Key Concepts Macro - Monetary Policy (5/5)
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Introduction Post
- Welcome or welcome back to the last part of our journey through the key concepts of macroeconomics.
- This Series will cover:
- GDP (Gross Domestic Product)
- Unemployment Rate
- Inflation
- Fiscal Policy
- Monetary Policy
- If you clearly understand those concepts you have good knowledge to understand everyday development around you.
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Why is it a policy?
- Since it is a planned strategy, just like fiscal policy, to steer the economy, it is a policy.
- Mostly focused on a long-term approach to control inflation, support growth and so on.
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How to apply the policy?
- Applied by central banks and not the governments:
- Interest rate adjustments (raising to slow inflation, lowering to boost spending)
- Open market operations (buying/selling government bonds to control money supply)
- Reserve requirements (how much banks must hold in reserve)
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What effects does it bring?
- Influences inflation (by controlling money flow and credit)
- Affects borrowing and spending (lower interest = more borrowing)
- Shapes investment and currency value
- Stabilizes the financial system during crises
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Differences from fiscal policy
- Controlled by central banks not governments.
- Uses interests rates and money supply instead of taxes and spending.
- Usually quicker to implement while governments need legislation.
- Focus on price stability and financial conditiond and less on employment, income distribution and growth.
- Usually politically independent while governments are obviously driven by political views.
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Takeaways
- Monetary policy is how central banks manage money and credit to influence inflation, spending and investment.
- It works through interest rates and liquidity, not taxes or spending.
- It complements fiscal policy, but is faster and more technical.
- When well-managed, it helps maintain stable prices and financial confidence.
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"Monetary policy: the subtle art of not doing too much or too little — at exactly the right time."
ECONOMIST'S SAYING
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IDEAS CURATED BY
Economics and politics student from Germany. Interested in a broad field of topics and trying to easily break down topics from his studies to everyone.
CURATOR'S NOTE
In this Mini-Series, we will talk about the key concepts of macroeconomics. I will shortly explain each concept in a respective post. This is the last part of the Mini-Series, covering the monetary policy.
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