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Understanding Monetary Policy Changes
When we talk about monetary policy, we're really discussing how central banks manage money in the economy. Here’s a simpler look at what happens when they decide to either expand or contract the money supply.
What Happens with Expansionary Monetary Policy?
More Money in the Economy:
Central banks might lower interest rates by buying government bonds. This action puts more money into the system. For example, if the federal funds rate goes down by 1%, the country’s economy (GDP) could grow by about 0.5% to 1%.
Risk of Inflation:
Lowering interest rates can lead to rising prices, known as inflation. If inflation goes above 2%, it may require some fixing to keep things balanced.
What Happens with Contractionary Monetary Policy?
Less Money in the Economy:
In this case, central banks might sell government bonds to increase interest rates. This means there is less money available. When rates go up by 1%, it might cause investments to drop by about 10%.
Slower Economy:
Higher interest rates can make people spend less. This could lead to more jobs lost, and unemployment might rise to around 6% if these conditions continue for a while.
By understanding these changes in monetary policy, we can better see how they affect our daily lives and the economy as a whole.
Understanding Monetary Policy Changes
When we talk about monetary policy, we're really discussing how central banks manage money in the economy. Here’s a simpler look at what happens when they decide to either expand or contract the money supply.
What Happens with Expansionary Monetary Policy?
More Money in the Economy:
Central banks might lower interest rates by buying government bonds. This action puts more money into the system. For example, if the federal funds rate goes down by 1%, the country’s economy (GDP) could grow by about 0.5% to 1%.
Risk of Inflation:
Lowering interest rates can lead to rising prices, known as inflation. If inflation goes above 2%, it may require some fixing to keep things balanced.
What Happens with Contractionary Monetary Policy?
Less Money in the Economy:
In this case, central banks might sell government bonds to increase interest rates. This means there is less money available. When rates go up by 1%, it might cause investments to drop by about 10%.
Slower Economy:
Higher interest rates can make people spend less. This could lead to more jobs lost, and unemployment might rise to around 6% if these conditions continue for a while.
By understanding these changes in monetary policy, we can better see how they affect our daily lives and the economy as a whole.