Level: SL and HL. Sections marked HL only are for Higher Level students.
Central banks change interest rates and the money supply to steer aggregate demand. Monetary policy is the main tool most economies use to keep inflation low and stable.
3.5.1 Monetary policy
Definition
Monetary policy is the use of interest rates and the money supply by the central bank to influence aggregate demand and achieve macroeconomic objectives.
In India, the Reserve Bank of India (RBI) conducts monetary policy through its Monetary Policy Committee; in the UK, it is the Bank of England; in the euro area, the European Central Bank; in the USA, the Federal Reserve.
🔒 Also in the full notes
- 3.5.2 Goals of monetary policy
- 3.5.3 The process of money creation by commercial banks (HL only)
- 3.5.4 Tools of monetary policy (HL only)
- 3.5.5 Demand and supply of money: equilibrium interest rates (HL only)
- 3.5.6 Real and nominal interest rates
- 3.5.7 Expansionary and contractionary monetary policy
- 3.5.8 Effectiveness of monetary policy
- Exam practice: 5 questions with mark allocations
- 2 exemplar answers with full model answers and examiner commentary
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