Monetary System Policy Tools - Interest rates ( capital vs money market)
4 important questions on Monetary System Policy Tools - Interest rates ( capital vs money market)
Objectives of monetary policy by Central Banks
- Stabilizing internal value of the currency
- Stabilizing external value of the currency
Stabilizing internal value of the currency
- Price stability
- inflation targeting
- monetary aggregates
Stabilizing external value of the currency
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Quantity theory of money
Equation of exchange
MV=PYr
( M= quantity of money ; V= velocity of circulation; P = price level ; Yr= real GDP ; PYr = nominal GDP)
Money flow = goods flow
When money flow ↑ > GDP = inflation
when money flow ↓ < GDP = deflation
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