2.6.1

Objectives of Monetary Policy

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Monetary Policy Objectives

Along with fiscal policy, monetary policy is a tool which is used to smooth business cycles and achieve macroeconomic stability.

Multiple objectives

Multiple objectives

In making decisions about the money supply, a central bank decides whether to raise or lower interest rates and, in this way, to influence macroeconomic policy, whose goal is low unemployment and low inflation.
The central bank is also responsible for regulating all or part of the nation’s banking system to protect bank depositors and insure the health of the bank’s balance sheet.

Central banks around the world

Central banks around the world

We call the organization responsible for conducting monetary policy and ensuring that a nation’s financial system operates smoothly the central bank.
Most nations have central banks or currency boards. Some prominent central banks around the world include the European Central Bank, the Bank of Japan, and the Bank of England.
In the United States, we call the central bank the Federal Reserve—often abbreviated as just “the Fed.”

Closing output gaps

Closing output gaps

Similar to fiscal policy, monetary policy can be used to close output gaps:
- When a recessionary output gap exists, expansionary monetary policy is most appropriate.
- When an inflationary output gap exists, contractionary monetary policy is most appropriate.

1

Microeconomics

1.1

Competitive Markets: Demand & Suply

1.1.1Markets & Demand 1.1.2Diminishing Marginal Returns 1.1.3Supply 1.1.4Market Equilibrium 1.1.5Price Mechanism 1.1.6Consumer & Producer Surplus 1.1.7IB Multiple Choice - Demand 1.1.8IB Multiple Choice - Supply

1.2

Elasticity

1.2.1Elasticities of Demand 1.2.2Factors Affecting Price Elasticity of Demand 1.2.3Elasticity of Supply 1.2.4Price Elasticity of Supply 1.2.5IB Multiple Choice - Price Elasticity of Demand 1.2.6IB Multiple Choice - Price Elasticity of Supply 1.2.7IB Multiple Choice - Other Elasticities

1.3

Government Intervention

1.3.1Indirect Taxes & Subsidies 1.3.2Application Question - Taxing Prices or Quantities 1.3.3Subsidies & Price Controls 1.3.4Deadweight Loss & Government Intervention 1.3.5Elasticity & Tax Incidence 1.3.6IB Multiple Choice - Government Intervention

1.4

Market Failure

1.4.1Types of Market Failure 1.4.2Introduction to Externalities 1.4.3Negative Externalities 1.4.4Policy for Negative Externalities 1.4.5Positive Externalities 1.4.6The Deadweight Welfare Loss of Externalities 1.4.7Case Study - The Externalities of Education 1.4.8Public Goods & the Free-Rider Problem 1.4.9Asymmetric Information 1.4.10End of Topic Test - Market Failure 1.4.11Application Questions - Market Failure

1.5

HL: Theory of the Firm & Market Structures

1.5.1Theory of the Firm & Market Structures

2

Macroeconomics

2.1

The Level of Overall Economic Activity

2.1.1The Circular Flow of Income 2.1.2Defining GDP 2.1.3Limitations of GDP 2.1.4IB Multiple Choice - Economic Indicators 2.1.5Business Cycles 2.1.6Output Gaps

2.2

Aggregate Demand & Aggregate Supply

2.2.1The Aggregate Demand Curve 2.2.2Components of Aggregate Demand 2.2.3Shape of the Aggregate Demand Curve 2.2.4Shifts in Aggregate Demand 2.2.5IB Multiple Choice - Aggregate Demand 2.2.6Short & Long-Run Aggregate Supply 2.2.7Alternative Models of LRAS 2.2.8Equilibrium in the AD-AS Model 2.2.9Output Gaps & the AD-AS Model

2.3

Macroeconomic Objectives

2.3.1Introduction to Unemployment 2.3.2Limitations of Unemployment 2.3.3Types of Unemployment 2.3.4Causes & Impact of Unemployment 2.3.5Defining Inflation 2.3.6Measuring Inflation 2.3.7Use of Index Numbers 2.3.8The Consumer Price Index 2.3.9Consequences of Inflation 2.3.10Causes of Inflation 2.3.11Inflation & Unemployment Tradeoff 2.3.12The Short-Run Phillips Curve 2.3.13The Long-Run Phillips Curve

2.4

Economic Growth, Poverty & Inequality

2.4.1Measuring Economic Growth 2.4.2Determinants of Productivity 2.4.3Economic Growth & Productivity 2.4.4Absolute & Relative Poverty 2.4.5Inequality 2.4.6Inequality 2 2.4.7Lorenz Curve 2.4.8Government Policy on Poverty 2.4.9End of Topic Test - Poverty & Inequality 2.4.10Application - Inequality & Poverty

2.5

Fiscal Policy

2.5.1Introduction to Fiscal Policy 2.5.2Fiscal Policy and AD-AS Model 2.5.3Fiscal Policy Lags 2.5.4Automatic Stabilizers 2.5.5IB Multiple Choice - Fiscal Policy

2.6

Monetary Policy

2.6.1Objectives of Monetary Policy 2.6.2Monetary Policy Implementation 2.6.3Monetary Policy & AD-AS Model 2.6.4Monetary Policy Lags & Pitfalls

2.7

Supply-Side Policies

2.7.1Supply-Side Policies 2.7.2Supply-Side Policies 2

3

The Global Economy

3.1

International Trade

3.1.1Globalisation 3.1.2Globalisation for LEDCs 3.1.3Globalisation for MEDCs 3.1.4Comparative Advantage & Trade 3.1.5Protectionism 3.1.6Arguments for Protectionism 3.1.7Arguments Against Protectionism 3.1.8End of Topic Test - Globalisation & Trade 3.1.9Case Study - Globalisation & Trade

3.2

Exchange Rates

3.2.1Floating Exchange Rates 3.2.2Fixed Exchange Rate 3.2.3Effect of a Stronger & Weaker Dollar

3.3

The Balance of Payments

3.3.1Balance of Payments 3.3.2Balance of Payments 2 3.3.3FDI & Reducing a BoP Deficit

3.4

Economic Integration

3.4.1Customs Unions & WTO 3.4.2Merged Currency

3.5

Terms of Trade

3.5.1Absolute & Comparative Advantage 3.5.2Gains from Trade 3.5.3Terms of Trade 3.5.4IB Multiple Choice - Comparative Advantage & Trade

3.6

Economic Development

3.6.1Factors Influencing Growth & Development 3.6.2International Institutions 3.6.3Measures of Development 3.6.4Barriers to Development 3.6.5Case Study - The Bottom Billion 3.6.6End of Topic Test - Emerging & Developing

3.7

The Role of Domestic & International Factors

3.7.1Interventionist Strategies 3.7.2Development Strategies 3.7.3Development Promotion Policies 3.7.4End of Topic Test - Growth & Global Development 3.7.5Application Questions -Growth & Global Development

3.8

The Role of International Trade

3.8.1International Institutions 3.8.2End of Topic Test - Globalisation & Trade

3.9

The Role of Foreign Aid

3.9.1Aid 3.9.2Limitations of Aid 3.9.3Support for Aid 3.9.4Application Questions - Developing Countries

Jump to other topics

1

Microeconomics

1.1

Competitive Markets: Demand & Suply

1.1.1Markets & Demand 1.1.2Diminishing Marginal Returns 1.1.3Supply 1.1.4Market Equilibrium 1.1.5Price Mechanism 1.1.6Consumer & Producer Surplus 1.1.7IB Multiple Choice - Demand 1.1.8IB Multiple Choice - Supply

1.2

Elasticity

1.2.1Elasticities of Demand 1.2.2Factors Affecting Price Elasticity of Demand 1.2.3Elasticity of Supply 1.2.4Price Elasticity of Supply 1.2.5IB Multiple Choice - Price Elasticity of Demand 1.2.6IB Multiple Choice - Price Elasticity of Supply 1.2.7IB Multiple Choice - Other Elasticities

1.3

Government Intervention

1.3.1Indirect Taxes & Subsidies 1.3.2Application Question - Taxing Prices or Quantities 1.3.3Subsidies & Price Controls 1.3.4Deadweight Loss & Government Intervention 1.3.5Elasticity & Tax Incidence 1.3.6IB Multiple Choice - Government Intervention

1.4

Market Failure

1.4.1Types of Market Failure 1.4.2Introduction to Externalities 1.4.3Negative Externalities 1.4.4Policy for Negative Externalities 1.4.5Positive Externalities 1.4.6The Deadweight Welfare Loss of Externalities 1.4.7Case Study - The Externalities of Education 1.4.8Public Goods & the Free-Rider Problem 1.4.9Asymmetric Information 1.4.10End of Topic Test - Market Failure 1.4.11Application Questions - Market Failure

1.5

HL: Theory of the Firm & Market Structures

1.5.1Theory of the Firm & Market Structures

2

Macroeconomics

2.1

The Level of Overall Economic Activity

2.1.1The Circular Flow of Income 2.1.2Defining GDP 2.1.3Limitations of GDP 2.1.4IB Multiple Choice - Economic Indicators 2.1.5Business Cycles 2.1.6Output Gaps

2.2

Aggregate Demand & Aggregate Supply

2.2.1The Aggregate Demand Curve 2.2.2Components of Aggregate Demand 2.2.3Shape of the Aggregate Demand Curve 2.2.4Shifts in Aggregate Demand 2.2.5IB Multiple Choice - Aggregate Demand 2.2.6Short & Long-Run Aggregate Supply 2.2.7Alternative Models of LRAS 2.2.8Equilibrium in the AD-AS Model 2.2.9Output Gaps & the AD-AS Model

2.3

Macroeconomic Objectives

2.3.1Introduction to Unemployment 2.3.2Limitations of Unemployment 2.3.3Types of Unemployment 2.3.4Causes & Impact of Unemployment 2.3.5Defining Inflation 2.3.6Measuring Inflation 2.3.7Use of Index Numbers 2.3.8The Consumer Price Index 2.3.9Consequences of Inflation 2.3.10Causes of Inflation 2.3.11Inflation & Unemployment Tradeoff 2.3.12The Short-Run Phillips Curve 2.3.13The Long-Run Phillips Curve

2.4

Economic Growth, Poverty & Inequality

2.4.1Measuring Economic Growth 2.4.2Determinants of Productivity 2.4.3Economic Growth & Productivity 2.4.4Absolute & Relative Poverty 2.4.5Inequality 2.4.6Inequality 2 2.4.7Lorenz Curve 2.4.8Government Policy on Poverty 2.4.9End of Topic Test - Poverty & Inequality 2.4.10Application - Inequality & Poverty

2.5

Fiscal Policy

2.5.1Introduction to Fiscal Policy 2.5.2Fiscal Policy and AD-AS Model 2.5.3Fiscal Policy Lags 2.5.4Automatic Stabilizers 2.5.5IB Multiple Choice - Fiscal Policy

2.6

Monetary Policy

2.6.1Objectives of Monetary Policy 2.6.2Monetary Policy Implementation 2.6.3Monetary Policy & AD-AS Model 2.6.4Monetary Policy Lags & Pitfalls

2.7

Supply-Side Policies

2.7.1Supply-Side Policies 2.7.2Supply-Side Policies 2

3

The Global Economy

3.1

International Trade

3.1.1Globalisation 3.1.2Globalisation for LEDCs 3.1.3Globalisation for MEDCs 3.1.4Comparative Advantage & Trade 3.1.5Protectionism 3.1.6Arguments for Protectionism 3.1.7Arguments Against Protectionism 3.1.8End of Topic Test - Globalisation & Trade 3.1.9Case Study - Globalisation & Trade

3.2

Exchange Rates

3.2.1Floating Exchange Rates 3.2.2Fixed Exchange Rate 3.2.3Effect of a Stronger & Weaker Dollar

3.3

The Balance of Payments

3.3.1Balance of Payments 3.3.2Balance of Payments 2 3.3.3FDI & Reducing a BoP Deficit

3.4

Economic Integration

3.4.1Customs Unions & WTO 3.4.2Merged Currency

3.5

Terms of Trade

3.5.1Absolute & Comparative Advantage 3.5.2Gains from Trade 3.5.3Terms of Trade 3.5.4IB Multiple Choice - Comparative Advantage & Trade

3.6

Economic Development

3.6.1Factors Influencing Growth & Development 3.6.2International Institutions 3.6.3Measures of Development 3.6.4Barriers to Development 3.6.5Case Study - The Bottom Billion 3.6.6End of Topic Test - Emerging & Developing

3.7

The Role of Domestic & International Factors

3.7.1Interventionist Strategies 3.7.2Development Strategies 3.7.3Development Promotion Policies 3.7.4End of Topic Test - Growth & Global Development 3.7.5Application Questions -Growth & Global Development

3.8

The Role of International Trade

3.8.1International Institutions 3.8.2End of Topic Test - Globalisation & Trade

3.9

The Role of Foreign Aid

3.9.1Aid 3.9.2Limitations of Aid 3.9.3Support for Aid 3.9.4Application Questions - Developing Countries

Practice questions on Objectives of Monetary Policy

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1
Which of these actions is most appropriate during an inflationary output gap?Multiple choice
2
Which of these actions is most appropriate during a recessionary output gap?Multiple choice

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IB Multiple Choice - Fiscal Policy

Monetary Policy Implementation