes borrowing more expensive and saving more lucrative, therefore, the money supply reduces.
    • Decreasing the interest rate will make borrowing more lucrative and saving less beneficial, so borrowing and spending increases.
    • What the central bank can do is change the rate of interest between the central and commercial bank
      • This in turn influences the general interest rate.
  • Monetary Policy
    • Government policy that is focused on controlling money syupply
    • Expansionary monetary policy
      • Increases money supply
      • Interest rate is reduced
      • It promotes economic growth
      • it also increases the employment as people are required to work in new or expanded industries
    • Contractionary monetary policy
      • Interest rate increased
      • It will reduce production
      • It will cause umemploiyment
      • It will reduce inflation as well
        • Demand will fall
  • Parts of Monetary Policy
    • Interest Rate
    • Interbank offer rate
      • Rate of interest between banks
      • Such as LIBOR or KIBOR
    • Minimum cash reserve and minimum reserve requirement
      • The amount of money from each deposit that commercial banks have to keep at central bank
      • The amount of money from each deposit that commercial banks have to keep with them
      • The rest they can lend
      • Increasing MCR and MRR would mean that lending will reduce as less money available to lend
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