Monetary policy

Learning objectives

Describe the role of a central bank and the goals of monetary policy: low and stable inflation, low unemployment, reduced business-cycle fluctuations, a stable environment for growth and external balance

Distinguish real from nominal interest rates and calculate the real interest rate from nominal interest and inflation data

(HL) Explain the tools of monetary policy: open market operations, minimum reserve requirements, changes in the central bank minimum lending rate and quantitative easing

Analyse expansionary and contractionary monetary policy using AD/AS diagrams and the transmission from interest rates to consumption, investment and net exports

(HL) Explain how commercial banks create money through lending and how the demand for and supply of money determine the equilibrium interest rate

Evaluate monetary policy: its flexibility, reversibility, short time lags and central bank independence against its limits when rates are near zero, confidence is low or objectives conflict