In an economic environment where the initial policy interest rate (ip) and the equilibrium interest rate (ie) are equal in the reserve market, the central bank plans to lower the required reserve ratios in order to recover from the economic recession. If this monetary policy measure is implemented, a. How a divergence occurs between the policy interest rate and the equilibrium interest rate? b. What kind of measure should the central bank take to keep the equilibrium and the policy interest rates equal?
Monetary Policy and Equation of Exchange
The monetary policy has been defined as the policy that is used by the Federal Reserve (the central bank of the US) or the central bank (the central bank of India is RBI) along with the use of the supply of money to accomplish certain macroeconomic policies. Monetary policy is a supply-side macroeconomic policy that supervises the growth rate and money supply in the economy.
Monetary Economics
As from the name, it is very evident that monetary economics deals with the monetary theory of economics. Therefore, we can say that monetary economics, is that part of economics that provides us with the idea or notion of analyzing money as a holding with its function, which acts as the medium of exchange, the store of value through which the buying and selling are done and also the unit of account. It also helps in formulating the framework of the monetary policy of a bank in an economy which ultimately results in the welfare of the people residing in that particular economy. The monetary policy of an economy also helps to analyze and evaluate the financial health of it.
: In an economic environment where the initial policy interest rate (ip) and the equilibrium interest
rate (ie) are equal in the reserve market, the central bank plans to lower the
order to recover from the economic recession. If this
a. How a divergence occurs between the policy interest rate and the equilibrium interest rate?
b. What kind of measure should the central bank take to keep the equilibrium and the policy
interest rates equal?
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