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<title>DP Economics: Unit 3.5 Government management of the economy – monetary policy</title>
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4px"><i class="expander fa fa-caret-right fa-rotate-90"></i><a class="" href="https://www.student.thinkib.net/economics/page/32112/textbook" title="Textbook">Textbook</a></li><ul class="level-1 expanded"><li class="" style="padding-left: 14px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/33061/contents-page" title="Contents page">Contents page</a></li><li class="" style="padding-left: 14px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/37990/textbook-approach-to-the-new-ib-economics-examination-specificat" title="Textbook approach to the new IB Economics examination specification">Textbook approach to the new IB Economics examination specification</a></li><li class=" parent" style="padding-left: 14px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/33060/chapter-1-introduction-to-economics" title="Chapter 1: Introduction to Economics">Chapter 1: Introduction to Economics</a></li><ul class="level-2 "><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/32395/unit-11-introduction-to-economics" title="Unit 1.1: Introduction to Economics">Unit 1.1: Introduction to Economics</a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/32541/unit-12-how-do-economists-approach-the-world" title="Unit 1.2: How do economists approach the world?">Unit 1.2: How do economists approach the world?</a></li></ul><li class=" parent" style="padding-left: 14px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/33063/chapter-2-microeconomics" title="Chapter 2: Microeconomics">Chapter 2: Microeconomics</a></li><ul class="level-2 "><li class="" 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(HL)">Unit 2.4(1): Behavioural economics (HL)</a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/32798/unit-242-business-objectives-hl" title="Unit 2.4(2): Business objectives (HL)">Unit 2.4(2): Business objectives (HL)</a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/32663/unit-251-price-elasticity-of-demand-ped" title="Unit 2.5(1): Price elasticity of demand (PED)">Unit 2.5(1): Price elasticity of demand (PED)</a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/32788/unit-252-income-elasticity-of-demand-yed-" title="Unit 2.5(2): Income elasticity of demand (YED) ">Unit 2.5(2): Income elasticity of demand (YED) </a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/32789/unit-26-price-elasticity-of-supply-pes-" title="Unit 2.6: Price elasticity of supply (PES) ">Unit 2.6: Price elasticity of supply (PES) </a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/33388/unit-271-governments-in-markets-tax-and-subsidy-" title="Unit 2.7(1): Governments in markets - tax and subsidy ">Unit 2.7(1): Governments in markets - tax and subsidy </a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/33424/unit-272-governments-in-markets-price-controls" title="Unit 2.7(2): Governments in markets - price controls">Unit 2.7(2): Governments in markets - price controls</a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/33665/unit-281-market-failure-externalities" title="Unit 2.8(1): Market failure – externalities">Unit 2.8(1): Market failure – externalities</a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/33808/unit-282-market-failure-merit-goods-and-demerit-goods-" title="Unit 2.8(2): Market failure - merit goods and demerit goods ">Unit 2.8(2): Market failure - merit goods and demerit goods </a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/34054/unit-283-government-intervention-to-manage-externalities-merit-a" title="Unit 2.8(3): Government intervention to manage externalities, merit and demerit goods ">Unit 2.8(3): Government intervention to manage externalities, merit and demerit goods </a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/34082/unit-284-common-access-pool-resources" title="Unit 2.8(4): Common access (pool) resources">Unit 2.8(4): Common access (pool) resources</a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/34087/unit-29-public-goods" title="Unit 2.9: Public goods">Unit 2.9: Public goods</a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/34247/unit-210-asymmetric-information-hl" title="Unit 2.10: Asymmetric information (HL)">Unit 2.10: Asymmetric information (HL)</a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/35118/unit-2111-market-power-theory-of-production-and-costs-hl" title="Unit 2.11(1) Market power - Theory of production and costs (HL)">Unit 2.11(1) Market power - Theory of production and costs (HL)</a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/35125/unit-2112-market-power-perfect-competitionhl" title="Unit 2.11(2) Market power - Perfect competition(HL)">Unit 2.11(2) Market power - Perfect competition(HL)</a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/35147/unit-2113-market-power-monopolyhl" title="Unit 2.11(3) Market power - Monopoly(HL)">Unit 2.11(3) Market power - Monopoly(HL)</a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/35151/unit-2114-market-power-monopolistic-competitionhl" title="Unit 2.11(4) Market power - Monopolistic competition(HL)">Unit 2.11(4) Market power - Monopolistic competition(HL)</a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/35153/unit-2115-market-power-oligopolyhl" title="Unit 2.11(5) Market power - Oligopoly(HL)">Unit 2.11(5) Market power - Oligopoly(HL)</a></li><li class=" parent" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/41603/economics-real-world-examples-and-extension-material-" title="Economics real world examples and extension material ">Economics real world examples and extension material </a></li><ul class="level-3 "><li class="" style="padding-left: 42px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/43378/opportunity-cost-and-production-possibility-curves" title="Opportunity cost and production possibility curves">Opportunity cost and production possibility curves</a></li><li class="" style="padding-left: 42px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/42559/demand-theory" title="Demand theory">Demand theory</a></li><li class="" style="padding-left: 42px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/41886/the-price-mechanism" title="The price mechanism">The price mechanism</a></li><li class="" style="padding-left: 42px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/43188/market-demand-and-supply" title="Market demand and supply">Market demand and supply</a></li><li class="" style="padding-left: 42px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/41705/demerit-goods" title="Demerit goods">Demerit goods</a></li><li class="" style="padding-left: 42px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/42275/market-failure-and-climate-change" title="Market failure and climate change">Market failure and climate change</a></li><li class="" style="padding-left: 42px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/42925/market-power" title="Market power">Market power</a></li><li class="" style="padding-left: 42px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/42099/applying-game-theory" title="Applying game theory">Applying game theory</a></li></ul></ul><li class="ancestor parent" style="padding-left: 14px"><i class="expander fa fa-caret-right fa-rotate-90"></i><a class="" href="https://www.student.thinkib.net/economics/page/34407/chapter-3-macroeconomics" title="Chapter 3: Macroeconomics">Chapter 3: Macroeconomics</a></li><ul class="level-2 expanded"><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/34355/unit-311-measuring-the-level-of-economic-activity" title="Unit 3.1(1): Measuring the level of economic activity">Unit 3.1(1): Measuring the level of economic activity</a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/34432/unit-312-measuring-economic-development" title="Unit 3.1(2): Measuring Economic Development">Unit 3.1(2): Measuring Economic Development</a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/34485/unit-321-variations-in-economic-activity-aggregate-demand-ad-" title="Unit 3.2(1): Variations in economic activity - aggregate demand (AD) ">Unit 3.2(1): Variations in economic activity - aggregate demand (AD) </a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/34487/unit-322-variations-in-economic-activity-aggregate-supplyas" title="Unit 3.2(2): Variations in economic activity - aggregate supply(AS)">Unit 3.2(2): Variations in economic activity - aggregate supply(AS)</a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/34758/unit-331-macroeconomic-objectives-economic-growth" title="Unit 3.3(1) Macroeconomic objectives: economic growth">Unit 3.3(1) Macroeconomic objectives: economic growth</a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/34771/unit-332-macroeconomic-objectives-unemployment-" title="Unit 3.3(2) Macroeconomic objectives: unemployment ">Unit 3.3(2) Macroeconomic objectives: unemployment </a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/34778/unit-333-macroeconomic-objectives-inflation-and-deflation-" title="Unit 3.3(3) Macroeconomic objectives: inflation and deflation ">Unit 3.3(3) Macroeconomic objectives: inflation and deflation </a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/34925/unit-341-economics-of-inequality-and-poverty" title="Unit 3.4(1) Economics of inequality and poverty">Unit 3.4(1) Economics of inequality and poverty</a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/34946/unit-342-policies-to-improve-equality-equity-and-poverty" title="Unit 3.4(2) Policies to improve equality, equity and poverty">Unit 3.4(2) Policies to improve equality, equity and poverty</a></li><li class="current" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/34993/unit-35-government-management-of-the-economy-monetary-policy" title="Unit 3.5 Government management of the economy – monetary policy">Unit 3.5 Government management of the economy – monetary policy</a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/34962/unit-36-government-management-of-the-economy-fiscal-policy" title="Unit 3.6 Government management of the economy – fiscal policy">Unit 3.6 Government management of the economy – fiscal policy</a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/35017/unit-371-market-based-supply-side-policies-" title="Unit 3.7(1) Market based supply-side policies ">Unit 3.7(1) Market based supply-side policies </a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/35018/unit-372-interventionist-supply-side-policies-" title="Unit 3.7(2) Interventionist supply-side policies ">Unit 3.7(2) Interventionist supply-side policies </a></li><li class=" parent" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/45803/economics-real-world-examples-and-extension-material-" title="Economics real world examples and extension material ">Economics real world examples and extension material </a></li><ul class="level-3 "><li class="" style="padding-left: 42px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/42639/measuring-economic-well-being" title="Measuring economic well-being">Measuring economic well-being</a></li><li class="" style="padding-left: 42px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/43044/inflation" title="Inflation">Inflation</a></li><li class="" style="padding-left: 42px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/42350/inequality" title="Inequality">Inequality</a></li><li class="" style="padding-left: 42px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/41639/inequity" title="Inequity">Inequity</a></li></ul></ul><li class=" parent" style="padding-left: 14px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/35414/chapter-4-the-global-economy" title="Chapter 4: The Global Economy">Chapter 4: The Global Economy</a></li><ul class="level-2 "><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/35346/unit-41-benefits-of-international-trade" title="Unit 4.1 Benefits of international trade">Unit 4.1 Benefits of international trade</a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/35348/unit-4243-trade-protectionism" title="Unit 4.2/4.3 Trade protectionism">Unit 4.2/4.3 Trade protectionism</a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/35407/unit-44-economic-integration-" title="Unit 4.4 Economic integration ">Unit 4.4 Economic integration </a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/35409/unit-45-exchange-rates" title="Unit 4.5 Exchange rates">Unit 4.5 Exchange rates</a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/35413/unit-46-balance-of-payments-" title="Unit 4.6 Balance of payments ">Unit 4.6 Balance of payments </a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/35675/unit-47-sustainable-development" title="Unit 4.7 Sustainable development">Unit 4.7 Sustainable development</a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/35685/unit-48-measuring-development-" title="Unit 4.8 Measuring development ">Unit 4.8 Measuring development </a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/35687/unit-49-barriers-to-economic-development" title="Unit 4.9 Barriers to economic development">Unit 4.9 Barriers to economic development</a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/35702/unit-410-economic-growth-and-economic-development-strategies" title="Unit 4.10: Economic growth and economic development strategies">Unit 4.10: Economic growth and economic development strategies</a></li><li class=" parent" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/45804/economics-real-world-examples-and-extension-material-" title="Economics real world examples and extension material ">Economics real world examples and extension material </a></li><ul class="level-3 "><li class="" style="padding-left: 42px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/41927/foreign-currency" title="Foreign currency">Foreign currency</a></li><li class="" style="padding-left: 42px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/43532/exchange-rates" title="Exchange rates">Exchange rates</a></li><li class="" style="padding-left: 42px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/43804/balance-of-payments" title="Balance of payments">Balance of payments</a></li><li class="" style="padding-left: 42px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/41796/economic-development" title="Economic development">Economic development</a></li></ul></ul></ul><li class=" parent std-toplevel" style="padding-left: 4px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/20132/units-1-2-microeconomics" title="Units 1-2: Microeconomics">Units 1-2: Microeconomics</a></li><ul class="level-1 "><li class=" parent" style="padding-left: 14px"><i class="expander fa fa-caret-right "></i><a class="std-disabled" href="#" title="Unit 1: Introduction to economics">Unit 1: Introduction to economics</a></li><ul class="level-2 "><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/20091/introductory-activity" title="Introductory activity">Introductory activity</a></li><li class=" parent" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/20093/unit-11-scarcity-choice-and-opportunity-cost" title="Unit 1.1: Scarcity, choice and opportunity cost">Unit 1.1: Scarcity, choice and opportunity cost</a></li><ul class="level-3 "><li class="" style="padding-left: 42px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/21647/factors-of-production" title="Factors of production">Factors of production</a></li></ul><li class=" parent" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/20114/economic-systems" title="Economic systems">Economic systems</a></li><ul class="level-3 "><li class="" style="padding-left: 42px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/20134/public-and-private-sectors" title="Public and private sectors">Public and private sectors</a></li></ul><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/28055/unit-12-economics-as-a-social-science" title="Unit 1.2: Economics as a social science">Unit 1.2: Economics as a social science</a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/29921/circular-flow-of-national-income" title="Circular flow of national income">Circular flow of national income</a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/29829/unit-1-review-terms" title="Unit 1: Review terms">Unit 1: Review terms</a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/41600/introduction-to-economics-crossword" title="Introduction to economics crossword">Introduction to economics crossword</a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/4331/unit-1-multiple-choice-quiz" title="Unit 1: Multiple choice quiz">Unit 1: Multiple choice quiz</a></li></ul><li class=" parent" style="padding-left: 14px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/20177/unit-21-23-competitive-markets-demand-and-supply" title="Unit 2.1-2.3: Competitive markets - demand and supply">Unit 2.1-2.3: Competitive markets - demand and supply</a></li><ul class="level-2 "><li class=" parent" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/28517/unit-21-demand" title="Unit 2.1: Demand">Unit 2.1: Demand</a></li><ul class="level-3 "><li class="" style="padding-left: 42px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/22349/determinants-of-demand" title="Determinants of demand">Determinants of demand</a></li></ul><li class=" parent" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/29949/unit-22-supply-" title="Unit 2.2: Supply ">Unit 2.2: Supply </a></li><ul class="level-3 "><li class="" style="padding-left: 42px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/20184/changes-to-supply-and-demand-" title="Changes to supply and demand ">Changes to supply and demand </a></li><li class="" style="padding-left: 42px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/21992/practise-exercises" title="Practise exercises">Practise exercises</a></li><li class="" style="padding-left: 42px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/26112/gold-exchange-game-demand-and-supply" title="Gold exchange game: Demand and supply">Gold exchange game: Demand and supply</a></li></ul><li class=" parent" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/20194/unit-23-competitive-market-equilibrium" title="Unit 2.3: Competitive market equilibrium">Unit 2.3: Competitive market equilibrium</a></li><ul class="level-3 "><li class="" style="padding-left: 42px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/20144/producer-and-consumer-surplus" title="Producer and consumer surplus">Producer and consumer surplus</a></li></ul><li class=" parent" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/22351/veblen-goods-and-super-luxury-goods" title="Veblen goods and super luxury goods">Veblen goods and super luxury goods</a></li><ul class="level-3 "><li class="" style="padding-left: 42px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/25677/are-cryptocurrencies-the-new-tulipmania" title="Are Cryptocurrencies the new Tulipmania?">Are Cryptocurrencies the new Tulipmania?</a></li></ul><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/20472/unit-21-23-multiple-choice-quiz" title="Unit 2.1-2.3: Multiple choice quiz">Unit 2.1-2.3: Multiple choice quiz</a></li></ul><li class=" parent" style="padding-left: 14px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/20113/unit-24-consumer-and-producer-behaviour-hl-only" title="Unit 2.4: Consumer and producer behaviour (HL only)">Unit 2.4: Consumer and producer behaviour (HL only)</a></li><ul class="level-2 "><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/36073/behavioural-economics-consumer-biases-nudge-theory-hl-only" title="Behavioural economics: Consumer biases / nudge theory (HL only)">Behavioural economics: Consumer biases / nudge theory (HL only)</a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/20378/business-objectives-hl-only" title="Business objectives (HL only)">Business objectives (HL only)</a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/28741/unit-21-24-review-terms-" title="Unit 2.1-2.4: Review terms ">Unit 2.1-2.4: Review terms </a></li></ul><li class=" parent" style="padding-left: 14px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/20195/unit-25-26-elasticity" title="Unit 2.5-2.6: Elasticity">Unit 2.5-2.6: Elasticity</a></li><ul class="level-2 "><li class=" parent" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/28713/unit-25-price-elasticity-of-demand" title="Unit 2.5: Price elasticity of demand">Unit 2.5: Price elasticity of demand</a></li><ul class="level-3 "><li class="" style="padding-left: 42px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/21545/determinants-of-price-elasticity-" title="Determinants of price elasticity ">Determinants of price elasticity </a></li><li class="" style="padding-left: 42px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/21532/ped-elasticity-and-sales-revenue" title="PED elasticity and sales revenue?">PED elasticity and sales revenue?</a></li></ul><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/21259/unit-25-income-elasticity-of-demand-yed" title="Unit 2.5: Income elasticity of demand (YED)">Unit 2.5: Income elasticity of demand (YED)</a></li><li class=" parent" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/21200/unit-26-price-elasticity-of-supply" title="Unit 2.6: Price elasticity of supply">Unit 2.6: Price elasticity of supply</a></li><ul class="level-3 "><li class="" style="padding-left: 42px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/20207/perfectly-elastic-inelastic-supply-curves" title="Perfectly elastic / inelastic supply curves">Perfectly elastic / inelastic supply curves</a></li></ul><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/20230/a-mathematical-note-about-elasticity-" title="A mathematical note about elasticity ">A mathematical note about elasticity </a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/39037/demand-and-supply-crossword" title="Demand and supply crossword">Demand and supply crossword</a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/29021/unit-25-26-review-terms" title="Unit 2.5-2.6: Review terms">Unit 2.5-2.6: Review terms</a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/20474/unit-25-26-multiple-choice-quiz-" title="Unit 2.5-2.6: Multiple choice quiz ">Unit 2.5-2.6: Multiple choice quiz </a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/44474/unit-21-25-competitive-markets-quiz" title="Unit 2.1- 2.5: Competitive markets quiz">Unit 2.1- 2.5: Competitive markets quiz</a></li></ul><li class=" parent" style="padding-left: 14px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/20243/unit-27-the-role-of-government-in-microeconomics-" title="Unit 2.7: The role of government in microeconomics ">Unit 2.7: The role of government in microeconomics </a></li><ul class="level-2 "><li class=" parent" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/26590/indirect-taxation" title="Indirect taxation">Indirect taxation</a></li><ul class="level-3 "><li class="" style="padding-left: 42px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/20246/ped-and-the-burden-of-tax-hl-only-" title="PED and the burden of tax (HL only) ">PED and the burden of tax (HL only) </a></li></ul><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/20277/government-subsidies-" title="Government subsidies ">Government subsidies </a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/29117/unit-27-indirect-tax-and-subsidy-review-terms" title="Unit 2.7: Indirect tax and subsidy review terms">Unit 2.7: Indirect tax and subsidy review terms</a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/20287/price-controls-maximum-price-" title="Price controls − maximum price ">Price controls − maximum price </a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/20288/minimum-price-" title="Minimum price ">Minimum price </a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/21540/minimum-wage-" title="Minimum wage ">Minimum wage </a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/38849/labour-market-crossword" title="Labour market crossword">Labour market crossword</a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/29260/unit-27-price-controls-review-terms" title="Unit 2.7: Price controls review terms">Unit 2.7: Price controls review terms</a></li></ul><li class=" parent" style="padding-left: 14px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/20303/unit-28-210-market-failure-" title="Unit 2.8-2.10: Market failure ">Unit 2.8-2.10: Market failure </a></li><ul class="level-2 "><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/21543/unit-28-merit-goods-" title="Unit 2.8: Merit goods ">Unit 2.8: Merit goods </a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/23123/unit-28-demerit-goods-negative-externalities" title="Unit 2.8: Demerit goods / negative externalities">Unit 2.8: Demerit goods / negative externalities</a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/38850/market-failure-crossword" title="Market failure crossword">Market failure crossword</a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/29262/unit-29-economics-of-the-environment-and-public-goods-" title="Unit 2.9: Economics of the environment and public goods ">Unit 2.9: Economics of the environment and public goods </a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/20332/unit-210-asymmetric-information-hl-only" title="Unit 2.10: Asymmetric information (HL only)">Unit 2.10: Asymmetric information (HL only)</a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/29828/unit-28-210-market-failure-review-sheet" title="Unit 2.8-2.10: Market failure review sheet">Unit 2.8-2.10: Market failure review sheet</a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/29827/unit-28-210-market-failure-review-terms" title="Unit 2.8-2.10: Market failure review terms">Unit 2.8-2.10: Market failure review terms</a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/20479/unit-27-210-multiple-choice-quiz-" title="Unit 2.7-2.10: Multiple choice quiz ">Unit 2.7-2.10: Multiple choice quiz </a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/44501/unit-27-210-government-failure-revision-quiz" title="Unit 2.7-2.10 Government failure revision quiz">Unit 2.7-2.10 Government failure revision quiz</a></li></ul><li class=" parent" style="padding-left: 14px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/20330/unit-211-market-power-hl-only" title="Unit 2.11: Market power (HL only)">Unit 2.11: Market power (HL only)</a></li><ul class="level-2 "><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/29835/assessment-map" title="Assessment map">Assessment map</a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/21528/production-hl-only" title="Production (HL only)">Production (HL only)</a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/29978/revenue-theory-hl-only" title="Revenue theory (HL only)">Revenue theory (HL only)</a></li><li class=" parent" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/20357/costs-of-production-hl-only" title="Costs of production (HL only)">Costs of production (HL only)</a></li><ul class="level-3 "><li class="" style="padding-left: 42px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/21286/economies-and-diseconomies-of-scale-hl-only" title="Economies and diseconomies of scale (HL only)">Economies and diseconomies of scale (HL only)</a></li><li class="" style="padding-left: 42px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/22494/long-run-average-cost-curves-hl-only" title="Long run average cost curves (HL only)">Long run average cost curves (HL only)</a></li><li class="" style="padding-left: 42px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/29838/breakeven-hl-only" title="Breakeven (HL only)">Breakeven (HL only)</a></li></ul><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/20340/economic-profit-hl-only" title="Economic profit (HL only)">Economic profit (HL only)</a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/39082/market-power-crossword" title="Market power crossword">Market power crossword</a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/22495/revision-exercise-on-cost-and-revenue-hl-only" title="Revision exercise on cost and revenue (HL only)">Revision exercise on cost and revenue (HL only)</a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/29845/unit-211-costs-revenue-and-profit-review-sheet-hl-only" title="Unit 2.11: Costs, revenue and profit review sheet (HL only)">Unit 2.11: Costs, revenue and profit review sheet (HL only)</a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/44484/unit-211-multiple-choice-quiz-sl-units" title="Unit 2.11: Multiple choice quiz (SL units)">Unit 2.11: Multiple choice quiz (SL units)</a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/29846/market-structures-hl-only" title="Market structures (HL only)">Market structures (HL only)</a></li><li class=" parent" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/29981/perfect-competition-hl-only" title="Perfect competition (HL only)">Perfect competition (HL only)</a></li><ul class="level-3 "><li class="" style="padding-left: 42px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/24486/profit-in-perfect-competition-hl-only" title="Profit in perfect competition (HL only)">Profit in perfect competition (HL only)</a></li><li class="" style="padding-left: 42px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/21302/efficiency-in-perfect-competition-hl-only" title="Efficiency in perfect competition (HL only)">Efficiency in perfect competition (HL only)</a></li></ul><li class=" parent" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/20430/monopoly-hl-only" title="Monopoly (HL only)">Monopoly (HL only)</a></li><ul class="level-3 "><li class="" style="padding-left: 42px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/24529/profit-and-revenue-maximisation-in-monopoly-hl-only" title="Profit and revenue maximisation in monopoly (HL only)">Profit and revenue maximisation in monopoly (HL only)</a></li><li class="" style="padding-left: 42px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/21306/a-comparison-of-monopoly-and-perfect-competition-hl-only" title="A comparison of monopoly and perfect competition? (HL only)">A comparison of monopoly and perfect competition? (HL only)</a></li></ul><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/20435/monopolistic-competition-hl-only" title="Monopolistic competition (HL only)">Monopolistic competition (HL only)</a></li><li class=" parent" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/20436/oligopoly-hl-only" title="Oligopoly (HL only)">Oligopoly (HL only)</a></li><ul class="level-3 "><li class="" style="padding-left: 42px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/22310/game-theory-hl-only" title="Game theory (HL only)">Game theory (HL only)</a></li></ul><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/29918/unit-211-market-structures-review-sheet-hl-only" title="Unit 2.11: Market structures review sheet (HL only)">Unit 2.11: Market structures review sheet (HL only)</a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/32337/unit-211-diagram-revision-" title="Unit 2.11: Diagram revision ">Unit 2.11: Diagram revision </a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/20480/unit-211-multiple-choice-quiz-hl-only" title="Unit 2.11: Multiple choice quiz (HL only)">Unit 2.11: Multiple choice quiz (HL only)</a></li></ul><li class="" style="padding-left: 14px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/32425/unit-212-the-markets-inability-to-achieve-equity-hl-only" title="Unit 2.12: The market’s inability to achieve equity (HL only)">Unit 2.12: The market’s inability to achieve equity (HL only)</a></li></ul><li class=" parent std-toplevel" style="padding-left: 4px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/21842/unit-3-macroeconomics-" title="Unit 3: Macroeconomics ">Unit 3: Macroeconomics </a></li><ul class="level-1 "><li class=" parent" style="padding-left: 14px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/3942/unit-31-measuring-economic-activity-and-illustrating-its-variati" title="Unit 3.1: Measuring economic activity and illustrating its variations">Unit 3.1: Measuring economic activity and illustrating its variations</a></li><ul class="level-2 "><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/20558/calculating-national-income" title="Calculating national income">Calculating national income</a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/21297/gdp-gni-as-a-measure-of-living-standards" title="GDP / GNI as a measure of living standards">GDP / GNI as a measure of living standards</a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/20567/national-income-statistics" title="National income statistics">National income statistics</a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/21580/the-business-cycle" title="The business cycle">The business cycle</a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/29931/unit-31-economic-activity-review-sheet" title="Unit 3.1: Economic activity review sheet">Unit 3.1: Economic activity review sheet</a></li></ul><li class=" parent" style="padding-left: 14px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/20592/unit-32-variations-in-economic-activityaggregate-demand-and-aggr" title="Unit 3.2: Variations in economic activity—aggregate demand and aggregate supply">Unit 3.2: Variations in economic activity—aggregate demand and aggregate supply</a></li><ul class="level-2 "><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/29933/aggregate-demand-and-supply" title="Aggregate demand and supply">Aggregate demand and supply</a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/21582/components-of-aggregate-demand" title="Components of aggregate demand">Components of aggregate demand</a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/20634/equilibrium-in-macroeconomics-neo-classical-perspective" title="Equilibrium in macroeconomics (neo-classical perspective)">Equilibrium in macroeconomics (neo-classical perspective)</a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/20439/equilibrium-in-macroeconomics-keynesian-perspective" title="Equilibrium in macroeconomics (keynesian perspective)">Equilibrium in macroeconomics (keynesian perspective)</a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/21349/john-maynard-keynes" title="John Maynard Keynes">John Maynard Keynes</a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/20650/keynesian-v-free-market-debate-" title="Keynesian v free market debate ">Keynesian v free market debate </a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/21342/changes-in-the-long-run-aggregate-supply" title="Changes in the long run aggregate supply">Changes in the long run aggregate supply</a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/30055/unit-32-aggregate-demand-and-supply-review-sheet" title="Unit 3.2: Aggregate demand and supply review sheet">Unit 3.2: Aggregate demand and supply review sheet</a></li></ul><li class=" parent" style="padding-left: 14px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/20610/unit-35-and-36-demand-management-fiscal-and-monetary-policy" title="Unit 3.5 and 3.6: Demand management - fiscal and monetary policy">Unit 3.5 and 3.6: Demand management - fiscal and monetary policy</a></li><ul class="level-2 "><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/30058/government-budget" title="Government budget">Government budget</a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/21585/fiscal-policy-" title="Fiscal policy ">Fiscal policy </a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/21343/multiplier-hl-only" title="Multiplier (HL only)">Multiplier (HL only)</a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/21795/monetary-policy-" title="Monetary policy ">Monetary policy </a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/30071/independent-central-banks" title="Independent central banks">Independent central banks</a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/30083/unit-35-and-36-review-sheet" title="Unit 3.5 and 3.6 review sheet">Unit 3.5 and 3.6 review sheet</a></li></ul><li class=" parent" style="padding-left: 14px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/20615/unit-37-supply-side-policies" title="Unit 3.7: Supply side policies">Unit 3.7: Supply side policies</a></li><ul class="level-2 "><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/20651/the-role-of-supply-side-policies" title="The role of supply side policies">The role of supply side policies</a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/20622/market-based-and-interventionist-supply-side-policies-" title="Market based and interventionist supply side policies ">Market based and interventionist supply side policies </a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/39129/aggregate-demand-and-supply-crossword" title="Aggregate demand and supply crossword">Aggregate demand and supply crossword</a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/30086/unit-37-review-sheet" title="Unit 3.7: Review sheet">Unit 3.7: Review sheet</a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/20755/unit-31-32-and-35-37-multiple-choice-quiz-" title="Unit 3.1-3.2 and 3.5-3.7: Multiple choice quiz ">Unit 3.1-3.2 and 3.5-3.7: Multiple choice quiz </a></li></ul><li class="" style="padding-left: 14px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/44522/unit-31-32-and-35-37-revision-quiz" title="Unit 3.1-3.2 and 3.5-3.7: Revision quiz">Unit 3.1-3.2 and 3.5-3.7: Revision quiz</a></li><li class=" parent" style="padding-left: 14px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/20686/unit-33-macroeconomic-objectives" title="Unit 3.3: Macroeconomic objectives">Unit 3.3: Macroeconomic objectives</a></li><ul class="level-2 "><li class=" parent" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/30118/unemployment" title="Unemployment">Unemployment</a></li><ul class="level-3 "><li class="" style="padding-left: 42px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/21351/types-of-unemployment" title="Types of unemployment?">Types of unemployment?</a></li><li class="" style="padding-left: 42px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/21593/equilibrium-unemployment-" title="Equilibrium unemployment ">Equilibrium unemployment </a></li><li class="" style="padding-left: 42px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/21594/disequilibrium-unemployment" title="Disequilibrium unemployment">Disequilibrium unemployment</a></li><li class="" style="padding-left: 42px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/30458/unemployment-review-sheet" title="Unemployment review sheet">Unemployment review sheet</a></li></ul><li class=" parent" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/20713/inflation-" title="Inflation ">Inflation </a></li><ul class="level-3 "><li class="" style="padding-left: 42px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/20712/measuring-inflation-hl-only" title="Measuring inflation (HL only)">Measuring inflation (HL only)</a></li><li class="" style="padding-left: 42px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/20685/costs-of-inflation-and-deflation" title="Costs of inflation and deflation">Costs of inflation and deflation</a></li><li class="" style="padding-left: 42px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/30465/inflation-review-sheet" title="Inflation review sheet">Inflation review sheet</a></li></ul><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/20716/unemployment-v-inflation-trade-off-hl-only" title="Unemployment v inflation trade off (HL only)">Unemployment v inflation trade off (HL only)</a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/39133/macroeconomic-objectives-crossword" title="Macroeconomic objectives crossword">Macroeconomic objectives crossword</a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/44511/unit-33-macroeconomic-indicators-revision-quiz" title="Unit 3.3: Macroeconomic indicators revision quiz">Unit 3.3: Macroeconomic indicators revision quiz</a></li></ul><li class=" parent" style="padding-left: 14px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/20741/unit-34-economics-of-inequality-and-poverty" title="Unit 3.4: Economics of inequality and poverty">Unit 3.4: Economics of inequality and poverty</a></li><ul class="level-2 "><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/32398/inequality" title="Inequality">Inequality</a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/21356/the-role-of-spending-and-taxation-on-inequality-" title="The role of spending and taxation on inequality ">The role of spending and taxation on inequality </a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/21313/consequences-of-economic-growth" title="Consequences of economic growth">Consequences of economic growth</a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/30257/economic-growth-and-inequality-review-sheet" title="Economic growth and inequality review sheet">Economic growth and inequality review sheet</a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/20756/unit-33-34-multiple-choice-" title="Unit 3.3-3.4: Multiple choice ">Unit 3.3-3.4: Multiple choice </a></li></ul></ul><li class=" parent std-toplevel" style="padding-left: 4px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/21844/unit-4-global-economy" title="Unit 4: Global economy">Unit 4: Global economy</a></li><ul class="level-1 "><li class=" parent" style="padding-left: 14px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/21367/unit-41-benefits-of-international-trade" title="Unit 4.1: Benefits of international trade">Unit 4.1: Benefits of international trade</a></li><ul class="level-2 "><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/30529/benefits-of-international-trade" title="Benefits of international trade">Benefits of international trade</a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/20823/absolute-and-comparative-advantage-hl-only" title="Absolute and comparative advantage (HL only)">Absolute and comparative advantage (HL only)</a></li></ul><li class=" parent" style="padding-left: 14px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/20845/unit-42-43-trade-protection" title="Unit 4.2-4.3: Trade protection">Unit 4.2-4.3: Trade protection</a></li><ul class="level-2 "><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/32419/barriers-to-trade-calculations-are-hl-only" title="Barriers to trade (calculations are HL only)">Barriers to trade (calculations are HL only)</a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/21610/case-study-on-tata-steel" title="Case study on Tata Steel">Case study on Tata Steel</a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/23455/the-defence-industry" title="The Defence industry">The Defence industry</a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/30610/unit-41-43-review-sheet" title="Unit 4.1-4.3: Review sheet">Unit 4.1-4.3: Review sheet</a></li></ul><li class=" parent" style="padding-left: 14px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/20894/unit-44-economic-integration-" title="Unit 4.4: Economic integration ">Unit 4.4: Economic integration </a></li><ul class="level-2 "><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/30634/economic-integration-some-hl-tasks" title="Economic integration (some HL tasks)">Economic integration (some HL tasks)</a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/20840/world-trade-organisation-wto" title="World trade organisation (WTO)">World trade organisation (WTO)</a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/30635/unit-44-review-sheet" title="Unit 4.4: Review sheet">Unit 4.4: Review sheet</a></li></ul><li class=" parent" style="padding-left: 14px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/20853/unit-45-exchange-rates" title="Unit 4.5: Exchange rates">Unit 4.5: Exchange rates</a></li><ul class="level-2 "><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/30611/floating-exchange-rates" title="Floating exchange rates">Floating exchange rates</a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/31824/fixed-managed-exchange-rate-systems-some-hl-tasks" title="Fixed / managed exchange rate systems (some HL tasks)">Fixed / managed exchange rate systems (some HL tasks)</a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/21624/the-market-for-foreign-exchange" title="The market for foreign exchange">The market for foreign exchange</a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/30614/unit-45-review-sheet" title="Unit 4.5: Review sheet">Unit 4.5: Review sheet</a></li></ul><li class=" parent" style="padding-left: 14px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/20859/unit-46-balance-of-payments" title="Unit 4.6: Balance of payments">Unit 4.6: Balance of payments</a></li><ul class="level-2 "><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/30624/balance-of-payments-" title="Balance of payments ">Balance of payments </a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/21386/current-account-hl-only" title="Current account (HL only)">Current account (HL only)</a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/20872/the-marshall-lerner-condition-j-curve-hl-only" title="The Marshall-Lerner condition / J curve (HL only)">The Marshall-Lerner condition / J curve (HL only)</a></li></ul><li class="" style="padding-left: 14px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/20899/units-41-46-multiple-choice-quiz-" title="Units 4.1-4.6: Multiple choice quiz ">Units 4.1-4.6: Multiple choice quiz </a></li><li class="" style="padding-left: 14px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/42989/unit-41-46-multiple-choice-quiz-ii" title="Unit 4.1-4.6: Multiple choice quiz II">Unit 4.1-4.6: Multiple choice quiz II</a></li><li class="" style="padding-left: 14px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/39438/unit-41-46-international-trade-crossword" title="Unit 4.1-4.6: International trade crossword">Unit 4.1-4.6: International trade crossword</a></li><li class=" parent" style="padding-left: 14px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/32423/unit-47-sustainable-development-" title="Unit 4.7: Sustainable development ">Unit 4.7: Sustainable development </a></li><ul class="level-2 "><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/26092/water-scarcity-activity" title="Water scarcity activity">Water scarcity activity</a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/32426/sustainable-development" title="Sustainable development">Sustainable development</a></li></ul><li class=" parent" style="padding-left: 14px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/20928/unit-48-measuring-development-" title="Unit 4.8: Measuring development ">Unit 4.8: Measuring development </a></li><ul class="level-2 "><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/30686/measuring-development" title="Measuring development">Measuring development</a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/21627/economic-development-" title="Economic development ">Economic development </a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/30679/unit-47-48-review-sheet" title="Unit 4.7-4.8: Review sheet">Unit 4.7-4.8: Review sheet</a></li></ul><li class=" parent" style="padding-left: 14px"><i class="expander fa fa-caret-right "></i><a class="std-disabled" href="#" title="Unit 4.9: Barriers to development">Unit 4.9: Barriers to development</a></li><ul class="level-2 "><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/30727/barriers-to-development-in-international-trade" title="Barriers to development in International trade">Barriers to development in International trade</a></li></ul><li class=" parent" style="padding-left: 14px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/32430/unit-410-economic-growth-andor-economic-development-strategies" title="Unit 4.10: Economic growth and/or economic development strategies">Unit 4.10: Economic growth and/or economic development strategies</a></li><ul class="level-2 "><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/30687/the-role-of-domestic-factors" title="The role of domestic factors">The role of domestic factors</a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/30688/the-role-of-international-trade-and-development" title="The role of international trade and development">The role of international trade and development</a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/30689/the-role-of-foreign-direct-investment-fdi" title="The role of foreign direct investment (FDI)">The role of foreign direct investment (FDI)</a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/25240/the-role-of-foreign-aid-" title="The role of foreign aid ">The role of foreign aid </a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/30819/multilateral-development-assistance" title="Multilateral development assistance">Multilateral development assistance</a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/21632/the-role-of-international-debt" title="The role of international debt">The role of international debt</a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/25242/the-balance-between-markets-and-intervention" title="The balance between markets and intervention">The balance between markets and intervention</a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/30926/unit-49-410-review-sheet" title="Unit 4.9 - 4.10: Review sheet">Unit 4.9 - 4.10: Review sheet</a></li></ul></ul><li class=" parent std-toplevel" style="padding-left: 4px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/21380/assessment" title="Assessment">Assessment</a></li><ul class="level-1 "><li class=" parent" style="padding-left: 14px"><i class="expander fa fa-caret-right "></i><a class="std-disabled" href="#" title="Internal assessment ">Internal assessment </a></li><ul class="level-2 "><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/20608/how-to-write-your-ia-student-handout" title="How to write your IA? (student handout)">How to write your IA? 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<div id="main-column" class="span9"> <article id="unit-35-government-management-of-the-economy-monetary-policy" style="margin-top: 16px;">
<h1 class="section-title">Unit 3.5 Government management of the economy – monetary policy</h1>
<ul class="breadcrumb"><li><a title="Home" href="https://www.student.thinkib.net/economics"><i class="fa fa-home"></i></a><span class="divider">/</span></li><li><span class="gray">Textbook</span><span class="divider">/</span></li><li><span class="gray">Chapter 3: Macroeconomics</span><span class="divider">/</span></li><li><span class="active">Unit 3.5 Government management of the economy – monetary policy</span></li></ul>
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<div class="intro-card"><div class="bg-cover" style="background-image: url("/media/ib/economics/images/textbook/macro-policies/australian-fed.jpg");"></div><img src="/media/ib/economics/images/textbook/macro-policies/australian-fed.jpg" style="display: none" /><div class="content"><p class="text">The government can use demand management or a demand-side approach where it affects aggregate demand in the economy to achieve its macroeconomic objectives. The government demand management approach can be broken down into monetary policy and fiscal policy. This chapter considers how monetary policy can be used to try and achieve the government's macroeconomic objectives.</p></div></div><div class="panel panel-has-footer" style="box-shadow: rgba(17, 34, 51, 0.3) 0px 10px 30px -15px; border-color: rgb(39, 45, 105);"><div class="panel-heading" style="background-color: rgb(39, 45, 105);"><a class="expander pull-right" href="#"><span class="fa fa-plus"></span></a><div><h3><strong>What you should know by the end of this chapter:</strong></h3></div></div></div><ul><li>Aims of monetary policy<img alt="" height="231" src="/media/ib/economics/images/textbook/macro-policies/monetary-policy.jpg" style="float: right;" width="430" /></li><li>Control of money supply and interest rates by the central bank</li><li>Monetary policy to achieve different macroeconomic objectives</li><li>Money creation by commercial banks (HL)</li><li>Tools of monetary policy (HL)</li><li>Determination of interest rates through the demand and supply for money (HL)</li><li>Real and nominal interest rates</li><li>Expansionary monetary policy</li><li>Contractionary monetary policy</li><li>Evaluation of monetary policy</li></ul><div class="greyBg"><h3>Revision material</h3><p><img alt="" src="/media/ib/economics/images/textbook/revision-material/logo.jpg" style="width: 200px; height: 95px; float: left;" />The link to the attached pdf is revision material from <strong>Unit 3.5 Government management of the economy – monetary policy</strong>. The revision material can be downloaded as a student handout.</p><p><a href="/media/ib/economics/images/textbook/macro-policies/monetary-policy/monetary-policy-revision-notes.pdf" target="_blank" title="Revision"><img class="ico" src="https://assets.inthinking.net/thinkib/icons/revision.png" /> Revision notes</a></p></div><div class="blueBg"><h3><strong>The aims of monetary policy</strong></h3><p>Governments have different economic tools they can use to target their macroeconomic objectives:</p><ul><li>Sustainable economic growth</li><li>Low unemployment</li><li>External balance on the current account balance of payments</li><li>Low inflation or price stability</li></ul><p>The government can use demand management or a demand-side approach where it affects aggregate demand in the economy to achieve these objectives. The government demand management approach can be broken down into monetary policy and fiscal policy. This chapter considers how monetary policy can be used to try and achieve the government's macroeconomic objectives.</p><h3><strong>Understanding monetary policy</strong></h3><p>Monetary policy is where the government uses interest rates and the supply of money to achieve its macroeconomic objectives. For example, the central bank of a country uses interest rates and the supply of money to manage the rate of inflation.</p><h4><strong>Importance of the central bank</strong></h4><div class="polaroid-left"><img src="/media/ib/economics/images/textbook/macro-policies/boj.jpg" style="margin: 8px 0px; float: left; width: 265px; height: 344px;" title="https://www.bloomberg.com/news/articles/2020-03-02/boj-s-kuroda-pledges-to-maintain-market-stability-in-statement" /><div class="caption">Haruhiko Kuroda - Head of the Bank of Japan</div></div><p>The central bank in an economy is the key institution the government uses to apply monetary policy. In the US the central bank is the Federal Reserve, in the EU it is the European Central Bank and in Japan, it is the Bank of Japan. In recent years many countries have made their central bank independent from the government so it can apply monetary policy without too much political influence on decision-making. The central bank applies monetary policy by using the following tools:</p><ul><li>Base interest (discount) rates</li><li>Quantitative easing</li><li>Open market operations</li><li>Minimum reserve requirements<hr class="hidden" /></li></ul><h3><strong>Determining the supply of money - credit creation (HL)</strong></h3><p>Credit creation is the way commercial banks in an economy create money from the funds deposited with them. Credit creation has an important influence on the money supply of the economy and the way monetary policy works. The process of credit creation is based on the following assumptions:</p><ul><li>One bank represents the whole banking system. In reality, the banking system is dominated by a number of large banks, but in this model, the whole banking system is considered to operate as one bank.</li><li>The firms and households that deposit money in banks will only withdraw a certain proportion at any one time to make transactions. This is realistic if you think about the way most people use their money. For example, we can assume that most customers will only withdraw 20 per cent of their deposit at any one time.</li><li>A minimum reserve asset ratio requirement is set based on the withdrawal rate of the bank's customers. In this case, it is 20 per cent.</li><li>The money withdrawn from the bank will be redeposited bank in the bank and not held outside the banking system.</li><li>Banks make a profit by charging a higher rate of interest to borrowers than they pay to depositors. Thus, banks have an incentive to lend as much as it is safe for them to do.</li></ul><h4><strong>The credit creation process</strong><img alt="" height="355" src="/media/ib/economics/images/textbook/macro-policies/money-multiplier.jpg" style="float: right;" title="http://www.londontown.com/LondonInformation/Useful_Numbers/Barclays_Bank/2e11/imagesPage/35377" width="242" /></h4><p>Based on these assumptions This is how credit creation works in an economy where a single bank represents the whole system:</p><p><strong>Step 1</strong> An initial deposit of $200,000 in cash is put into the bank.</p><p><strong>Step 2</strong> The bank can use the $200,000 as a 20% reserve asset to cover cash withdrawals. In this case, it will use $40,000 of the initial $200,000 deposit to cover withdrawals from the customer who made the $200,000 deposit. The remaining $160,000 can be used to cover cash withdrawals from any loans the bank makes.</p><p><strong>Step 3</strong> An individual asks for a loan from the bank to buy a house for $200,000. The banks will make this loan because they can use $40,000 of the $200,000 initial deposit as a 20 per cent reserve to cover a withdrawal that might occur from the $200,000 loan made. After the loan is made and the borrower buys the house, the individual they bought the house from will deposit the $200,000 back in the bank. As a result of this, the bank has created $200,000 of credit and this money is now circulating in the economy. </p><hr class="hidden" /><p><strong>Step 4</strong> A firm applies for a $600,000 loan from the bank to buy a new machine. The bank has $120,000 of the initial deposit left ($200,000 - $80,000) to cover the 20% reserve asset ratio requirement for the loan for the $600,000 machine. Another $600,000 has been created with this loan so the total amount of credit creation of is $800,000 ($200,000 + $600,000).</p><p><strong>Step 5</strong> The bank will not make any new loans now because it has reached its 20% reserve asset ratio limit where it has $200,000 backing $1,000,000 of funds ($200,000 initial deposit + $200,000 house loan + $600,000 machine loan).</p><h4><strong>The money multiplier</strong></h4><p>The money multiplier is the amount of credit that can be created from a certain quantity of money deposited. The money multiplier can be calculated by using the equation:</p><p>1 / minimum reserve requirement = money multiplier</p><p>1 / 0.2 = 5</p><p>5 x $200,000 = $1,000,000</p><p>This example of credit creation shows how an increase in bank deposits of $200,000 can lead to a $1,000,000 ($200,000 deposit plus $800,000 created credit) increase in the money supply when the reserve asset ratio is 20 per cent.</p></div><div class="pinkBg"><div class="panel panel-has-footer" style="box-shadow: rgba(17, 34, 51, 0.3) 0px 10px 30px -15px; border-color: rgb(39, 45, 105);"><div class="panel-heading" style="background-color: rgb(39, 45, 105);"><a class="expander pull-right" href="#"><span class="fa fa-plus"></span></a><div><h4><strong>Inquiry case example - Increasing credit in Australia</strong></h4></div></div></div><p><img alt="" src="/media/ib/economics/images/textbook/macro-policies/australian-fed.jpg" style="float: left; width: 356px; height: 250px;" title="https://www.ig.com/en/news-and-trade-ideas/forex-news/the-central-bank-of-australia-reveals-the-countrys-new--20-bill-190222" />Data from the Australian central bank, the Reserve Bank of Australia showed that businesses and households borrowed record amounts last month. Australia's domestic credit increased 4.9% in June, compared with an increase of 5.6% in the previous month. Australia's domestic credit growth has averaged 8.6%, over the last 20 years.</p><hr class="hidden" /><p>Whilst higher borrowing in Australia helps fund increased consumption and investment it does increase household and business debt in the country and can put a strain on the banking system. If people lose their jobs and businesses fail, then the resulting bad debts for banks can lead to losses for banks, as firms and households cannot repay their loans.</p><h5><a href="/media/ib/economics/images/textbook/macro-policies/monetary-policy/bank-of-australia.pdf" target="_blank" title="Questions"><img class="ico" src="https://assets.inthinking.net/thinkib/icons/question.png" /> Worksheet questions </a></h5><h5>Questions</h5><p><strong>a. Define the term monetary policy. [2] </strong></p><section class="tib-hiddenbox"><p>Monetary policy is where the government uses interest rates and the supply of money to achieve its macroeconomic objectives.</p></section><p><strong>b. Outline how increased borrowing leads to greater consumption and investment in the Australian economy. [2]</strong></p><section class="tib-hiddenbox"><ul><li>Consumption spending on 'big ticket' items such as cars and home improvements is often funded by borrowing.</li><li>Investment spending such as new buildings and machinery is often funded by borrowing.</li></ul></section><p><strong>c. The minimum reserve requirement in the Australian economy is 8% and $40 million is deposited in the Australian banking system. Calculate the increase in credit. [2]</strong></p><section class="tib-hiddenbox"><p>1/0.08 x $40 million = $500 million</p></section><p><strong>d. Explain the likely effects of a decrease in interest rates on a country with a deflationary gap. [10 marks] </strong></p><section class="tib-hiddenbox"><p>Answers might include: </p><ul><li>Definitions of interest rate and deflationary gap.<img alt="" src="/media/ib/economics/images/textbook/inquiry-case-example-questions/deflationary-gap(1).jpg" style="width: 341px; height: 244px; float: right;" /></li><li>A diagram to show aggregate demand increasing and the deflationary gap being closed. This is shown in the diagram as AD shifts to AD1.</li><li>An explanation that a decrease in interest rates will increase consumption expenditure because household borrowing costs fall and the incentive to save is reduced and this will reduce savings.</li><li>An explanation that lower interest rates will increase investment expenditure because business interest costs are reduced and businesses receive less interest from funds they keep in the bank.<hr class="hidden" /></li><li>An explanation that lower interest rates may cause a country’s exchange rate to depreciate which decreases export prices and increases import prices. This could cause net exports to increase.</li><li>An explanation that a rise in consumption, investments next exports caused by a decrease in interest rates will increase aggregate demand and move national income closer to full employment income – closing the deflationary gap.</li><li>An example of a country where interest rates have been reduced to close a deflationary gap such as a reduction in US interest rates during the Covid19 pandemic.</li></ul></section><h5>Investigation</h5><p><strong>Research current changes in borrowing by firms and households in a country and think about the impact it has on that country’s banking system. </strong></p></div><div class="blueBg"><h3><strong>Interest rates</strong></h3><h4><strong>The influence of the base rate</strong></h4><p>The base interest rate has an important influence over the interest rates set throughout the economy by banks and other lending institutions. The base rate is the interest rate charged by the central bank to the commercial banking sector. The financial system in the economy is set up so that commercial banks need to continuously borrow money from the central bank. If the central banks change the base rate the commercial banks will pay a different rate and they will then pass on this change in interest rate to their customers and the interest rate change will filter through the economy. For example, if the base rate is increased it means commercial banks have to pay more to the central bank, they will then pass the interest rate increase to their customers and interest rates throughout the economy (personal loans, mortgage and credit card interest rates) will increase.</p><h4><strong>Market interest rates</strong></h4><p>The other important influence on interest rates in the economy is the interest rates set in the money markets. The market rate of interest is determined by the demand and supply of money.</p><h5><strong>Demand for money</strong></h5><p>Firms and households demand money because they need to make transactions when they buy goods and services. There is a negative relationship between the rate of interest and the demand for money because as the rate of interest increases the quantity demanded of money falls as the cost of borrowing increases. This means firms and households borrow less and therefore demand less money to buy goods and services. This is particularly true of goods such as cars and goods associated with home improvements. As interest rates decrease the quantity demand for money increases as the cost of borrowing decreases. The demand for money is shown in diagram 3.38.</p><hr class="hidden" /><p><strong><img alt="" height="272" src="/media/ib/economics/images/textbook/macro-policies/demand-and-supply-for-money.jpg" style="float: right;" width="374" /></strong></p><h5><strong>Supply of money</strong></h5><p>The supply of money in the economy is set by the central bank and the banking system. The central bank controls the money issued to the banking system and the banking system creates credit that determines the amount of money circulating in the economy. The supply of money is fixed in a given time period and is perfectly inelastic. This is shown in diagram 3.38.</p><hr class="hidden" /><h5><strong>Equilibrium interest rate</strong></h5><p>The equilibrium rate of interest rate is set where the demand for money equals the supply of money in diagram 3.38.</p><h5><strong>Changes in the market rate of interest<img alt="" height="285" src="/media/ib/economics/images/textbook/macro-policies/change-in-interest-rate.jpg" style="float: left;" width="388" /></strong></h5><p>The market interest rate will change if there is either a change in the demand for money or the supply of money. For example, if there is a fall in aggregate demand in a recession there will be fewer transactions and the money demand curve will fall from Md to Md1 causing a fall in the market of interest. This is shown in diagram 3.39.</p><hr class="hidden" /><p><strong>Nominal and real interest rates</strong></p><p>Nominal interest rates make no allowance for inflation. Most of the economic data used to report the state of the economy use interest rates stated in nominal terms. If a central bank increases interest rates from 1 per cent to 2 per cent this will lead to an increase in the nominal interest rate. The real interest rate makes an allowance for inflation. It is calculated as:</p><p>Nominal interest rate – inflation rate = real interest rate</p><p>If a country has a nominal interest rate of 5 per cent and the inflation rate is 2 per cent, the real interest rate is:</p><p>5% - 2% = 3%</p><p>The real interest rate is used by firms and households to give them information about the returns they pay or receive on money borrowed or saved. For example, if an individual saves money at a nominal interest rate of 4 per cent and inflation is 5 per cent they know the real value of their savings will be falling.</p></div><div class="pinkBg"><div class="panel panel-has-footer" style="box-shadow: rgba(17, 34, 51, 0.3) 0px 10px 30px -15px; border-color: rgb(39, 45, 105);"><div class="panel-heading" style="background-color: rgb(39, 45, 105);"><a class="expander pull-right" href="#"><span class="fa fa-plus"></span></a><div><h4><strong>Inquiry case example - Negative interest rates?</strong></h4></div></div></div><p><strong><img alt="" src="/media/ib/economics/images/textbook/macro-policies/negative-rates.jpg" style="float: right; width: 405px; height: 159px;" title="https://www.diamondportfolio.com.au/news/diamonds-and-a-world-of-negative-interest-rates/" /></strong>When a central bank adopts a negative interest rate commercial banks have to pay interest to the central bank for keeping their excess reserves with the central bank. The objective of this approach is to stop commercial banks from holding excess cash (liquidity) and to make them lend money to households and businesses. If a commercial bank has to pay to keep money in the central bank it might as well lend it out.</p><hr class="hidden" /><hr class="hidden" /><p>In 2014 the European Central Bank used negative interest rates by cutting its deposit rate to -0.1%. The Bank of Japan adopted a similar policy in 2016 cutting interest rates to -0.1% to increase bank lending and also to stop the value of the Yen appreciating. The strong Yen was hurting Japanese exporters. One question remains: how long might it be before commercial banks offer negative interest rates to their retail customers?</p><p><a href="/media/ib/economics/images/textbook/macro-policies/monetary-policy/negative-interest-rates.pdf" target="_blank" title="Questions"><img class="ico" src="https://assets.inthinking.net/thinkib/icons/question.png" /> Worksheet questions</a></p><h5><strong>Questions</strong></h5><p><strong>a. Define the term base interest rate. [2]</strong></p><section class="tib-hiddenbox"><p>The base interest rate is the rate of interest charged by the central bank to the commercial banks.</p></section><p><strong>b. Explain the impact of the European Central Bank cutting its base rate to -0.1% on consumption in the European Union. [4]</strong></p><section class="tib-hiddenbox"><p>If the ECB reduces its base rate to -0.1% this means European commercial banks will have to pay interest to keep their money in the ECB and this acts as an incentive to reduce their own rates and lend more money to households. If households have to pay lower interest rates they will find their borrowing costs fall and their returns from saving will decrease. This will lead to an increase in consumption. </p></section><p><strong>c. Explain how the market rate of interest rate decreases using the demand and supply of money. [10]</strong></p><section class="tib-hiddenbox"><p>Answers might include:<img alt="" src="/media/ib/economics/images/textbook/inquiry-case-example-questions/market-rate-of-interest.jpg" style="float: right; width: 400px; height: 292px;" /></p><ul><li>Definitions of interest rate, demand for money, supply of money.</li><li>A diagram to show a fall in the market interest rate in a country. </li><li>An explanation that the market rate of interest is determined by the demand and supply of money which is IR at Qm in the diagram.</li><li>An explanation that a fall in demand for money in a recession or an increase in the money supply from the banking system leads to a fall in the market rate of interest.</li></ul></section><h5><strong>Investigation</strong></h5><p><strong>Find out about situations where central banks used negative interest rates. </strong></p></div><div class="greyBg"><h3><strong>The tools of monetary policy (HL)</strong></h3><p>The government has a number of monetary tools it can use to achieve its policy objectives. In many countries, the government sets the direction of monetary policy through its macroeconomic objectives and the central bank makes decisions on how the different policy tools are applied.</p><h4><strong>The minimum reserve requirement </strong></h4><p>The minimum reserve requirement is the quantity of cash banks must hold as a reserve or keep in deposit at the central bank. It is a safety net that protects banks in situations where depositors withdraw more money from their accounts than they normally do and threaten the bank's liquidity (the amount of cash it holds). If the central bank wants to reduce the money supply it can increase the minimum reserve requirement of commercial banks and this reduces their ability to create credit because they have to hold more cash. If the minimum reserves requirement is reduced by the central bank the banking system can create more credit and there is an increase in the money supply.</p><h4><strong>Open market operations</strong></h4><p>Open market operations is a monetary tool used by the central banks to regulate the money supply by buying and selling government bonds. If the government sells government bonds in the financial markets, buyers will purchase them using cash. As cash is taken out of the financial system there is less money for the banks to use to create credit and the money supply falls. If the central bank buys government bonds in the financial markets, more cash enters the system and the money supply increases.</p><h4><strong>Quantitative easing </strong></h4><p><img alt="" src="/media/ib/economics/images/textbook/macro-policies/quantitive-easing.jpg" style="float: left; width: 400px; height: 294px;" />Quantitative easing was used extensively by central banks following the global financial crisis to increase aggregate demand. Quantitative easing involves central banks using open market operations to increase the money supply by purchasing large quantities of government and corporate bonds. The banking system uses the additional cash from quantitative easing to create credit and the money supply increases which reduces interest rates. The impact of quantitative easing is shown in diagram 3.40.</p><hr class="hidden" /><p>As market interest rates are pushed down by quantitative easing this increases consumption and investment which increases aggregate demand and economic growth. </p><hr class="hidden" /><hr class="hidden" /><h3><strong>Expansionary monetary policy</strong></h3><p>Expansionary monetary policy is where the government reduces interest rates and increases the supply of money to increase consumption and investment to increase aggregate demand. Expansionary monetary policy is normally used to increase economic growth and reduce unemployment.</p><h4><strong>How the policy works</strong><img alt="" height="310" src="/media/ib/economics/images/textbook/macro-policies/expansionary-monetary-policy(1).jpg" style="float: right;" width="430" /></h4><p>When the central bank reduces its base rate, it charges a lower interest rate to commercial banks and they pass on this reduction in interest rates to households and firms in the form of lower interest loans (personal loans, mortgages and credit cards). Lower interest rates will also mean less interest is paid on the money firms and households hold in banks. This causes consumption and investment spending to rise which increases aggregate demand. The increase in aggregate demand leads to a rise in GDP as firms respond by producing more. This also leads to an increase in employment. </p><hr class="hidden" /><p>This is sometimes called the monetary transmission mechanism and is shown in diagram 3.41 where a rise in aggregate demand and the subsequent rise in the demand for labour reduces unemployment. Expansionary monetary policy also closes the deflationary gap.</p><hr class="hidden" /><p><img alt="" height="87" src="/media/ib/economics/images/textbook/macro-policies/monetary-flow-diagram.jpg" style="float: left;" width="476" />The flow diagram shows the monetary transmission mechanism as interest rates are reduced.</p><hr class="hidden" /><h3><strong>Evaluation of expansionary monetary policy</strong></h3><h4><strong>Strengths </strong></h4><ul><li>Expansionary monetary policy is relatively quick to apply which gives it <strong>flexibility</strong> in the way it can be applied. If the central banks have evidence of a rise in unemployment or a fall in economic growth they can respond by immediately decreasing base interest rates.</li><li>Monetary policy can be <strong>applied incrementally</strong> so it can be adjusted to changes in the economic growth and unemployment rate. If the growth rate is falling or unemployment is rising month by month, interest rates can be continuously adjusted to tackle the changes in those rates.</li><li>Because central banks are independent of governments in most countries they have some freedom <strong>from government political influence</strong>. An independent central bank can stop a government from using expansionary monetary policy to increase economic growth in the run-up to an election to create economic boom conditions which could lead to inflation.</li></ul><h4><strong>Weaknesses </strong></h4><ul><li>When an expansionary monetary policy is being applied there may be a rise in average price level and an <strong>increase in inflation</strong>. This is particularly true if the rise in aggregate demand leads to an inflationary gap. This is shown in diagram 3.41 where the increase in aggregate demand leads to an increase in the average price level from P to P1.</li><li>When <strong>interest rates are very low</strong> and even close to zero the central bank has little room to reduce rates in response to a rise in unemployment or falling economic growth.</li><li><strong>Commercial banks may not pass on an increase in interest rates.</strong> When the central bank uses expansionary monetary policy and interest rates are being reduced commercial banks can often increase their profits by not passing on the interest rate reduction. The interest rate reduction means commercial banks pay a lower interest cost to the central bank but can still receive the same interest rate from their borrowers if they do not decrease their own interest rate.</li><li>A decrease in the Interest rates in the economy relies on households and firms changing consumption and investment in response to the interest rate change. In a recession, <strong>low levels of business and consumer confidence </strong>may mean firms and households do not increase consumption and investment because they are worried about spending in an uncertain economic environment. This is particularly true of large investment projects by firms and the purchase of expensive items by consumers.</li><li>There are <strong>time lags</strong> in the application of monetary policy that make it difficult to manage. It is estimated that it takes 18 months for the full effects of an interest rate change to have an impact on the macroeconomy. This means there can be policy mistakes in the application of expansionary monetary policy. For example, a central bank might decrease interest rates and see little increase in consumption and investment in the short run so the central bank might cut interest rates again and this leads to a surge in consumption and investment which causes inflation.</li><li>An expansionary monetary policy where interest rates are reduced can lead to a <strong>depreciation in the exchange rate</strong> as currency investors sell the domestic currency because of the lower interest returns they receive from domestic banks. As the exchange rate depreciates it can make imports more expensive and this adds to inflation.</li></ul><h4></h4><ul></ul></div><div class="pinkBg"><div class="panel panel-has-footer" style="box-shadow: rgba(17, 34, 51, 0.3) 0px 10px 30px -15px; border-color: rgb(39, 45, 105);"><div class="panel-heading" style="background-color: rgb(39, 45, 105);"><a class="expander pull-right" href="#"><span class="fa fa-plus"></span></a><div><h4><strong>Inquiry case example - The ECB announces quantitative easing</strong></h4></div></div></div><p>On March 2<strong><img alt="" src="/media/ib/economics/images/textbook/macro-policies/ecb-rates.jpg" style="float: left; width: 400px; height: 225px;" title="https://www.cnbc.com/video/2019/09/12/ecb-cuts-rates-and-resumes-quantitative-easing-in-new-stimulus-package.html" /></strong>020 the European Central bank (ECB) announced €750 billion Pandemic Emergency quantitative easing. The ECB is planning to purchase a mixture of financial assets in the form of the private sector and public sector bonds. This significant move by the ECB is in response to the economic slowdown caused by the Covid19 crisis.</p><hr class="hidden" /><p>By buying bonds in the financial markets cash enters the system which, through the money multiplier, increases the money supply and drives down interest rates. The ECB hopes this aggressive expansionary monetary policy will increase consumption and investment and stimulate economic growth to mitigate some of the slowdown caused by the pandemic. Quantitative easing was used by many central banks as part of expansionary monetary policy after the financial crisis in 2008.</p><p><a href="/media/ib/economics/images/textbook/macro-policies/monetary-policy/quantitative-easing.pdf" target="_blank" title="Questions"><img class="ico" src="https://assets.inthinking.net/thinkib/icons/question.png" /> Worksheet questions</a></p><h5><strong>Questions</strong></h5><p><strong>a. Define the term quantitative easing. [2]</strong></p><section class="tib-hiddenbox"><p>Quantitative easing involves central banks using open market operations to increase the money supply by purchasing large quantities of government and corporate (private sector) bonds.</p></section><p><strong>b. Explain how quantitative easing increases the money supply. [4]</strong></p><section class="tib-hiddenbox"><p>When the central bank buys government and corporate (private sector) bonds more money is injected into a country's financial system and this increases the country's money supply. The money supply will be further increased through credit creation and the money multiplier. </p></section><p><strong>c. Using a diagram explain how quantitative easing can lead to a fall in market interest rates. [4]</strong></p><section class="tib-hiddenbox"><p><img alt="" src="/media/ib/economics/images/textbook/inquiry-case-example-questions/quant-ease.jpg" style="float: right; width: 400px; height: 292px;" />When the central bank buys bonds as part of quantitative easing it uses cash which increases the supply of money in the economy. This is shown in the diagram where Ms shifts to Ms1 in the money markets which causes the market interest rate to fall from IR to IR1.</p></section><h5><strong>Investigation</strong></h5><p><strong>Research the use of quantitative easing by another central bank. </strong></p></div><div class="blueBg"><h3><strong>Contractionary monetary policy </strong></h3><p>Governments and central banks apply contractionary monetary policy when they increase interest rates and reduce the supply of money to reduce the rate of inflation.</p><h4><strong>How the policy works</strong></h4><p>If inflation rises in the economy the central bank raises its base rate which is the interest rate it charges to commercial banks. The commercial banks then pass on the higher interest rate to their customers and this raises interest rates throughout the economy. Households and firms start paying higher interest costs on loans and receiving greater interest returns on money held in banks.</p><hr class="hidden" /><p><img alt="" src="/media/ib/economics/images/textbook/inquiry-case-example-questions/inflationary-gap.jpg" style="float: left; width: 400px; height: 317px;" />As the interest rates rise throughout the economy consumption and investment fall and this reduces aggregate demand. As aggregate demand falls in an economy the average price level falls fromacro economyd inflation falls. In diagram 3.42 the fall in aggregate demand closes the inflationary gap as output falls from Y to YFE.</p><hr class="hidden" /><p><img alt="" src="/media/ib/economics/images/textbook/macro-policies/contractionary-monetary-policy-flow-diagram.jpg" style="float: left; width: 500px; height: 95px;" /></p><p>The flow diagram illustrates the monetary transmission mechanism of contractionary monetary policy.</p><hr class="hidden" /><h4><strong>Evaluation of contractionary monetary policy</strong></h4><strong>Strengths </strong><ul><li>Contractionary monetary policy can be applied quickly which gives it <strong>flexibility as a policy</strong>. If the rate of inflation rises the central bank can react almost immediately to increase interest rates to reduce aggregate demand and inflation.</li><li>Contractionary monetary policy can be <strong>applied incrementally</strong> so it can be adjusted to changes in the inflation rate. If the inflation rate is rising month by month, interest rates can be continuously increased to tackle the problem.</li><li>Because central banks are independent of governments in most countries they have some freedom to apply contractionary monetary without <strong>political influence</strong>. For example, a rise in inflation might need a rise in interest rates but the government might not want to do this for political reasons, but an independent central bank can still increase the rate of interest to reduce inflation. </li></ul><h5><strong>Weaknesses </strong></h5><ul><li>When a contractionary monetary policy is being applied the fall in aggregate demand may lead to a<strong> reduction in economic growth</strong> and even a recession and this will lead to a rise in unemployment. This is shown in diagram 3.42 when aggregate demand falls from AD to AD1 because of a rise in interest rates.</li><li>An increase in interest rates by the central bank in its application of contractionary monetary policy may <strong>not be passed on by the commercial banks.</strong> The lending market is competitive and if banks are competing to make loans to new customers, they might not pass on the increase in interest rates so they can keep attracting new borrowers with lower interest rates. </li><li>Similar to expansionary monetary policy, there are <strong>time lags</strong> in the application of the policy that makes it difficult to manage. The estimated 18 months it takes for the full effects of an increase in interest rate to have an impact on the macroeconomy leads to policy mistakes. If the government increases interest too much this can lead to a fall in economic growth and even a recession.</li><li>An increase in interest rates as part of contractionary monetary policy can lead to an <strong>appreciation in the exchange rate</strong> as foreign currency investors are attracted to the domestic currency by higher interest rates in domestic banks. As the exchange rate appreciates it makes export prices more expensive and import prices cheaper and this can lead to a balance of payments current account deficit.</li></ul></div><div class="pinkBg"><div class="panel panel-has-footer" style="box-shadow: rgba(17, 34, 51, 0.3) 0px 10px 30px -15px; border-color: rgb(39, 45, 105);"><div class="panel-heading" style="background-color: rgb(39, 45, 105);"><a class="expander pull-right" href="#"><span class="fa fa-plus"></span></a><div><h4><strong>Inquiry case example - Contractionary monetary policy in Turkey</strong></h4></div></div><strong><img alt="" src="/media/ib/economics/images/textbook/macro-policies/turkey-money.jpg" style="float: right; width: 282px; height: 282px;" title="https://www.wsj.com/articles/turkeys-inflation-hits-18-putting-fresh-pressure-on-the-lira-1535964091" /></strong></div><p>In 2018 the central bank base rate in Turkey was increased from 17.5% to 24% in a bold attempt to tackle soaring inflation. The rate rise came despite pressure from President Erdoğan who strongly opposed the action of the central bank. This contractionary move by the bank was in response to a spike in inflation that increased to nearly 25%.</p><hr class="hidden" /><p>The rate rise announced by the central bank caused an appreciation in the Turkish Lira which rose nearly 3% on the news. President Erdoğan was not alone in voicing concerns about the rise in interest rates which increased borrowing costs for hard-hit businesses and consumers. The central bank argued that allowing Turkish inflation to get out of control would bring huge costs to the economy.</p><hr class="hidden" /><h5><a href="/media/ib/economics/images/textbook/macro-policies/monetary-policy/turkey-interest-rates.pdf" target="_blank" title="Solution key"><img class="ico" src="https://assets.inthinking.net/thinkib/icons/solution-key.png" /> Worksheet question</a></h5><h5>Question</h5><p><strong>Using a real-world example, evaluate the effectiveness of monetary policy to reduce inflation. [15]</strong></p><section class="tib-hiddenbox"><p><img alt="" src="/media/ib/economics/images/textbook/inquiry-case-example-questions/inflationary-gap(1).jpg" style="float: right; width: 400px; height: 319px;" />Answers might include:</p><ul><li>Definitions of monetary policy and inflation.</li><li>A diagram to show the impact of contractionary monetary on inflation.</li><li>An explanation of how the Turkish central bank increasing interest rates reduces aggregate demand from AD to AD1 which causes the average price level to fall from P to P1 and this leads to a fall in inflation.</li><li>An example of how monetary policy is applied to reduce inflation. In this case in Turkey.<hr class="hidden" /></li><li>Evaluation might include discussion of the problems of applying contractionary monetary policy such as falling AD and recession; commercial banks not passing on a rise in interest rates; time lags leading to policy errors and an appreciation in the exchange rate.</li></ul></section><p><strong>Investigate inflation in Turkey and how the Turkish central bank used contractionary monetary policy to deal with high inflation. </strong></p></div><div class="panel" style="box-shadow: rgba(38, 0, 0, 0.3) 0px 10px 30px -15px; border-color: rgb(124, 7, 21);"><div class="panel-heading" style="background-color: rgb(124, 7, 21);"><a class="expander pull-right" href="#"><span class="fa fa-plus"></span></a><div><p>Thinking about a key concept - Interdependence</p></div></div><div class="panel-body" style="background-color: inherit;"><div><p>The money transmission mechanism associated with monetary policy shows how changes in interest set off a chain reaction throughout the macroeconomy. A cut in interest rates leads to a rise in consumption and investment which leads to an increase in aggregate demand which can cause a rise in economic growth and the average price level. The same interest rate change will affect the exchange rate, the price of government bonds and the stock market. The series of reactions brought about by a change in monetary policy show how interrelated the macroeconomy is. This is a challenge for policymakers because of the range of consequences a change in interest rates can have. Some of these consequences might be intended and some might not.</p></div></div><div class="panel-footer" style="background-color: rgba(124, 7, 21, 0.1);"><div><p>text</p></div></div></div><div class="panel panel-has-footer" style="box-shadow: rgba(17, 34, 51, 0.3) 0px 10px 30px -15px; border-color: rgb(39, 45, 105);"><div class="panel-heading" style="background-color: rgb(39, 45, 105);"><a class="expander pull-right" href="#"><span class="fa fa-plus"></span></a><div><p>Now test yourself</p></div></div></div><div class="tib-quiz" data-quiz-id="1294" data-structure="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" data-score-answers="6d4a526a457a48584f763758344a7649472f76324c53614b78524c393439595570496d5a5971374b38686f3d"><div class="exercise"><div class="q-question"><p>Which of the following is not true about monetary policy?</p></div><div class="q-answer"><p><label class="radio" data-answer="5bec7a229825de6f1763ce025ec105a9"><input type="radio" /><span> It is a demand-side policy</span></label></p><p><label class="radio" data-answer="bb7e0bc270d41d07f2d453fd1bb64c12"><input type="radio" /><span> It involves the use of taxation to manage the economy</span></label></p><p><label class="radio" data-answer="b96a25f96ab4d0eb1d4de5ce9e65c5dc"><input type="radio" /><span> The central bank has an important role in managing the policy</span></label></p><p><label class="radio" data-answer="ae6a39ad42d5ba15c7299b0efd70f12d"><input type="radio" /><span> Reducing inflation can be a key objective of the policy</span></label></p></div><div class="q-explanation"><p>Taxation is fiscal rather than monetary policy.</p></div><div class="actions"><span class="score" data-score="0"></span><button class="btn check"><i class="fa fa-check-square-o"></i> Check</button></div></div><p> </p><div class="exercise"><div class="q-question"><p>Using the data below, which of the following is the value of credit created?</p><p><dollar>$</dollar>80,000 initial deposit</p><p>Minimum reserves requirement 16%</p></div><div class="q-answer"><p><label class="radio" data-answer="ea140927d05c17195770164d11ba6aeb"><input type="radio" /><span> <dollar>$</dollar>1,280,000</span></label></p><p><label class="radio" data-answer="73aac8fd5415e02990ee229633903cf0"><input type="radio" /><span> <dollar>$</dollar>80,000</span></label></p><p><label class="radio" data-answer="df48c585292a1c87680a4893f7a513dc"><input type="radio" /><span> <dollar>$</dollar>500,000</span></label></p><p><label class="radio" data-answer="8bfeb753dc02f83952ad98f6dee1cf18"><input type="radio" /><span> <dollar>$</dollar>92,800</span></label></p></div><div class="q-explanation"><p>1/0.16 x <dollar>$</dollar>80,000 = <dollar>$</dollar>500,000</p></div><div class="actions"><span class="score" data-score="0"></span><button class="btn check"><i class="fa fa-check-square-o"></i> Check</button></div></div><p> </p><div class="exercise"><div class="q-question"><p>Which of the following is most likely to lead to a rise in interest rates in an economy?</p></div><div class="q-answer"><p><label class="radio" data-answer="35072cb32cc0142e06b5cd8566f4ef64"><input type="radio" /><span> Increase in the money supply</span></label></p><p><label class="radio" data-answer="e24824a457d0798a8668658d5ceed126"><input type="radio" /><span> Decrease in the demand for money</span></label></p><p><label class="radio" data-answer="cef71cbf853d0e19253c3b8bc1e76682"><input type="radio" /><span> Central bank reduces the base rate</span></label></p><p><label class="radio" data-answer="5e0b0f80d112f0f61e331fb5a1843857"><input type="radio" /><span> Increase in the minimum reserve requirement</span></label></p></div><div class="q-explanation"><p>Increasing the minimum reserve requirement reduces the commercial bank's ability to create money which reduces the supply of money and increases interest rates.</p></div><div class="actions"><span class="score" data-score="0"></span><button class="btn check"><i class="fa fa-check-square-o"></i> Check</button></div></div><p> </p><div class="exercise"><div class="q-question"><p>Which of the following best describes a situation where the central bank sells government bonds to increase market interest rates?</p></div><div class="q-answer"><p><label class="radio" data-answer="5b4b8e706bd5ccf831ae7bd133652b8f"><input type="radio" /><span> Quantitative easing</span></label></p><p><label class="radio" data-answer="3d75aa2fb570017d689a6e5816b16cdd"><input type="radio" /><span> Open market operations</span></label></p><p><label class="radio" data-answer="d549c656cacd8113aa39e5ec034a90ae"><input type="radio" /><span> Increasing the base rate</span></label></p><p><label class="radio" data-answer="5e0b0f80d112f0f61e331fb5a1843857"><input type="radio" /><span> Increase in the minimum reserve requirement</span></label></p></div><div class="q-explanation"><p>When the central bank sells government bonds it is called open market operations.</p></div><div class="actions"><span class="score" data-score="0"></span><button class="btn check"><i class="fa fa-check-square-o"></i> Check</button></div></div><p> </p><div class="exercise"><div class="q-question"><p>Which of the following is a strength of contractionary monetary policy?</p></div><div class="q-answer"><p><label class="radio" data-answer="672300666ea2c84c927a40cbb75f5765"><input type="radio" /><span> Consumers might respond slowly to an increase in interest rates</span></label></p><p><label class="radio" data-answer="5b19c32b7d930e1d68976dd53590e9e9"><input type="radio" /><span> It can reduce the rate of economic growth</span></label></p><p><label class="radio" data-answer="feeb7814769548ec9e3ebef4b9c20969"><input type="radio" /><span> The policy can be used incrementally</span></label></p><p><label class="radio" data-answer="de8aa4dfbbf0c0e4eff30cfe34712e2e"><input type="radio" /><span> It is associated with time lags</span></label></p></div><div class="q-explanation"><p> </p></div><div class="actions"><span class="score" data-score="0"></span><button class="btn check"><i class="fa fa-check-square-o"></i> Check</button></div></div><p> </p><div class="exercise"><div class="q-question"><p>Which of the following is least likely to be the function of a country's central bank?</p></div><div class="q-answer"><p><label class="radio" data-answer="866010472926152f85d10fe8af640576"><input type="radio" /><span> Application of monetary policy</span></label></p><p><label class="radio" data-answer="bbf06c8e0f3f44f0338f9c1a5b9a30fa"><input type="radio" /><span> Accepting deposits from large manufacturing businesses</span></label></p><p><label class="radio" data-answer="9838458a916ffea815d32297e5c8aefd"><input type="radio" /><span> Lending to commercial banks</span></label></p><p><label class="radio" data-answer="a79f76d58023465164f0e6f64f4d1a91"><input type="radio" /><span> Setting base interest rates</span></label></p></div><div class="q-explanation"><p>The central bank does not lend to or accept funds from businesses other than commercial banks.</p></div><div class="actions"><span class="score" data-score="0"></span><button class="btn check"><i class="fa fa-check-square-o"></i> Check</button></div></div><p> </p><div class="exercise"><div class="q-question"><p>Which of the following is least likely to be true in the diagram?</p><p><img alt="" height="259" src="/media/ib/economics/images/textbook/mc-questions/expansionary-monetary-policy.jpg" width="352" /></p></div><div class="q-answer"><p><label class="radio" data-answer="bb838048220567e3e3fbb27fb767d5a1"><input type="radio" /><span> The increase in AD could have been caused by a cut in the base rate</span></label></p><p><label class="radio" data-answer="42d77f4f2c7d58a2f897e0b67d3c4a36"><input type="radio" /><span> The increase in AD could be the result of expansionary monetary policy</span></label></p><p><label class="radio" data-answer="cd44d948479cf23c04de95c6133696c6"><input type="radio" /><span> The increase in AD could have been caused by an increase in the minimum reserve requirement</span></label></p><p><label class="radio" data-answer="9d79e25f71f50250b14b9ca1260ca161"><input type="radio" /><span> The increase in AD could have been caused by quantitative easing</span></label></p></div><div class="q-explanation"><p>An increase in the minimum reserve requirement will reduce the supply of money and increase interest rates which will reduce AD.</p></div><div class="actions"><span class="score" data-score="0"></span><button class="btn check"><i class="fa fa-check-square-o"></i> Check</button></div></div><p> </p><div class="exercise"><div class="q-question"><p>Under what conditions is expansionary monetary policy most likely to be effective in increasing aggregate demand?</p></div><div class="q-answer"><p><label class="radio" data-answer="72697b075bc2491df1b2e9a0bebe016d"><input type="radio" /><span> Weak consumer confidence data has been released</span></label></p><p><label class="radio" data-answer="500ee56ba022d287de75efc6152b55a6"><input type="radio" /><span> The exchange rate is depreciating</span></label></p><p><label class="radio" data-answer="b735860122b78907f586148e84628e69"><input type="radio" /><span> Business confidence is falling</span></label></p><p><label class="radio" data-answer="1eaf9f97221983efbec0db01b0054e37"><input type="radio" /><span> The income tax rate has increased </span></label></p></div><div class="q-explanation"><p>A depreciating exchange rate makes export prices fall and can increase the net export component of aggregate demand.</p></div><div class="actions"><span class="score" data-score="0"></span><button class="btn check"><i class="fa fa-check-square-o"></i> Check</button></div></div><p> </p><div class="exercise"><div class="q-question"><p>Which interest rate does the central bank change when it is applying monetary policy?</p></div><div class="q-answer"><p><label class="radio" data-answer="e729eb7ecc56fc3a471d2e00575defae"><input type="radio" /><span> The base interest rate</span></label></p><p><label class="radio" data-answer="12a9d44f5d7f4db68843433ee9b5d9d6"><input type="radio" /><span> The real interest rate</span></label></p><p><label class="radio" data-answer="7a6d25a51ac4bae9a3b468acdc74f6c4"><input type="radio" /><span> The nominal interest rate</span></label></p><p><label class="radio" data-answer="b696be59a6c0cd63d04b1da7f9af015e"><input type="radio" /><span> The market interest rate</span></label></p></div><div class="q-explanation"><p>The central bank changes the base interest rate when it is applying monetary policy. This is the interest rate it charges to the commercial banks.</p></div><div class="actions"><span class="score" data-score="0"></span><button class="btn check"><i class="fa fa-check-square-o"></i> Check</button></div></div><p> </p><div class="exercise"><div class="q-question"><p>Which of the following is the most likely consequence of an increase in a country’s money supply?</p></div><div class="q-answer"><p><label class="radio" data-answer="788272e595879d41a907d262f5b57664"><input type="radio" /><span> A rise in unemployment</span></label></p><p><label class="radio" data-answer="bf87996655f8fb2d9cc1acbcfa365b63"><input type="radio" /><span> An appreciation in the exchange rate</span></label></p><p><label class="radio" data-answer="5c74e8bb65b280faea120d1396011464"><input type="radio" /><span> A decrease in economic growth </span></label></p><p><label class="radio" data-answer="9fcff45c2691a96c3f871bccc84ebb0c"><input type="radio" /><span> Market interest rates decrease</span></label></p></div><div class="q-explanation"><p>As the money supply increases the equilibrium market interest rate decreases.</p></div><div class="actions"><span class="score" data-score="0"></span><button class="btn check"><i class="fa fa-check-square-o"></i> Check</button></div></div><p> </p><div class="totals"><span class="score">Total Score: </span><button class="btn btn-success check-total"><i class="fa fa-check-square-o"></i> Check</button></div></div><hr><script>document.querySelectorAll('.tib-teacher-only').forEach(e => e.remove());</script>
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