AP Macroeconomics
Advanced Placement Macroeconomics studying national and global economic systems.
Advanced Topics
Monetary Policy and Central Banking
The Role of Central Banks
Central banks, like the Federal Reserve in the US, manage a nation's money supply and interest rates to promote economic stability and growth.
Tools of Monetary Policy
- Open Market Operations: Buying or selling government bonds to adjust the money supply.
- Discount Rate: The interest rate charged to commercial banks for borrowing funds.
- Reserve Requirements: The fraction of deposits that banks must hold in reserve.
Expansionary vs. Contractionary Policy
- Expansionary policies increase money supply and lower interest rates to stimulate borrowing and spending.
- Contractionary policies reduce money supply and raise interest rates to cool off inflation.
Real-World Impact
Monetary policy affects everything from mortgage rates to business loans, shaping economic activity across the nation.
Key Formula
\[MV = PQ\]
Examples
The Federal Reserve cuts interest rates during a recession to encourage consumer spending.
Raising reserve requirements to control inflation in a booming economy.
In a Nutshell
Central banks use monetary policy to influence money supply, interest rates, and overall economic activity.