Download Monetary policy

Tutorial: Economic Lyceum
Topic: State Economic Policy
Prepared by: Ing. Lenka Gabrielová
Projekt Anglicky v odborných předmětech, CZ.1.07/1.3.09/04.0002
je spolufinancován Evropským sociálním fondem a státním rozpočtem České republiky.
MACROECONOMIC POLICY - MONETARY
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It is a process in which the originator of
monetary policy (the Central Bank) tries to
use its tools to achieve predetermined goals.
Monetary policy is conducted by a central
authority (the central bank or another
institution).
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The goals are:
Stabilization of economic development,
particularly the stability of the price level (‚the
fight against inflation, or ‚healthy monetary
development‘)
Economic growth support
Promoting employment
Balanced payment balance
Stability and liquidity of the banking sector
Exchange rate stabilization
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As ultimate objectives are considered low
inflation, low unemployment and equal
balance of goods and services.
The intermediate goals are money supply,
interest rate and exchange rate.
The monetary policy is not able to
simultaneously achieve all its ultimate goals.
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The major representative of monetary policy is
the central bank (the Czech National Bank – in
the Czech Republic), the various commercial
banks are only the indirect representatives.
The Czech National Bank performs banking
supervision – a check whether the commercial
banks respect the conditions associated with the
licence issued. If the banks have a high
proportion of bad credits or if there is a
suspicion of fraudulent management activities,
the CNB may establish a system of receivership.
The central bank influences the price level
stability by controlling the money supply or by
changing interest rates.
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If there is money increase in the economy, the interest rate
reduces; however, investments, consumption and
sometimes net export increase.
If these components increase, the aggregate demand and
GDP increase as well.
We will achieve lower unemployment and higher inflation
and by means of depreciation there will be an improvement
in the balance of goods and services.
Expansionary monetary policy will reduce unemployment
and improve the balance of goods and services in the short
period of time; as for the long term effect there is only an
increase in inflation.
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If there is a lack of money in the economy, the
interest rate rises; however, the investments and
consumer expenditures are limited and they may
affect a net export.
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Aggregate demand decreases. The real GDP
declines or reduces the growth rate.
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This may result in the situation where the total price
level can not move or fall = deflation.
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Restrictive monetary policy will increase
unemployment and the trade balance will be worse
in the short term; the long-term consequence is
only a reduction in inflation.
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Who leads the central bank? Is it more effective if
the central bank is independent on the
government or vice versa is it better if the activity
of the central bank is under the supervision and
control of the government? And why?
If the central bank reduces interest rates, will the
investments increase or decrease? And what
about consumption? Will it increase or decrease?
Explain.
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HOLMAN, Robert: Ekonomie, 4. vydání, Praha:
C.H. Beck 2005, ISBN 80B7179-891-6
KLIKOVÁ, Christiana, KOTKLÁN, Igor:
Hospodářská politika, Ostrava, Institut vzdělávání
SOCRATES, s.r.o., 2006, ISBN: 808657204
SLANÝ, Antonín a kolektiv: Makroekonomická
analýza a hospodářská politika, Praha, C. H. Beck,
2003, ISBN: 8071797383
VOSTROVSKÁ, Zdena, VORLÍČEK, Jan: Úvod do
hospodářské a sociální politiky, Praha, VŠE, 2005