Answer to Question #268620 in Macroeconomics for Shelle

Question

The central bank of your assigned Caribbean country decides to pursue an expansionary monetary policy. (i) Identify one possible action they could take. (1 mark) (ii) Carefully explain, in as much detail as possible, how the chosen action will impact the money market. (5 marks) (iii) Illustrate the overall impact of the chosen action on the money market. (3 marks)

Answer 1

Solution:

i.). Expansionary <span style="color: black; background: white;">monetary policy</span> is when a central bank uses its tools to stimulate the economy. One possible action the central bank could take is decreasing bank reserve requirements.

ii.). When reserve requirements decline, it allows banks to lend a higher proportion of their capital to consumers and businesses. As a result, money supply will increase in the money market.

iii.). This action by the central bank will lower other interest rates, like those banks use when they lend money to consumers, which helps spur consumer spending through increased credit and lending throughout the nation’s economy, thus increasing the economic growth of a nation.