Topic 8- Banking System and Monetary Policy (12)
Topic 8- Banking System and Monetary Policy (12)
tem
and Moneta
ry
Policy
TOPIC 8
Learning Outcome
By the end of this chapter, students should be able to:
0 Understand and define monetary policy
0 Use and suggest a suitable / appropriate monetary
policy to solve an economic problem
0 Identify and explain tools of monetary policy tools to
fight inflation and deflation.
0 Identify and explain tools of monetary tools as used in
Malaysia.
Learning Objective
0 Various monetary policy tools generally used to tackle
problems of inflation and deflation
Chapter Outline
0 Money Supply
0 Tools of monetary policy
0 The monetary multiplier.
0 The banking system’s lending potential
0 Easy money and tight money
The Supply of Money
• Money supply is the total amount of
money available in an economy at a
particular point in time.
Supply for Money
Interest Rate (percent per year)
Money supply
The amount of
money supplied
9 E2
not depends on
7 E1 interest rates
0 Qm
Quantity Of Money (billions of dollars)
The Money Market (equilibrium and
changes in equilibrium)
The interest rate of 7.2 20
it can be represented as a 0 200 400 600 800 1,000 1,200 1,400 1,600 1,800
1 1
10 %
r 10
0 Please note that “r” is represented as reserve ratio/ required
reserve requirement/ Statutory Reserve Requirement.
0 The higher the reserve ratio, the smaller the money multiplier,
and the less money will be created.
Easy and Tight Money Policies
Easy money
0 The central bank is trying to expand the amount of
money in the economy.
0 The motive is to curb recession.
Tight money
0 The central bank is trying to shrink the amount of
money in the economy.
0 The motive is curb inflation.
THE END OF TOPIC 8