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 economic growth (US)

Stabilizing external value of the currency

- (fixed) exchange rate policy
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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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