Monetary Policy
| English | Chinese | Pinyin |
|---|---|---|
| monetary policy | 货币政策 | huò bì zhèng cè |
| expansionary | 扩张性 | kuò zhāng xìng |
| contractionary | 紧缩性 | jǐn suō xìng |
| open-market operations | 公开市场操作 | gōng kāi shì chǎng cāo zuò |
| reserve requirement | 准备金要求 | zhǔn bèi jīn yāo qiú |
| discount rate | 贴现率 | tiē xiàn lǜ |
| investment | 投资 | tóu zī |
| aggregate demand | 总需求 | zǒng xū qiú |
The central bank steers the economy
- The government's fiscal tools are spending and taxes.
- The central bank has a different lever: the money supply and interest rates.
- Pull it one way to fight a recession, the other to fight inflation.
- This is monetary policy 货币政策.
Two directions
- Expansionary 扩张性 (easy) policy raises the money supply and lowers interest rates to fight a recession.
- Contractionary 紧缩性 (tight) policy lowers the money supply and raises interest rates to fight inflation.
Expansionary or contractionary?
Expansionary policy raises the money supply and lowers rates to fight recession; contractionary policy does the reverse to fight inflation.
Expansionary monetary policy, used to fight a recession:
More money and lower rates spur borrowing and spending, shifting AD right.
To fight inflation, the central bank uses contractionary policy — selling bonds and raising rates.
Less money and higher rates cool borrowing and shift AD left.
Three tools
- Open-market operations 公开市场操作: buying government bonds injects money (expansionary); selling drains it. This is the main everyday tool.
- The reserve requirement 准备金要求: lowering it lets banks lend more (expansionary).
- The discount rate 贴现率: the rate the central bank charges banks; a lower rate encourages lending.
To inject money (expansionary), the central bank's open-market operation is to:
Buying bonds pays banks in reserves, raising the money supply.
Select all three main tools of monetary policy.
Open-market operations, reserve requirement and discount rate are monetary tools; income tax is fiscal.
How it reaches output
- The chain: a change in the money supply moves the interest rate, which changes investment 投资 and interest-sensitive spending, which shifts aggregate demand 总需求.
- Worked idea. In a recession the central bank buys bonds → reserves and the money supply rise → the interest rate falls from 5% to 3% → cheaper borrowing spurs investment → AD shifts right → output rises toward full employment.
A lower interest rate raises ______ and interest-sensitive spending, shifting AD right.
Cheaper borrowing spurs investment, so aggregate demand rises.
Put the expansionary monetary chain in order.
Money up → rate down → investment up → AD right → output up.
Monetary policy uses the money supply and interest rates. Expansionary (more money, lower rates) fights recession; contractionary (less money, higher rates) fights inflation. The main tool is open-market operations; the chain runs money → interest rate → investment → aggregate demand.